-----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, ExH+G5l3mARmruc63ev/a7cXbU/Mjff3RGBVoBy3/PJj7IIJjZxf9JofYNXAnclq Wfk5/FrP0Ta5XKpsrtZ1oA== 0000007383-96-000039.txt : 19961106 0000007383-96-000039.hdr.sgml : 19961106 ACCESSION NUMBER: 0000007383-96-000039 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961104 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: 96653610 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 SEPTEMBER 30, 1996 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 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 September 30, 1996: 106,616,146 2 ARMCO INC. INDEX Page ---- Part I. Financial Information Condensed Statement of Consolidated Financial Position - September 30, 1996 and December 31, 1995 2 Condensed Statement of Consolidated Operations and Retained Deficit - Three and Nine Months Ended September 30, 1996 and 1995 3 Condensed Statement of Consolidated Cash Flows - Nine Months Ended September 30, 1996 and 1995 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 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) September 30, December 31, 1996 1995 ------------ ------------ ASSETS Current assets Cash and cash equivalents $ 140.9 $ 136.8 Receivables, less allowance for doubtful accounts 201.8 169.4 Inventories (Note 2) 246.8 216.2 Net assets held for sale (Note 5) - 85.5 Other 8.0 5.9 - ------------------------------------------------------------------------------ Total current assets 597.5 613.8 Investments Investment in AFSG 85.6 85.6 Other, less allowance for impairment 54.6 37.2 Property, plant and equipment 1,251.9 1,208.3 Accumulated depreciation (584.0) (539.8) - ------------------------------------------------------------------------------ Property, plant and equipment - net 667.9 668.5 Deferred tax asset 325.8 326.1 Goodwill and other intangible assets 142.3 145.9 Other assets 21.6 19.5 - ------------------------------------------------------------------------------ Total assets $1,895.3 $1,896.6 - ------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities Trade accounts and notes payable $ 152.5 $ 148.2 Employee-related obligations 118.9 172.4 Other liabilities 79.5 72.6 Current portion of long-term debt 33.4 25.8 - ------------------------------------------------------------------------------ Total current liabilities 384.3 419.0 Long-term debt, less current portion 344.4 361.6 Long-term employee benefit obligations, less current portion 1,198.7 1,165.9 Other liabilities 188.1 180.5 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 (1,372.6) (1,378.5) Other (0.5) (1.9) - ------------------------------------------------------------------------------ Total shareholders' deficit (220.2) (230.4) - ------------------------------------------------------------------------------ Total liabilities and shareholders' deficit $1,895.3 $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 Nine Months Ended September 30, September 30, ------------------- ------------------- 1996 1995 1996 1995 -------- -------- -------- -------- Net sales $ 429.2 $ 404.1 $ 1,310.4 $ 1,163.1 Cost of products sold (Note 3) (381.2) (364.1) (1,189.7) (1,033.8) Selling and administrative expenses (23.8) (23.2) (69.2) (70.2) - ------------------------------------------------------------------------------ Operating profit 24.2 16.8 51.5 59.1 Interest income 2.2 3.0 8.0 9.9 Interest expense (9.0) (8.7) (27.5) (24.7) Gain on sale of investment in AK Steel stock (Note 6) - - - 27.2 Sundry other - net (Note 4) (7.2) (12.3) (18.3) (37.9) - ------------------------------------------------------------------------------ Income (loss) before income taxes 10.2 (1.2) 13.7 33.6 Provision for income taxes (0.3) (0.9) (0.9) (1.7) - ------------------------------------------------------------------------------ Income (loss) from continuing operations 9.9 (2.1) 12.8 31.9 Discontinued operations (Note 5) Gain on sale of Aerospace and Strategic Materials 6.5 - 6.5 - Equity in income of National-Oilwell - 2.0 - 6.3 - ------------------------------------------------------------------------------ Net income (loss) 16.4 (0.1) 19.3 38.2 Retained deficit, beginning of period (1,384.5) (1,361.0) (1,378.5) (1,390.4) Preferred stock dividends (4.5) (4.5) (13.4) (13.4) - ------------------------------------------------------------------------------ Retained deficit, end of period $(1,372.6) $(1,365.6) $(1,372.6) $(1,365.6) - ------------------------------------------------------------------------------ Weighted average number of common and common equivalent shares outstanding - primary 106.6 106.1 106.5 106.0 Net income (loss) applicable to common stock $ 11.9 $ (4.6) $ 5.9 $ 24.8 Earnings (loss) per common share - primary Income (loss) from continuing operations $ 0.05 $ (0.06) $ 0.00 $ 0.17 Income from discontinued operations 0.06 0.02 0.06 0.06 - ------------------------------------------------------------------------------ Net income (loss) $ 0.11 $ (0.04) $ 0.06 $ 0.23 Earnings per common share - fully diluted * * * * Cash dividends per share $2.10 Class A $ 0.525 $ 0.525 $ 1.575 $ 1.575 $3.625 Class A 0.906 0.906 2.719 2.719 $4.50 Class B 1.125 1.125 3.375 3.375 * Antidilutive or dilution less than 3% See Notes to Condensed Consolidated Financial Statements.
