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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1994
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OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
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Commission File No. 1-873-2
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ARMCO INC.
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(Exact name of registrant as specified in its charter)
Ohio 31-0200500
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Oxford Centre, 301 Grant St., Pittsburgh, PA 15219-1415
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(Address of principal executive offices, Zip Code)
(412) 255-9800
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(Registrant's telephone number, including area code)
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(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
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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
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares of common stock outstanding at July 31, 1994: 104,692,152
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ARMCO INC.
INDEX
Page
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Part I. Financial Information
Condensed Statement of Consolidated Financial Position -
June 30, 1994 and December 31, 1993 2
Condensed Statement of Consolidated Operations and
Retained Deficit -
Three and Six Months Ended June 30, 1994 and 1993 3
Condensed Statement of Consolidated Cash Flows -
Six Months Ended June 30, 1994 and 1993 4
Notes to Condensed Consolidated Financial Statements 5-10
Management's Discussion and Analysis of the Condensed
Consolidated Financial Statements 11-17
Segment Report 18
Part II. Other Information
Item 1 Legal Proceedings 19
Item 6 Exhibits and Reports on Form 8-K 20
Signatures 22
Exhibits
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ARMCO INC.
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(Unaudited)
(Dollars in millions) June 30, December
31,
1994 1993
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ASSETS
Current assets
Cash and cash equivalents $ 152.1 $ 183.5
Receivables, less allowance for doubtful accts 186.2 185.1
Inventories (Note 2) 177.2 205.5
Net assets held for sale 27.5 30.9
Other (Note 4) 44.1 20.4
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Total current assets 587.1 625.4
Investments
Investment in National-Oilwell (Note 5) 88.4 83.9
Investment in North American Stainless (Note 5) 50.3 43.8
Investment in AFSG (Note 6) 97.1 97.1
Other, less allowance for impairment 29.5 44.3
Property, plant and equipment 1,023.5 983.0
Accumulated depreciation (479.2) (455.2)
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Property, plant and equipment - net 544.3 527.8
Deferred tax asset 338.5 295.6
Goodwill and other intangible assets 159.7 162.6
Other assets 20.4 24.2
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Total assets $1,915.3 $1,904.7
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LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Accounts and notes payable $ 110.1 $ 119.6
Employee benefit obligations 137.0 98.3
Accrued salaries and wages 30.1 28.7
Other accrued liabilities 93.7 98.1
Current portion of long-term debt
and lease obligations 2.7 8.3
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Total current liabilities 373.6 353.0
Long-term debt and lease obligations,
less current portion 381.9 379.7
Long-term employee benefit obligations 1,265.4 1,270.9
Other liabilities 138.8 204.5
Commitments and contingencies (Notes 6 and 9)
Class B common stock of subsidiary,
redemption values $12.7 and $13.2 9.9 9.7
Shareholders' deficit (Note 8)
Preferred stock - Class A 137.6 137.6
Preferred stock - Class B 48.3 48.3
Common stock 1.0 1.0
Additional paid-in capital 953.5 951.1
Retained deficit (1,416.5) (1,450.3)
Unrealized gain on equity securities 26.1 -
Other (4.3) (0.8)
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Total shareholders' deficit (254.3) (313.1)
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Total liabilities and shareholders' deficit $1,915.3 $1,904.7
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<FN>
See Notes to Condensed Consolidated Financial Statements
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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,
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1994 1993 1994 1993
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Net sales $354.9 $ 454.1 $ 734.5 $ 880.7
Cost of products sold (316.3) (405.6) (663.0) (792.8)
Selling and administrative expenses (24.6) (31.5) (48.4) (63.0)
Special charge (Note 3) - - (20.0) -
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Operating profit 14.0 17.0 3.1 24.9
Interest income 1.9 1.3 3.8 2.9
Interest expense (8.4) (10.6) (17.3) (21.4)
Sundry other - net (10.4) (11.1) (21.1) (16.8)
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Loss before income taxes (2.9) (3.4) (31.5) (10.4)
