-----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, Uawh7HaUlco6MGBLbKli9fFlSDab4FZ2grlqY/ZjsJe+31VCy1QVYztTFUJb3UKf s3mt9d4kzIwHL6SJCcA46g== 0000007383-96-000036.txt : 19960802 0000007383-96-000036.hdr.sgml : 19960802 ACCESSION NUMBER: 0000007383-96-000036 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960801 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: 96602182 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, 1996 FORM 10-Q 1 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, 1996 -------------------------------------- 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, 1996: 106,615,837 2 ARMCO INC. INDEX Page ---- Part I. Financial Information Condensed Statement of Consolidated Financial Position - June 30, 1996 and December 31, 1995 2 Condensed Statement of Consolidated Operations and Retained Deficit - Three and Six Months Ended June 30, 1996 and 1995 3 Condensed Statement of Consolidated Cash Flows - Six Months Ended June 30, 1996 and 1995 4 Notes to Condensed Consolidated Financial Statements 5-7 Management's Discussion and Analysis of the Condensed Consolidated Financial Statements 8-11 Segment Report 12 Part II. Other Information Item 1. Legal Proceedings 13 Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14 Exhibit 11 Computation of Income (Loss) Per Common Share -1- 3 ARMCO INC. CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION (Unaudited)
(Dollars in millions) June 30, December 31, 1996 1995 ASSETS -------- -------- Current assets Cash and cash equivalents $ 181.0 $ 136.8 Receivables, less allowance for doubtful accounts 200.4 169.4 Inventories (Note 2) 226.4 216.2 Net assets held for sale (Note 5) - 85.5 Other 7.8 5.9 - ---------------------------------------------------------------------------- Total current assets 615.6 613.8 Investments Investment in AFSG 85.6 85.6 Other, less allowance for impairment 54.8 37.2 Property, plant and equipment 1,237.0 1,208.3 Accumulated depreciation (569.3) (539.8) - ---------------------------------------------------------------------------- Property, plant and equipment - net 667.7 668.5 Deferred tax asset 325.8 326.1 Goodwill and other intangible assets 144.0 145.9 Other assets 22.8 19.5 - ---------------------------------------------------------------------------- Total assets $1,916.3 $1,896.6 - ---------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities Trade accounts and notes payable $ 162.8 $ 148.2 Employee-related obligations 119.1 172.4 Other liabilities 67.3 72.6 Current portion of long-term debt 28.6 25.8 - ---------------------------------------------------------------------------- Total current liabilities 377.8 419.0 Long-term debt, less current portion 364.2 361.6 Long-term employee benefit obligations, less current portion 1,216.5 1,165.9 Other liabilities 190.8 180.5 Commitments and contingencies (Note 7) Shareholders' deficit (Note 8) 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 965.9 963.0 Retained deficit (1,384.5) (1,378.5) Other (1.4) (1.9) - ---------------------------------------------------------------------------- Total shareholders' deficit (233.0) (230.4) - ---------------------------------------------------------------------------- Total liabilities and shareholders' deficit $1,916.3 $1,896.6 - ---------------------------------------------------------------------------- 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, -------------------- ------------------- 1996 1995 1996 1995 --------- --------- --------- -------- Net sales $ 450.8 $ 390.6 $ 881.2 $ 759.0 Cost of products sold (Note 3) (415.6) (342.0) (808.5) (669.7) Selling and administrative expenses (23.0) (22.8) (45.4) (47.0) - ----------------------------------------------------------------------------- Operating profit 12.2 25.8 27.3 42.3 Interest income 2.8 3.2 5.8 6.9 Interest expense (9.3) (8.5) (18.5) (16.0) Gain on sale of investment in AK Steel stock (Note 6) - 25.9 - 27.2 Sundry other - net (Note 