-3- 5 ARMCO INC. CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS (Unaudited) (Dollars in millions)
Nine Months Ended September 30, ----------------- 1996 1995 ------ ------ Cash flows from operating activities: Net income $ 19.3 $ 38.2 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and lease-right amortization 44.1 39.8 Undistributed earnings from discontinued operations - (6.4) Net gain on sales of investments and facilities (1.4) (28.4) Other 2.0 8.8 Change in assets and liabilities: Trade accounts and notes receivable (32.5) (50.4) Inventory (30.7) (41.4) Payables and accrued operating expenses 2.4 35.3 Employee benefit obligations (9.3) (25.7) Other assets and liabilities - net 3.3 5.2 - --------------------------------------------------------------------------- Net cash used in operating activities (2.8) (25.0) - --------------------------------------------------------------------------- Cash flows from investing activities: Net proceeds from the sale of businesses and assets 5.6 23.5 Proceeds from the sale and maturity of liquid investments - 24.7 Proceeds from the sale of investments 79.3 29.9 Purchase of liquid investments (0.3) (5.0) Contributions to investees (3.6) - Capital expenditures (41.9) (110.2) Other (2.2) (1.4) - --------------------------------------------------------------------------- Net cash provided by (used in) investing activities 36.9 (38.5) - --------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from drawdown of debt 2.2 - Principal payments on debt (18.1) (6.1) Dividends paid (13.4) (16.4) Other (0.7) 2.9 - --------------------------------------------------------------------------- Net cash used in financing activities (30.0) (19.6) - --------------------------------------------------------------------------- Net change in cash and cash equivalents 4.1 (83.1) Cash and cash equivalents: Beginning of period 136.8 202.8 - --------------------------------------------------------------------------- End of period $ 140.9 $ 119.7 - --------------------------------------------------------------------------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest (net of capitalized interest) $ 23.0 $ 20.3 Income taxes 0.1 0.7 Supplemental schedule of noncash investing and financing activities: Issuance of restricted stock 3.0 4.6 Debt incurred directly for property - 16.2 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 September 30, 1996, and the results of operations for the three and nine months ended September 30, 1996 and 1995 and cash flows for the nine months ended September 30, 1996 and 1995. The results of operations for the nine months ended September 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.
September 30, December 31, 1996 1995 ------------ ------------ Inventories on LIFO: Finished and semi-finished $ 260.1 $ 226.8 Raw materials and supplies 23.8 24.8 Adjustment to state inventories at LIFO value (62.8) (57.3) ------- ------- Total 221.1 194.3 ------- ------- Inventories on average cost: Finished and semi-finished 17.7 15.5 Raw materials and supplies 8.0 6.4 ------- ------- Total 25.7 21.9 ------- ------- Total inventories $ 246.8 $ 216.2 ======= =======
3. Cost of products sold for the nine months ended September 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 $5.5 and $21.3 for the three and nine months ended September 30, 1996, and $9.4 and $29.0 for the three and nine months ended September 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 and reductions in unfunded liabilities due to favorable returns on pension assets and Armco's recent contributions to the pension plans. In the nine months ended September 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 park had a market value significantly in excess of Armco's historical cost carrying value. Armco is currently discussing the sale of this property. -5- 7 5. Oregon Metallurgical Corporation (OREMET), formerly 80% owned by Armco, was part of the Aerospace and Strategic Materials business segment that Armco sold in 1985. Prior to the sale, Armco filed a suit on behalf of OREMET in the U.S. Claims Court, claiming refunds and interest on federal and state taxes. Pursuant to the sales agreement, Armco retained the benefit of its share of any proceeds of this action, net of taxes imposed on OREMET and the buyer. In 1988, as a result of a favorable settlement of this refund action with the Internal Revenue Service (IRS), Armco recorded a $15.2 net of tax adjustment to the gain on the sale of this business segment. Armco and OREMET recently reached an agreement with the IRS that the 1988 refund of taxes and interest should not, itself, have been subject to tax, further increasing the cash proceeds to Armco. In the third quarter of 1996, Armco recorded an additional $6.5 gain on the sale. Included in Net assets held for sale as of December 31, 1995 was $85.5 representing Armco's 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 operations on the Condensed Statement of Consolidated Operations and Retained Deficit. 