Credit for income
taxes (Notes 4 and 10) 29.8 2.2 29.6 9.1
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Income (loss) from Armco and
consolidated subsidiaries 26.9 (1.2) (1.9) (1.3)
Equity in losses of Armco Steel
Company, L.P. (Note 4) - - - (17.9)
Gain on investment in
Armco Steel Company, L.P. (Note 4) 36.5 - 36.5 -
Equity in income (loss) of
equity companies (Note 5) 6.5 (0.2) 8.1 (3.3)
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Income (loss) from continuing
operations 69.9 (1.4) 42.7 (22.5)
Discontinued operations
-Worldwide Grinding Systems
Income from operations - 10.1 - 9.2
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Income (loss) before cumulative
effect of accounting changes 69.9 8.7 42.7 (13.3)
Cumulative effect of changes in
accounting for postretirement
and postemployment benefits and
income taxes (Note 11) - - - (307.5)
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Net income (loss) 69.9 8.7 42.7 (320.8)
Retained deficit,
beginning of period (1,482.0) (1,124.7) (1,450.3) (790.7)
Preferred stock dividends (4.4) (4.4) (8.9) (8.9)
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Retained deficit, end of period $(1,416.5) $(1,120.4) $(1,416.5) $(1,120.4)
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Weighted average number of
common and common equivalent
shares outstanding-primary 104.6 104.2 104.4 103.7
Net income (loss) applicable
to common stock $ 65.5 $ 4.3 $ 33.8 $(329.7)
Per share of common stock-primary
Income (loss) from continuing
operations $ 0.63 $ (0.06) $ 0.32 $ (0.30)
Income from discontinued
operations - 0.10 - 0.09
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Income (loss) before cumulative
effect of accounting changes 0.63 0.04 0.32 (0.21)
Cumulative effect of changes in
accounting for postretirement
and postemployment benefits and
income taxes - - - (2.97)
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Net income (loss) per share
- primary $ 0.63 $ 0.04 $ 0.32 $ (3.18)
Net income (loss) per share
- fully dilutive 0.55 * * *
Cash dividends per share
$2.10 Class A $ 0.525 $ 0.525 $ 1.050 $ 1.050
$3.625 Class A 0.906 0.906 1.813 1.813
$4.50 Class B 1.125 1.125 2.250 2.250
<FN>
* Antidilutive or dilution less than 3%
See Notes to Condensed Consolidated Financial Statements
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ARMCO INC.
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
(Unaudited)
(Dollars in millions) Six Months Ended
June 30,
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1994 1993
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Cash flows from operating activities:
Net income (loss) $ 42.7 $ (320.8)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and lease-right amortization 24.6 28.1
Income from discontinued operations - (9.2)
Gain on sales of investments and facilities (67.2) (0.9)
Equity in undistributed (earnings) losses
of associated companies (5.7) 21.4
Special charge 20.0 -
Cumulative effect of accounting changes - 307.5
Other 3.5 5.8
Change in assets and liabilities, net of
effects of acquisitions and dispositions:
Accounts receivable (8.2) (39.9)
Inventory 28.2 (14.1)
Payables and accrued expenses 10.9 (8.1)
Other assets and liabilities - net (28.1) 20.0
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Net cash provided by (used in) operating
activities 20.7 (10.2)
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Cash flows from investing activities:
Net proceeds from the sale of businesses
and asset 1.8 12.9
Proceeds from the sale and maturity of
marketable securities - 1.8
Proceeds from the sale of investments 15.9 4.5
Purchase of marketable securities - (0.1)
Purchase of investments (8.3) (0.9)
Contributions to equity investees (6.1) (4.6)
Capital expenditures (41.0) (17.5)
Net cash used in discontinued operations (2.5) (43.4)
Other 2.7 0.2
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Net cash used in investing activities (37.5) (47.1)
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Cash flows from financing activities:
Proceeds from drawdown of construction debt 7.5 -
Principal payments on debt (10.9) (5.2)
Change in notes payable (0.8) (2.4)
Dividends paid (8.9) (8.9)
Other (1.7) 0.9
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Net cash used in financing activities (14.8) (15.6)
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Effect of exchange rate changes on cash and
cash equivalents 0.2 (2.6)
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Net change in cash and cash equivalents (31.4) (75.5)
Cash and cash equivalents:
Beginning of year 183.5 171.3
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End of period $152.1 $ 95.8
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Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 17.3 $ 22.1
Income taxes 0.1 1.6
Supplemental schedule of noncash investing and
financing activities:
Issuance of restricted stock 2.5 0.1
<FN>
See Notes to Condensed Consolidated Financial Statements.