4) (9.5) (12.7) (11.1) (25.6) - ------------------------------------------------------------------------------ Income (loss) before income taxes (3.8) 33.7 3.5 34.8 Provision for income taxes (0.2) (0.6) (0.6) (0.8) - ----------------------------------------------------------------------------- Income (loss) from continuing operations (4.0) 33.1 2.9 34.0 Discontinued operation - Equity in income of National-Oilwell (Note 5) - 2.8 - 4.3 - ----------------------------------------------------------------------------- Net income (loss) (4.0) 35.9 2.9 38.3 Retained deficit, beginning of period (1,376.1) (1,392.5) (1,378.5) (1,390.4) Preferred stock dividends (4.4) (4.4) (8.9) (8.9) - ------------------------------------------------------------------------------ Retained deficit, end of period $(1,384.5) $(1,361.0) $(1,384.5) $(1,361.0) - ------------------------------------------------------------------------------ Weighted average number of common and common equivalent shares outstanding - primary 106.7 106.2 106.5 106.0 Net income (loss) applicable to common stock $ (8.4) $ 31.5 $ (6.0) $ 29.4 Earnings (loss) per common share - primary Income (loss) from continuing operations $ (0.08) $ 0.27 $ (0.06) $ 0.24 Discontinued operation - Equity in income of National-Oilwell - 0.03 - 0.04 - ------------------------------------------------------------------------------ Net income (loss) $ (0.08) $ 0.30 $ (0.06) $ 0.28 Earnings (loss) per common share - fully diluted * 0.28 * * 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%
-3- 5 ARMCO INC. CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS (Unaudited) (Dollars in millions)
Six Months Ended June 30, ------------------ 1996 1995 -------- -------- Cash flows from operating activities: Net income $ 2.9 $ 38.3 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and lease-right amortization 29.3 26.0 Undistributed earnings from discontinued operations - (4.3) Net gain on sales of investments and facilities (1.4) (28.4) Other (1.1) 7.2 Change in assets and liabilities: Trade accounts and notes receivable (30.4) (32.3) Inventory (10.2) (31.1) Payables and accrued operating expenses 11.7 25.1 Employee benefit obligations 11.3 26.5 Other assets and liabilities - net (2.4) (4.5) - --------------------------------------------------------------------------- Net cash provided by operating activities 9.7 22.5 - --------------------------------------------------------------------------- Cash flows from investing activities: Net proceeds from the sale of businesses and assets 4.9 20.3 Proceeds from the sale and maturity of liquid investments 0.2 24.7 Proceeds from the sale of investments 79.2 29.8 Purchase of investments (0.4) (1.2) Contributions to investees (3.6) - Capital expenditures (27.0) (85.8) Net cash (used in) provided by businesses held for sale (4.5) 0.5 Other (1.7) (0.1) - --------------------------------------------------------------------------- Net cash provided by (used in) investing activities 47.1 (11.8) - --------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from drawdown of debt 0.6 - Principal payments on debt (3.2) (0.5) Dividends paid (8.9) (12.0) Other (1.1) 3.2 - --------------------------------------------------------------------------- Net cash used in financing activities (12.6) (9.3) - --------------------------------------------------------------------------- Net change in cash and cash equivalents 44.2 1.4 Cash and cash equivalents: Beginning of period 136.8 202.8 - --------------------------------------------------------------------------- End of period $181.0 $204.2 - --------------------------------------------------------------------------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest (net of capitalized interest) $ 17.4 $ 14.9 Income taxes 0.1 0.1 Supplemental schedule of noncash investing and financing activities: Issuance of restricted stock 3.0 4.4 Debt incurred directly for property - 11.6 Note received in partial payment for asset sale 10.6 1.0 See Notes to Condensed Consolidated Financial Statements.