6. During the nine months ended September 30, 1995, Armco sold all of the shares it had received in the initial public offering and recapitalization of AK Steel Holding Corporation, recognizing a gain of $27.2. 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 September 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 September 30, 1996, Armco had recorded in its Condensed Statement of Consolidated Financial Position, legal and environmental reserves of $85.5, of which $18.1 was classified as current. -6- 8 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. 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 October 25, 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. 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 nine months ended September 30, 1996 and 1995 were as follows:
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 1996 1995 1996 1995 -------- -------- -------- -------- Net sales $ 429.2 $ 404.1 $1,310.4 $1,163.1 Operating profit 24.2 16.8 51.5 59.1 Gain on the sale of AK Steel stock -- -- -- 27.2 Income (loss) from continuing operations 9.9 (2.1) 12.8 31.9 Discontinued operations Gain on sale of Aerospace and Strategic Materials 6.5 -- 6.5 -- Equity in income of National-Oilwell -- 2.0 -- 6.3 Net income (loss) 16.4 (0.1) 19.3 38.2 Net income (loss) per common share - primary 0.11 (0.04) 0.06 0.23
Net sales in the three and nine months ended September 30, 1996 were 6% and 13% higher, respectively, than in the same periods last year, primarily due to higher sales of automotive chrome, electrical and carbon steels in the Specialty Flat-Rolled Steels segment. In the nine months ended September 30, 1996, operating profit included income of $4.2 related to the partial settlement of a business interruption insurance claim. Excluding this credit, the decrease in operating profit from last year was primarily due to the effects of planned equipment outages and higher outside processing costs. -7- 9 Income from continuing operations for the nine months ended September 30, 1996 and 1995 was $12.8 and $31.9, 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 discussing the sale of this property. During the first nine months of 1995, Armco sold all of the shares it had received in the initial public offering and recapitalization of AK Steel Holding Corporation, recognizing a gain of $27.2. Oregon Metallurgical Corporation (OREMET), formerly 80% owned by Armco, was part of the Aerospace and Strategic Materials business segment that Armco sold in 1985. Prior to the sale, Armco filed a suit on behalf of OREMET in the U.S. Claims Court, claiming refunds and interest on federal and state taxes. Pursuant to the sales agreement, Armco retained the benefit of its share of any proceeds of this action, net of taxes imposed on OREMET and the buyer. In 1988, as a result of a favorable settlement of this refund action with the Internal Revenue Service (IRS), Armco recorded a $15.2 net of tax adjustment to the gain on the sale of this business segment. Armco and OREMET recently reached an agreement with the IRS that the 1988 refund of taxes and interest should not, itself, have been subject to tax, further increasing the cash proceeds to Armco. In the third quarter of 1996, Armco recorded an additional $6.5 gain on 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 loss was recorded on the sale. The equity income of National-Oilwell, recognized prior to the fourth quarter of 1995, is reported in Discontinued operations. Net income (loss) per common share reflects a deduction of $4.5 for the third quarter and $13.4 for the first nine months of each year for preferred stock dividends declared. BUSINESS SEGMENT RESULTS - ------------------------ Specialty Flat-Rolled Steels - ----------------------------
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 1996 1995 1996 1995 -------- -------- -------- -------- Customer sales $ 350.5 $ 326.1 $1,098.7 $ 950.7 Operating profit 19.3 13.3 51.5 63.9
Customer sales for the segment were $24.4 and $148.0 higher in the third quarter and first nine months of 1996, respectively, than in the same periods of 1995, primarily as a result of higher sales of automotive chrome, electrical and carbon steels. Part of the increase was attributable to a third quarter 1995 equipment failure which resulted in lost sales last year. The nine-month period increase also reflects the idling of the Mansfield Operations during the entire first quarter of 1995 pending completion of its new thin-slab caster. The caster was completed, and the plant resumed operations, in April 1995. Year-to-date 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. -8- 10 Customer sales and shipments by major product line and total raw steel production were as follows:
Three Months Ended Sept. 30, Nine Months Ended Sept. 30, ---------------------------- --------------------------- 1996 1995 1996 1995 ------------ ------------ ------------ ----------- (tons in thousands) Sales Tons Sales Tons Sales Tons Sales Tons ------ ---- ------ ---- ------ ---- ----- ---- Automotive chrome $122.2 93 $101.9 73 $ 390.5 293 $313.4 232 Electrical 91.9 67 80.0 58 275.2 203 251.4 182 Specialty strip and sheet 59.3 23 68.4 24 191.9 73 207.1 77 Specialty semi-finished 38.4 27 42.9 24 109.3 77 93.7 58 Carbon 30.0 58 23.3 60 105.6 233 53.8 120 Other 8.7 -- 9.6 -- 26.2 -- 31.3 -- ------- ---- ------- ---- ------- ---- ------ ---- Total $350.5 268 $326.1 239 $1,098.7 879 $950.7 669 Raw steel production 369 311 1,112 816
Automotive chrome shipments were 27% higher in the third 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 first nine months 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 current year demand. Shipments of electrical steel products increased 16% in the third quarter as a result of generally good market conditions and some easing of capacity constraints. Driven by strong housing starts, demand remained strong for grain oriented electrical steel used in utility distribution transformers. However, shipments of non-oriented electrical steel used in motors and generators suffered under pressure from imports. Specialty strip and sheet shipments declined slightly in the year-to-year comparisons due to softer market conditions and increased import penetration. Average sales realization per ton was 10% lower in the third quarter of 1996 compared to 1995 as a result of the elimination of raw material surcharges and base price erosion. Specialty semi-finished shipments increased slightly in the third quarter of 1996, primarily due to export sales, which generated lower margins. A 20% reduction in average sales realization per ton reflected worldwide market softness and the elimination of raw material surcharges. Specialty semi- finished products have also been adversely affected by import competition. Carbon steel shipments in the third quarter of 1996 totaled 58,000 tons compared to 60,000 tons shipped in the same period of 1995. In the first half of 1996, Armco began exiting the lower-priced hot band market, shifting the product mix to more galvanized steel and increasing average sales realization per ton by 33%. All of Armco's carbon steel products are produced at the Mansfield and Dover Operations. Specialty Flat-Rolled Steels' operating profit for the first nine months 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. Third quarter 1996 operating profit also included an $8.8 loss from the Mansfield and Dover Operations, compared to a loss of $32.7 in the same period last year while Mansfield was ramping up. During the nine months ended September 30, 1996 and 1995, the combined Mansfield and Dover losses were $41.0 and $82.8, respectively. Mansfield, in addition to producing carbon steels, shipped a significant percentage of Armco's automotive chrome stainless in 1996. Mansfield continues to show improvement in operating cost, throughput and productivity. -9- 11 During the first nine months of 1996, operating profit for this segment was 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 order to meet demand during this time, Armco used outside processors to finish some of its stainless steels, resulting in increased costs. Outlook: With all of its equipment now fully operational, Armco expects increased production and continued reduction in losses at Mansfield in the fourth quarter of 1996. The completion of the Specialty Flat-Rolled Steels finishing facilities upgrades earlier this year resulted in increased finishing capacity, further improvement in quality and lower costs, including a reduction in the use of high cost outside processors. However, fourth quarter 1996 volume will be adversely affected by customer holiday shutdowns, while Armco's costs will be higher in the quarter due to its own annual maintenance outages. Demand for Armco's automotive chrome stainless, electrical and carbon steel products remains relatively strong. However, the market conditions for specialty strip and sheet and specialty semi-finished products have weakened and are having an adverse effect on both volume and pricing. Weak market conditions, together with higher imports, are expected to continue to exert downward pressure on shipments and pricing of specialty strip and sheet and specialty semi-finished products. In October 1996, the membership of the independent union representing approximately 1,900 employees at the Butler Operations ratified a new five- year contract. The new contract is expected to result in Armco maintaining its competitive position. Fabricated Products - -------------------
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 1996 1995 1996 1995 -------- -------- -------- -------- Customer sales $ 78.7 $ 78.0 $211.7 $212.4 Operating profit 10.5 10.7 18.4 16.9