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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, 1993.
In the opinion of Armco's management, the accompanying condensed
consolidated financial statements contain all adjustments, which were
of a normal recurring nature, necessary to present fairly, in all
material respects, the financial position as of June 30, 1994, the
results of operations for the three and six months ended June 30, 1994
and 1993 and cash flows for the six months ended June 30, 1994 and
1993. The results of operations for the three and six months ended
June 30, 1994 are not necessarily indicative of the results to be
expected for the year 1994.
2. Armco's inventories are valued at the lower of cost or market. Cost
of inventories at most of Armco's domestic operations is measured on
the LIFO - Last In, First Out - method. Other inventories are valued
principally at average cost.
June 30, December 31,
Inventories on LIFO: 1994 1993
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Finished and semi-finished $ 158.0 $ 190.8
Raw materials and supplies 26.9 21.5
Less - Adjustment to state
inventories at LIFO value (36.5) (38.5)
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Total 148.4 173.8
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Inventories on average cost:
Finished and semi-finished 11.2 14.1
Raw materials and supplies 17.6 17.6
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Total 28.8 31.7
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Total inventories $ 177.2 $ 205.5
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3. In the six months ended June 30, 1994, Armco recorded a special charge
of $20.0 for expenses associated with the temporary idling and
restructuring of its Empire-Detroit steelmaking facilities in
Mansfield and Dover, Ohio. These facilities are to be idled until
completion of construction of a new thin-slab continuous caster at the
Mansfield facility, scheduled for the second quarter of 1995.
Approximately two-thirds of the charge is associated with group
insurance, workers' compensation and other benefits for employees
while the plant is idled. The remaining third of the charge relates
to inventory writedowns and work force reductions. The liabilities
related to this charge are recorded primarily in the current portion
of employee benefit obligations in the Condensed Statement of
Consolidated Financial Position.
4. On April 7, 1994, Armco Steel Company, L.P. (ASC), a fifty percent
owned joint venture limited partnership between subsidiaries of Armco
and Kawasaki Steel Corporation, completed an initial public offering
and recapitalization. As part of this transaction, the business and
assets of ASC were transferred to AK Steel Corporation (AK Steel), a
newly formed, publicly traded company. In exchange for its interest
in ASC, Armco received 1,023,987 shares of stock in AK Steel with a
June 30, 1994 market value of $26.1, recorded in Other current assets
with a corresponding credit in Unrealized gain in equity securities.
The stock represents about four percent of the outstanding AK Steel
shares. In addition, Armco was released from certain obligations to
make future cash payments to the former joint venture. The number of
shares received and other terms of the restructuring and
recapitalization were determined by arm's-length negotiations.
As a result of the transaction, in the three and six months ended June
30, 1994, Armco recognized nonrecurring gains totaling $66.5, or $.64
per share, primarily as a result of its release from certain
obligations, as discussed above, recognition of deferred pension
curtailment gains established at ASC's formation and a tax benefit
related to the effect of this transaction on Armco's deferred tax
asset position. Of the $66.5, a $30.0 tax benefit is recorded in
Credit for income taxes and $36.5 is recognized as a Gain on
investment in Armco Steel Company, L.P. In
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addition, should Armco decide to sell its shares in AK Steel,
following the 180-day waiting period included in the transaction
agreement, it would recognize a gain equal to the net proceeds
received upon such sale.