-4- 6 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. (Armco) should be read in conjunction with the financial statements in Armco's Annual Report to Shareholders for the year ended December 31, 1995. 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, the financial position as of June 30, 1996, and the results of operations for the three and six months ended June 30, 1996 and 1995 and cash flows for the six months ended June 30, 1996 and 1995. The results of operations for the six months ended June 30, 1996 are not necessarily indicative of the results to be expected for the year 1996. 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, 1996 1995 -------- ----------- Inventories on LIFO: Finished and semi-finished $ 230.1 $ 226.8 Raw materials and supplies 28.1 24.8 Adjustment to state inventories at LIFO value (57.2) (57.3) -------- -------- Total 201.0 194.3 -------- -------- Inventories on average cost: Finished and semi-finished 17.7 15.5 Raw materials and supplies 7.7 6.4 -------- -------- Total 25.4 21.9 -------- -------- Total inventories $ 226.4 $ 216.2 ======== ========
3. Cost of products sold for the six months ended June 30, 1996 includes income of $4.2 related to the partial settlement of a business interruption insurance claim for a third quarter 1995 unplanned outage. The outage resulted from the failure of a generator on one stand of the hot mill at the Butler Operations, which reduced efficiency during a six-week period, resulting in the use of alternative and more costly product routings and lost sales. 4. Sundry other - net in Armco's Condensed Statement of Consolidated Operations and Retained Deficit includes expenses of $7.9 and $15.8 for the three and six months ended June 30, 1996, and $10.0 and $19.6 for the three and six months ended June 30, 1995, respectively, for interest on employee benefit obligations related to facilities that have been divested. The reduction in expense in 1996 is primarily due to lower interest rates. 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 a 500-acre industrial park owned by Armco. Armco had elected to defer gains resulting from individual asset sales at this site because of uncertainty concerning realization of the carrying value of the remaining property. The gains were recognized following receipt, in March 1996, of an independent appraiser's report indicating that the land, buildings and dock facilities in the -5- 7 park had a market value significantly in excess of Armco's historical cost carrying value. Armco is currently discussing the sale of this property with a number of potential buyers. 5. At December 31, 1995, Armco had recorded $85.5 in Net assets held for sale in the Condensed Statement of Consolidated Financial Position for its 50% ownership interest in National-Oilwell, an oil field equipment and supply joint venture. The sale of National-Oilwell was completed on January 16, 1996, with Armco receiving $77.0 in cash and receivables with a face value of $13.0. The receivables were recorded in other investments at a discounted value of $10.6. After recording $2.1 for recognition of deferred foreign translation losses and miscellaneous expenses, no gain or loss was recorded on the sale. The equity income of National-Oilwell, recognized prior to the fourth quarter of 1995, is reported in Discontinued operation on the Condensed Statement of Consolidated Operations and Retained Deficit. 6. On May 4, 1995, Armco announced that it had completed the sale of all of the shares of stock it had received as a result of the initial public offering and recapitalization of AK Steel Holding Corporation. In the three and six months ended June 30, 1995, Armco recorded gains of $25.9 and $27.2, respectively, related to the sale. 7. 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 operations of Armco's runoff insurance companies, including matters related to Northwestern National Insurance Company, a runoff company currently involved in, among other matters, litigation with respect to certain reinsurance programs. At June 30, 1996 and December 31, 1995, Armco had recorded an $85.6 investment in these companies. Armco believes, based on current facts and circumstances, that its ultimate liability for pending claims, contingent liabilities, environmental matters and matters related to its runoff insurance companies 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, contingent liabilities and other matters could have a material effect on the results of its operations in future interim or annual periods. At June 30, 1996, Armco had recorded in its Condensed Statement of Consolidated Financial Position legal and environmental reserves of $85.7, of which $13.9 was classified as current. 8. Under the terms of one of Armco's revolving credit facilities, which expires on December 31, 1998, 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. -6- 8 On February 23, 1996, the Board of Directors adopted a Stockholder Rights Plan and declared a dividend distribution of one preferred stock purchase right for each outstanding share of common stock of Armco to stockholders of record at the close of business on June 26, 1996. The new rights replace similar rights initially distributed in 1986. At its July 26, 1996 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. Information relating to Armco's industry segments can be found on page 12. -7- 9 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, 1996 and 1995 were as follows:
Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- 1996 1995 1996 1995 ------ ------ ------ ------ Net sales $450.8 $390.6 $881.2 $759.0 Operating profit 12.2 25.8 27.3 42.3 Gain on the sale of AK Steel stock -- 25.9 -- 27.2 Income (loss) from continuing operations (4.0) 33.1 2.9 34.0 Discontinued operation - equity in income of National-Oilwell -- 2.8 -- 4.3 Net income (loss) (4.0) 35.9 2.9 38.3 Net income (loss) per common share - primary (0.08) 0.30 (0.06) 0.28
Net sales in the three and six months ended June 30, 1996 were 15% and 16% higher, respectively, than in the same periods last year, primarily due to higher sales of carbon, automotive chrome, electrical and specialty semi- finished steels in the Specialty Flat-Rolled Steels segment. In the six months ended June 30, 1996, operating profit included income of $4.2 related to the partial settlement of a business interruption insurance claim. Excluding this one-time credit, the decrease in operating profit from last year was primarily due to the effects of planned equipment outages and higher outside processing costs. Income from continuing operations for the six months ended June 30, 1996 and 1995 was $2.9 and $34.0, respectively. Included in the 1996 amount was the above-mentioned insurance settlement and a $6.3 gain, which resulted from the recognition of gains previously deferred in connection with asset sales at a 500-acre industrial park owned by Armco. Armco had elected to defer gains resulting from individual asset sales at this site because of the uncertainty concerning realization of the carrying value of the remaining property. The gains were recognized following receipt, in March 1996, of an independent appraiser's report indicating that the land, buildings and dock facilities in the park had a market value significantly in excess of Armco's historical cost carrying value. Armco is currently negotiating the sale of this property. During the first six months of 1995, Armco sold all of the shares it had received in the initial public offering and recapitalization of AK Steel Holding Corporation. In the three and six months ended June 30, 1995, Armco recognized gains of $25.9 and $27.2, respectively, related to the sale. At December 31, 1995, Armco had recorded $85.5 in Net assets held for sale for its 50% ownership interest in National-Oilwell, an oil field equipment and supply joint venture. The sale of National-Oilwell was completed on January 16, 1996, with Armco receiving $77.0 in cash and receivables with a face value of $13.0. The receivables were recorded at a discounted value of $10.6. After recording $2.1 for recognition of deferred foreign translation losses and miscellaneous expenses, no gain or -8- 10 loss was recorded on the sale. The equity income of National-Oilwell, recognized prior to the fourth quarter of 1995, is reported in Discontinued operation. Net income (loss) per common share reflects a deduction of $4.4 for the second quarter and $8.9 for the first six months of each year for preferred stock dividends declared. BUSINESS SEGMENT RESULTS - ------------------------ Specialty Flat-Rolled Steels - ----------------------------
Three Months Ended Six Months Ended June 30, June 30, ------------------ --------------- 1996 1995 1996 1995 ------ ------ ------ ------ Customer sales $376.1 $320.9 $748.2 $624.6 Operating profit 12.2 27.4 32.2 50.6
Customer sales for the segment were $55.2 and $123.6 higher in the second quarter and first six months of 1996, respectively, than in the same periods of 1995, primarily as a result of higher shipments of automotive chrome, electrical, specialty semi-finished and carbon steels. The six-month increase, in particular, reflects the idling of the Mansfield Operations during all of the first quarter of 1995 pending completion of its new thin- slab caster. The caster was completed, and the plant resumed operations, in April 1995. Average sales per ton in 1996 was down from 1995 levels due to the elimination of raw material price surcharges on certain stainless steels; market softness, particularly for specialty strip and sheet and specialty semi-finished products, and increased sales of lower-priced carbon products. Customer sales and shipments by major product line and total raw steel production were as follows:
Three Months Ended June 30, Six Months Ended June 30, -------------------------- ------------------------ 1996 1995 1996 1995 ---------- ---------- ---------- ---------- (tons in thousands) Sales Tons Sales Tons Sales Tons Sales Tons ----- ---- ----- ---- ----- ---- ----- ---- Automotive chrome $138.1 104 $104.9 77 $268.3 200 $211.5 159 Electrical 92.2 69 83.2 61 183.3 136 171.4 124 Specialty strip and sheet 66.9 26 70.6 26 132.6 50 138.7 53 Specialty semi-finished 39.3 29 29.9 19 70.9 50 50.8 34 Carbon 31.4 67 20.1 44 75.6 175 30.5 60 Other 8.2 -- 12.2 -- 17.5 -- 21.7 -- ------ ---- ------ --- ------ --- ------ ---- Total $376.1 295 $320.9 227 $748.2 611 $624.6 430 Raw steel production 353 266 743 505