Third quarter customer sales in this segment equaled last year's level, with higher sales at Douglas Dynamics, L.L.C., offset by a decrease in sales at Sawhill Tubular. The higher customer sales at Douglas Dynamics were a result of price increases, which offset a slight decline in the number of snowplows shipped. Although Sawhill's shipment volumes increased in the third quarter comparison, a decrease in customer sales resulted from lower prices caused by increased domestic competitive pressures and a high level of imports. Douglas Dynamics' operating profit during the three- and nine-month periods ended September 30, 1996 were slightly higher than in the same periods 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 recorded a slight decrease in profits in the third quarter comparison as a result of experiencing relatively higher costs for steel compared to product selling price. Compared to the first nine months of 1995, Sawhill's operating profit was higher due to cost reductions and quality improvements. Outlook: Douglas Dynamics anticipates somewhat lower snowplow sales over the next twelve months compared to the last twelve months as a result of reduced shipments partially offset by price increases. Operating results for the next twelve months are expected to decline somewhat from the previous twelve-month period. -10- 12 Sawhill Tubular's sales and profitability are expected to remain level for the next twelve months, although some of its markets remain soft. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- At September 30, 1996, Armco had $140.9 of cash and cash equivalents compared to $136.8 at December 31, 1995. Cash and cash equivalents increased $4.1 during the first nine months of 1996, primarily due to cash inflows of $77.0 from the sale of Armco's investment in National-Oilwell and cash generated by operations; partially offset by capital expenditures of $41.9, pension contributions totaling $28.2, principal payments on debt of $18.1 and preferred stock dividends of $13.4. 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 September 30, 1996, $77.3 of the receivables facility was used as support for letters of credit, while no borrowings were outstanding under either facility. Armco anticipates that cash expenditures for capital projects during the remainder of the year will total approximately $22.0. In addition, Armco has $6.2 of debt commitments maturing through December 1996 and expects to make discretionary pension payments of about $13.0 during the remainder of the year. During 1997, Armco expects to spend approximately $60.0 to $70.0 for capital expenditures, $27.2 in debt payments and $30.0 to $40.0 for pension funding. These expenditures will be paid out of existing cash balances and cash generated from operations and asset disposals. On October 25, 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 December 31, 1996 to shareholders of record on November 29, 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 January 2, 1997 to shareholders of record on November 29, 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 -------------------- -------------------------- 3rd 2nd 1st 4th 3rd 2nd 1st Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. ------ ------ ------ ------ ------ ------ ------ Specialty Flat-Rolled Steels: Customer sales $350.5 $376.1 $372.1 $326.3 $326.1 $320.9 $303.7 Operating profit 19.3 12.2 20.0 12.1 13.3 27.4 23.2 Fabricated Products: Customer sales 78.7 74.7 58.3 70.5 78.0 69.7 64.7 Operating profit 10.5 6.4 1.5 5.1 10.7 5.4 0.8 Corporate general (5.6) (6.4) (6.4) (7.3) (7.2) (7.0) (7.5) - ----------------------------------------------------------------------------- Total operating profit 24.2 12.2 15.1 9.9 16.8 25.8 16.5 Interest income 2.2 2.8 3.0 1.9 3.0 3.2 3.7 Interest expense (9.0) (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 (7.2) (9.5) (1.6) (11.7) (12.3) (12.7) (12.9) Provision for income taxes (0.3) (0.2) (0.4) (0.3) (0.9) (0.6) (0.2) - ----------------------------------------------------------------------------- Income (loss) from continuing operations 9.9 (4.0) 6.9 (8.4) (2.1) 33.1 0.9 Discontinued operations Gain on sale of Aerospace and Strategic Materials 6.5 - - - - - - Equity in income of National-Oilwell - - - - 2.0 2.8 1.5 - ----------------------------------------------------------------------------- Net income (loss) $ 16.4 $ (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 Reports on Form 10-Q for the quarters ended March 31, 1996 and June 30, 1996 (Form 10-Qs). The following summarizes significant developments in previously reported matters and any claims asserted since June 30, 1996: In the Larry B. Ricke, Trustee v. Armco action, on August 13, 1996, the U.S. -------------------------------- Court of Appeals affirmed the District Court's decision denying Armco's Motion for Summary Judgment. On September 26, 1996, Armco filed a Petition for Rehearing which was denied on October 21, 1996. The district court will schedule a status conference in the near future to establish procedures and discovery schedules for the case