Losses incurred by ASC during the first quarter of 1993 reduced
Armco's investment in ASC to zero, after which Armco stopped recording
its equity in losses of the joint venture.
5. Armco and Acerinox S.A. of Spain each own a 50% partnership interest
in North American Stainless (NAS) through their respective
subsidiaries, First Stainless Inc. and Stainless Steel Invest, Inc.
On July 18, 1994, Armco announced the signing of a letter of intent to
sell 90% of its 50% equity interest in NAS for $73.0 in cash. Armco
expects to record a gain of approximately $27.0 on completion of the
sale, which is expected to occur in the third quarter of this year.
In the second quarter of 1994, Armco and Acerinox, together invested
an additional $12.1 in NAS. Armco is currently limited, under its
debt agreements, as to the amount of contributions it can make to its
joint venture partnerships.
In the three and six months ended June 30, 1994, National-Oilwell,
Armco's oil field equipment joint venture with USX, sold certain
productive assets and lines of business. In the three and six month
periods, Armco recognized $4.4 in equity income related to the net
gain on these sales.
6. Armco Financial Services Group (AFSG) consists primarily of insurance
companies which Armco intends to sell and which continue underwriting
activities (AFSG companies to be sold) and insurance companies that
have stopped writing new business for retention and are being
liquidated (runoff companies).
Armco signed a definitive agreement, dated August 2, 1994, to sell the
AFSG companies to be sold. The agreement is subject to a number of
conditions, including approvals by regulatory authorities. The
proceeds from the sale of these businesses have been pledged as
security for certain note obligations due to the runoff companies and
will be retained in the investment portfolio of the runoff companies.
Armco's investment in the AFSG companies to be sold is recorded at net
realizable value, or $73.9 at June 30, 1994. These businesses are
accounted for as discontinued operations and, as such, Armco does not
recognize, in its financial statements, AFSG's results of operations.
The following presents the summarized results of operations and
financial condition of the AFSG companies to be sold:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
Results of Operations 1994 1993 1994 1993
--------------------- ---- ---- ---- ----
Premiums earned $54.3 $57.1 $108.2 $115.6
Losses and loss adjustment
expenses (40.9) (44.5) (85.6) (87.2)
Underwriting expenses (20.7) (21.2) (41.8) (43.4)
------ ------ ------ ------
Underwriting loss (7.3) (8.6) (19.2) (15.0)
Investment income 7.3 10.3 14.6 20.7
Other income (expenses) (0.1) 1.1 (0.1) (0.2)
------ ------ ------ ------
Income (loss) before
effect of accounting change (0.1) 2.8 (4.7) 5.5
Cumulative effect of accounting
change for postretirement benefits - - - (14.0)
------ -------- ------- -------
Net income (loss) $ (0.1) $ 2.8 $ (4.7) $ (8.5)
======= ======== ======== ========
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June 30, Dec. 31,
Financial Condition 1994 1993
------------------- ------- -------
Assets:
Invested assets $408.4 $440.7
Receivables 88.4 87.7
Other assets 40.4 43.0
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Total assets 537.2 571.4
Liabilities:
Property and casualty reserves 399.0 398.3
Payables and other liabilities 30.5 37.2
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Total liabilities 429.5 435.5
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Net assets 107.7 135.9
Net income not recognized (5.7) (10.4)
Unrealized investment (gain) loss
not recognized 10.2 (13.3)
Loss on disposal of business (45.0) (45.0)
Net liabilities to be retained 6.7 6.7
------ ------
Armco's investment $ 73.9 $ 73.9
======= ======
The runoff companies are accounted for by Armco as discontinued
operations under the liquidation basis of accounting whereby all
future cash inflows and outflows are considered. Armco believes,
based on current facts and circumstances, including the opinion of
outside actuaries, that future changes in estimates of net
losses relating to the ultimate liquidation of the runoff companies
will not be material to Armco's financial position or liquidity. As
of June 30, 1994 and December 31, 1993, Armco's investment in the net
assets of the runoff companies was $23.2.