Automotive chrome shipments were 35% higher in the second quarter of 1996 than in the same period in 1995, as the Mansfield Operations shipped significant quantities of this product line in the current year. During the ramp up in the second quarter of 1995, Mansfield did not produce stainless steel products. Strong production of North American light vehicles and increased use of stainless in exhaust systems stimulated demand. Shipments of electrical steel products increased 13% in the second quarter as a result of generally good market conditions, supplier contracts and some easing of capacity constraints. Demand remained strong for grain oriented electrical steel used in utility distribution transformers and non-oriented electrical steel used in motors and generators. Specialty strip and sheet shipments remained flat in the year-to-year comparisons due to softer market conditions and increased import penetration. Average sales per ton were 5% lower in the second quarter of 1996 compared to 1995, primarily as a result of the elimination of raw material surcharges, with some base price erosion also experienced. -9- 11 Specialty semi-finished shipments increased 10,000 tons in the second quarter of 1996, despite a weak domestic market. Much of the increase was due to export sales, which generated lower margins. Carbon steel shipments in the first half of 1996 totaled 175,000 tons compared to 60,000 tons shipped in the first half of 1995. All of Armco's carbon steel products are produced at the Mansfield and Dover Operations. Mansfield was idle during the first quarter of 1995 and ramping up production during the second quarter. During the first quarter of 1995, the Dover facility was selling some galvanized carbon steel produced from steel purchased from outside sources. The decrease in shipments between the first and second quarters of this year was primarily due to planned outages and the shift to higher margin stainless production at Mansfield. Operating profit for the first half of 1996 included income of $4.2 related to the partial settlement of a business interruption insurance claim for a third quarter 1995 unplanned outage. The outage resulted from the failure of a generator on one stand of the hot mill at the Butler Operations, which reduced efficiency during a six-week period, resulting in the use of alternative and more costly product routings and lost sales. Second quarter 1996 operating profit also included $15.7 of losses from the Mansfield and Dover Operations, compared to losses totaling $26.1 in the same period last year while Mansfield was ramping up. During the six months ended June 30, 1996 and 1995, the combined Mansfield and Dover losses were $32.2 and $50.1, respectively. Mansfield, in addition to producing carbon steels, shipped a significant percentage of Armco's automotive chrome in 1996. While product quality at Mansfield is meeting customer requirements, operating costs, throughput and productivity at the plant, though showing improvement in the second quarter, are still not at acceptable levels. In addition to its direct losses, Mansfield's operating problems were reflected in the results of the other operations in the Specialty Flat-Rolled Steels segment due to the increasing interdependence of the operating facilities. During the first six months of 1996, operating profit for this segment was also lower than last year due to several planned equipment outages, including outages necessary to upgrade Armco's finishing facilities as part of the strategic facilities plan. The outages and the subsequent process of restarting and returning these facilities to full capability contributed to lower yields. In addition, in order to meet demand during this time, Armco used outside processors to finish some of its stainless steels, resulting in increased costs. Outlook: Armco is encouraged by the quality of products produced at Mansfield, but continues to concentrate on improving the operations and integrating its specialty steel producing capability with the other plants in the segment. With all of Mansfield's equipment now fully operational, Armco expects increased production and a significant reduction in losses at Mansfield in the second half of 1996 compared to the first half. The recent completion of the Specialty Flat-Rolled Steels finishing facilities upgrades should result in increased finishing capacity, further improvement in quality and lower costs beginning in the third quarter of 1996. While demand for Armco's automotive chrome product remains relatively strong, the markets for specialty strip and sheet and specialty semi-finished products have weakened. Market conditions for these product lines are expected to have an adverse affect on both volume and pricing, with industry overcapacity a key concern in specialty semi-finished. For specialty strip and sheet, demand and pricing are also expected to come under continued downward pressure as a result of imports. Fabricated Products - -------------------