to progress to trial. In the Pension Benefit Guaranty Corporation v. Armco and Eastern Stainless ------------------------------------------------------------------- Corporation action, the court has reset the summary jury trial for February 3, - ----------- 1997, and trial on the merits for March 24, 1997. Armco has renewed its motion to dismiss the derivative claims and has filed a motion for summary judgment with respect to the direct claims. The court has set a hearing for these motions on December 5, 1996. In the Granville Solvents matter, trial is expected in 1997. In the matter involving the former E. G. Smith plant in Cambridge, Ohio, Armco paid a penalty of $100,000 and agreed to initiate a $200,000 study to reduce the environmental effects of nitric acid pickling. If Armco does not implement the results of the study, an additional penalty up to $100,000 may be assessed. 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-Qs 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 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 Common Share B. No report on Form 8-K was filed by Armco since June 30, 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 persons. Armco Inc. ----------------------------------- (Registrant) Date November 4, 1996 /s/ David G. Harmer --------------------- ----------------------------------- David G. Harmer Vice President and Chief Financial Officer Date November 4, 1996 /s/ John N. Davis --------------------- ----------------------------------- John N. Davis Vice President and Controller -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 Nine Months Ended PRIMARY September 30, September 30, - ------------------------------------------------------------------------------ 1996 1995 1996 1995 - ------------------------------------------------------------------------------ Income (loss) from continuing operations $ 9.9 $ (2.1) $ 12.8 $ 31.9 Preferred stock dividends (4.5) (4.5) (13.4) (13.4) - ------------------------------------------------------------------------------ Income (loss) from continuing operations applicable to common stock 5.4 (6.6) (0.6) 18.5 Income from discontinued operation 6.5 2.0 6.5 6.3 - ------------------------------------------------------------------------------ Net income (loss) applicable to common stock $ 11.9 $ (4.6) $ 19.3 $ 24.8 - ------------------------------------------------------------------------------ Weighted average number of common shares 106.6 106.1 106.5 105.9 Weighted average number of common equivalent shares - - - 0.1 - ------------------------------------------------------------------------------ Average common shares outstanding as adjusted 106.6 106.1 106.5 106.0 - ------------------------------------------------------------------------------ Income (loss) per share from continuing operations $ 0.05 $(0.06) $ 0.00 $ 0.17 Income per share from discontinued operation 0.06 0.02 0.06 0.06 - ------------------------------------------------------------------------------ Net income (loss) per share $ 0.11 $(0.04) $ 0.06 $ 0.23 - ------------------------------------------------------------------------------ FULLY DILUTED* Income (loss) from continuing operations $ 9.9 $ (2.1) $ 12.8 $ 31.9 Preferred stock dividends - (4.5) - - - ------------------------------------------------------------------------------ Income (loss) from continuing operations applicable to common stock 9.9 (6.6) 12.8 31.9 Income from discontinued operation 6.5 2.0 6.5 6.3 - ------------------------------------------------------------------------------ Net income (loss) applicable to common stock $ 16.4 $ (4.6) $ 19.3 $ 38.2 - ------------------------------------------------------------------------------ Weighted average number of common shares 106.6 106.1 106.5 105.9 Weighted average number of common equivalent shares - ** - 0.1 Weighted average number of preferred shares on an "if converted" basis 22.7 ** 22.7 22.7 - ------------------------------------------------------------------------------ Average common shares outstanding as adjusted 129.3 106.1 129.2 128.7 - ------------------------------------------------------------------------------ Income (loss) per share from continuing operations $ 0.08 $(0.06) $ 0.10 $ 0.25 Income per share from discontinued operation 0.05 0.02 0.05 0.05 - ------------------------------------------------------------------------------ Net income (loss) per share $ 0.13 $(0.04) $ 0.15 $ 0.30 - ------------------------------------------------------------------------------ Shares of stock outstanding at September 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 3RD 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 9-MOS DEC-31-1996 SEP-30-1996 140,900 0 201,800 0 246,800 597,500 1,251,900 584,000 1,895,300 384,300 344,400 1,100 0 185,900 (407,200) 1,895,300 1,310,400 1,310,400 1,189,700 1,189,700 0 0 27,500 13,700 900 12,800 6,500 0 0 19,300 0.06 0.15
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