There are various matters pending which involve AFSG, relating to
litigation, arbitration and regulatory affairs, including matters
related to Northwestern National Insurance Company, a runoff company
currently involved in, among other matters, arbitration and litigation
with respect to certain reinsurance programs. The ultimate liability
from such matters at June 30, 1994 cannot be determined; but in
Armco's opinion, based on current facts and circumstances and the
views of outside counsel and advisors, any liability resulting will
not materially affect Armco's financial condition or liquidity.
However, it is possible that due to fluctuations in Armco's results,
future developments with respect to changes in the ultimate liability
could have a material effect on future interim or annual results of
operations.
7. Armco has in place an agreement with a group of banks to provide a
credit facility for borrowings up to $170.0 on a revolving credit
basis until December 31, 1995, secured by certain of Armco's
receivables and inventories. At June 30, 1994, Armco had no
borrowings outstanding under the agreement, but had utilized $83.8 of
the credit facility as support for letters of credit.
As amended in the second quarter of 1994, the credit agreement
requires Armco to maintain a minimum working capital of $150.0 from
May 1, 1994 through August 31, 1994, dropping to $130.0 from September
1, 1994 through December 31, 1994. At June 30, 1994, Armco's working
capital, as defined, was $212.7. In addition, Armco must maintain
cumulative net income greater than zero for the year 1994, increasing
by $10.0 per quarter in 1995, and meet certain ratio requirements.
Noncompliance with any of these covenants or the occurrence of any
other event of default could result in the lending banks terminating
their commitments under the credit agreement and/or accelerating the
payment of amounts due thereunder.
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8. Under the terms of the credit agreement (Note 7), 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 these tests in the near term.
Armco is incorporated in the State of Ohio and is permitted to pay
dividends on its common and preferred stock only to the extent that it
has surplus as defined in the corporate statute of Ohio. At June 30,
1994, the amount from which Armco is permitted to pay dividends was
$123.3.
At its July 1994 meeting, the Board of Directors declared the regular
quarterly dividends payable on Armco's $2.10 Cumulative Convertible
Class A, $3.625 Cumulative Convertible Class A and $4.50 Cumulative
Convertible Class B preferred stock issues.
9. A subsidiary of LTV Steel Company and First Taconite Company, a
subsidiary of Armco, each owned a 50% interest in the properties and
assets of Reserve Mining Company (Reserve Mining), a Minnesota
partnership that produced taconite iron ore pellets and which filed
for reorganization under Chapter 11 in 1986. On August 17, 1989,
Cyprus Northshore Mining Corporation (Cyprus), a wholly owned
subsidiary of Cyprus Minerals Company, purchased the assets of Reserve
Mining. On that date, Armco and First Taconite Company entered into
an agreement with the State of Minnesota, the Reserve Mining Company
bankruptcy trustee and Cyprus, whereby Cyprus agreed to operate the
Reserve Mining facility and, upon the purchase by AK Steel (formerly
ASC) of certain quantities of iron ore pellets produced by the
facility, or upon an approved modification to a tailings disposal site
closure plan by the state as provided in the agreement, Cyprus agreed
to assume closure and perpetual maintenance obligations of the
tailings disposal site. Cyprus continues to operate the facility.
In the second quarter of 1994, the Pension Benefit Guaranty
Corporation (PBGC) filed suit seeking a judgment against Armco for the
liability of Reserve Mining for the alleged underfunded amount of
guaranteed benefits to be paid by the PBGC. On June 30, 1994, Armco
settled this litigation. Under the agreement, Armco paid the PBGC
$10.0 in connection with the Reserve Mining pension liability and
agreed to contribut $17.5 to the Armco Inc. Pension Agreements Plan.