Three Months Ended Six Months Ended June 30, June 30, --------------- --------------- 1996 1995 1996 1995 ------ ------ ------ ------ Customer sales $ 74.7 $ 69.7 $133.0 $134.4 Operating profit 6.4 5.4 7.9 6.2
-10- 12 Second quarter customer sales increased 7% from last year, with higher sales attributable to both Sawhill Tubular and Douglas Dynamics, L.L.C. Customer sales at Douglas Dynamics increased primarily as a result of demand created by record snowfalls in the Northeast and heavy snowfalls in several other geographical markets and as a result of price increases. The increase in customer sales at Sawhill resulted from a 20% rise in volume, partially offset by lower prices. Lower sales for the first six months of 1996, compared to 1995, were primarily due to lower first quarter prices at Sawhill. In spite of higher second quarter sales, Douglas Dynamics' operating profit was equal to operating profit from the same period last year. Increased sales and cost reductions related to the elimination of production outsourcing were offset by higher fixed manufacturing, administrative and selling costs, primarily related to the introduction of new products. Sawhill Tubular experienced increased profits in the second quarter comparison as a result of the higher sales, lower raw material costs, and quality and cost improvements. Outlook: Douglas Dynamics anticipates somewhat lower snowplow sales over the next twelve months compared to the last twelve months; however, Armco expects the lower volume to be more than offset by price increases and new product sales. Operating results for the next twelve months are expected to decline slightly from the previous twelve-month period. Sawhill Tubular's sales and profitability are expected to remain level for the next twelve months, though some of its markets remain soft. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- At June 30, 1996, Armco had $181.0 of cash and cash equivalents compared to $136.8 at December 31, 1995. Cash and cash equivalents increased $44.2 during the first six months of 1996, primarily due to cash inflows of $77.0 from the sale of Armco's investment in National-Oilwell and $9.7 of cash generated by operations. Partially offsetting these cash inflows were capital expenditures of $27.0 and preferred stock dividends of $8.9. In addition to the cash on hand, Armco has a receivables credit facility, under which Armco Funding Corporation, a wholly owned subsidiary to which Armco sells substantially all of its receivables, may borrow 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. At June 30, 1996, $82.8 of the receivables facility was used as support for letters of credit, while no borrowings were outstanding under either facility. Armco anticipates that its 1996 cash expenditures for capital projects will total approximately $60.0 to $70.0. In addition, Armco has $22.4 of debt commitments maturing through December 1996 and expects to make discretionary pension payments of about $40.0 during the remainder of the year. The capital expenditures, and debt and pension payments will be paid out of existing cash balances and cash generated from operations and asset disposals. On July 26, 1996, 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, 1996 to shareholders of record on August 30, 1996. 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, 1996 to shareholders of record on August 30, 1996. 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 its inventory credit facility. -11- 13 ARMCO INC. SEGMENT REPORT (Unaudited) (Dollars in millions)
1996 1995 -------------- ----------------------------- 2nd 1st 4th 3rd 2nd 1st Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. ------ ------ ------ ------ ------ ----- Specialty Flat-Rolled Steels: Customer sales $376.1 $372.1 $326.3 $326.1 $320.9 $303.7 Operating profit 12.2 20.0 12.1 13.3 27.4 23.2 Fabricated Products: Customer sales 74.7 58.3 70.5 78.0 69.7 64.7 Operating profit 6.4 1.5 5.1 10.7 5.4 0.8 Corporate general (6.4) (6.4) (7.3) (7.2) (7.0) (7.5) - ----------------------------------------------------------------------------- Total operating profit 12.2 15.1 9.9 16.8 25.8 16.5 Interest income 2.8 3.0 1.9 3.0 3.2 3.7 Interest expense (9.3) (9.2) (8.2) (8.7) (8.5) (7.5) Gain on sale of investment in AK Steel stock - - - - 25.9 1.3 Sundry other - net (9.5) (1.6) (11.7) (12.3) (12.7) (12.9) Provision for income taxes (0.2) (0.4) (0.3) (0.9) (0.6) (0.2) - ----------------------------------------------------------------------------- Income (loss) from continuing operations (4.0) 6.9 (8.4) (2.1) 33.1 0.9 Discontinued operation - Equity in income of National-Oilwell - - - 2.0 2.8 1.5 - ----------------------------------------------------------------------------- Net income (loss) $ (4.0) $ 6.9 $ (8.4) $ (0.1) $ 35.9 $ 2.4 ============================================================================= See Notes to Condensed Consolidated Financial Statements.
-12- 14 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, 1995 (the Form 10-K) and Armco's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 (the Form 10-Q). The following summarizes significant developments in previously reported matters and any new claims asserted since March 31, 1996: In the Pension Benefit Guaranty Corporation v. Armco Inc. and Eastern -------------------------------------------------------------- Stainless Corporation (Eastern) action, at a hearing on May 29, 1996, the - ------------------------------- court deferred ruling on Armco's and Eastern's Motion to Dismiss the Derivative Claims and granted plaintiff ninety days to perform discovery regarding the Committee's investigation. In the Fultz Landfill Superfund action, Armco has identified eight additional companies which Armco will add as third-party defendants. After the addition of these parties, Armco will once again seek an equitable settlement of this case. In the Granville Solvents matter, discovery is nearly complete; trial is expected in late 1996 or 1997. The matter involving the former E. G. Smith plant in Cambridge, Ohio, has been resolved through another consent order with the United States Environmental Protection Agency under which Armco will pay a penalty of $100,000. In addition, Armco agreed to expend $200,000 on a study of means to reduce the environmental effects of nitric acid pickling. If Armco does not implement the results of the study at its operating locations, an additional payment up to $100,000 may be required. 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 1997 annual meeting of shareholders must be received by Armco by November 14, 1996, 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 1997 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 26, 1997. 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 (Loss) Per Share B. No Reports on Form 8-K were filed by Armco since March 31, 1996. -13- 15 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 person. Armco Inc. ---------------------------------- (Registrant) Date August 1, 1996 /s/ David G. Harmer -------------------- ----------------------------------- David G. Harmer Vice President and Chief Financial Officer, and Principal Financial Officer -14 - EX-11 2 EX-11 EXHIBIT 11 ARMCO INC. COMPUTATION OF INCOME (LOSS) PER COMMON SHARE (Dollars and shares in millions, except per share amounts)
Three Months Ended Six Months Ended PRIMARY June 30, June 30, - ----------------------------------------------------------------------------- 1996 1995 1996 1995 - ----------------------------------------------------------------------------- Income (loss) from continuing operations $ (4.0) $ 33.1 $ 2.9 $ 34.0 Preferred stock dividends (4.4) (4.4) (8.9) (8.9) - ----------------------------------------------------------------------------- Income (loss) from continuing operations applicable to common stock (8.4) 28.7 (6.0) 25.1 Income from discontinued operation - 2.8 - 4.3 - ----------------------------------------------------------------------------- Net income (loss) applicable to common stock $ (8.4) $ 31.5 $ (6.0) $ 29.4 Weighted average number of common shares 106.7 106.0 106.5 105.8 Weighted average number of common equivalent shares - 0.2 - 0.2 - ----------------------------------------------------------------------------- Average common shares outstanding as adjusted 106.7 106.2 106.5 106.0 - ----------------------------------------------------------------------------- Income (loss) per share from continuing operations $(0.08) $ 0.27 $(0.06) $ 0.24 Income per share from discontinued operation - 0.03 - 0.04 - ----------------------------------------------------------------------------- Net income (loss) per share $(0.08) $ 0.30 $(0.06) $ 0.28 - ----------------------------------------------------------------------------- FULLY DILUTED* - ------------- Income (loss) from continuing operations $ (4.0) $ 33.1 $ 2.9 $ 34.0 Preferred stock dividends (4.4) - (8.9) - - ----------------------------------------------------------------------------- Income (loss) from continuing operations applicable to common stock (8.4) 33.1 (6.0) 34.0 Income from discontinued operation - 2.8 - 4.3 - ----------------------------------------------------------------------------- Net income (loss) applicable to common stock $ (8.4) $ 35.9 $ (6.0) $ 38.3 - ----------------------------------------------------------------------------- Weighted average number of common shares 106.7 106.0 106.5 105.8 Weighted average number of common equivalent shares - 0.1 - 0.2 Weighted average number of preferred shares on an "if converted" basis ** 22.7 ** 22.7 - ----------------------------------------------------------------------------- Average common shares outstanding as adjusted 106.7 128.8 106.5 128.7 - ----------------------------------------------------------------------------- Income (loss) per share from continuing operations $(0.08) $ 0.26 $(0.06) $ 0.27 Income per share from discontinued operation - 0.02 - 0.03 - ----------------------------------------------------------------------------- Net income (loss) per share $(0.08) $ 0.28 $(0.06) $ 0.30 - ----------------------------------------------------------------------------- Shares of stock outstanding at June 30 Common 106.6 106.1 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%. ** Antidilutive
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-31-1996 JUN-30-1995 181,000 0 200,400 0 226,400 615,600 1,237,000 569,300 1,916,300 377,800 364,200 1,100 0 185,900 (420,000) 1,916,300 881,200 881,200 808,500 808,500 0 0 18,500 3,500 600 2,900 0 0 0 2,900 (0.06) (0.06)
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