These amounts had been previously accrued.
In connection with the formation of ASC, ASC assumed and agreed to
satisfy and indemnify Armco against certain obligations and
liabilities related to the business and assets transferred to ASC
including, among other things, environmental-related costs and
obligations, employee benefit obligations, and liabilities under
certain long-term supply contracts. As part of the recapitalization
which resulted in the formation of AK Steel (Note 4), AK Steel assumed
such obligations and indemnification of Armco.
NAS had long-term debt outstanding totaling $117.9 at June 30, 1994 as
well as a revolving bank credit facility totaling $40.0, of which
$39.0 was used as of June 30, 1994. At December 31, 1993 and March
31, 1994, NAS was not in compliance with certain covenants contained
in these loan agreements. Lenders have agreed to waive compliance
with those covenants as of December 31, 1993 and March 31, 1994 and,
in the second quarter of 1994, agreed to amendments to the covenants
which bring the joint venture back into compliance.
Armco provides a $7.4 letter of credit to secure 50% of NAS debt
service payments. This letter of credit will be released if the
proposed sale of 90% of Armco's interest is completed (Note 5).
Armco has entered into certain contracts, which mature over the next
two years, related to nickel, a commodity used in the production of
stainless steel. These contracts involve the cash settlement of the
difference between the market price of nickel at maturity and the
contract
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price. Gains and losses related to outstanding contracts are
recognized in income currently. Based on market values at June 30,
1994, contracts with a nominal amount of $7.0 would require Armco to
pay a total of $1.5 during 1994 and 1995. Such amount has been
accrued in the financial statements.
There are various claims pending involving Armco and its subsidiaries
regarding product liability, antitrust, patent, employee benefits,
environmental and hazardous waste matters, reinsurance and insurance
arrangements (Note 6), and other matters arising out of the conduct of
Armco's business. Armco believes that the ultimate liability from
pending claims and contingent liabilities will not materially affect
the consolidated financial condition or liquidity of Armco; however,
it is possible that due to fluctuations in Armco's results, future
developments with respect to such matters could have a material effect
on the results of operations in future interim or annual periods.
Under the federal Comprehensive Environmental Response, Compensation
and Liability Act, certain analogous state laws, and the federal
Resource Conservation and Recovery Act, past disposal of wastes,
whether on-site or at other locations, may result in the imposition of
cleanup obligations by federal or state regulatory authorities or
other potentially responsible parties, even when the wastes were
disposed of in accordance with applicable laws and requirements in
existence at the time of disposal. The federal government has
asserted that joint and several liability applies in hazardous waste
litigation and courts have held that, absent proof that damages are
allocable or subject to allocation, joint and several liability will
be applied. Armco has been named as a defendant, or identified as a
potentially responsible party, in various proceedings wherein the
federal government seeks reimbursement for, or compulsory clean-up of,
hazardous waste sites. Armco has been required to perform or fund
such cleanup or participate in cleanup with others at a number of
sites at which its facilities disposed of wastes in the past and may,
from time to time, be required to remediate or join with others in the
remediation of other locations as these sites are identified by
federal or state authorities. Armco is also a party to various
private lawsuits with respect to alleged property damages and personal
injury from waste disposal sites. In addition, environmental exit
costs with respect to Armco's ongoing businesses, which costs it is
Armco's policy not to accrue until a decision is made to dispose of a
property, may be incurred if Armco makes a decision to dispose of
additional properties. These costs include remediation and closure
costs such as for cleanup of soil contamination, closure of waste
treatment facilities and monitoring commitments. While Armco believes
that the ultimate liability for the environmental remediation matters
identified to date, including the cleanup, closure, and monitoring of
waste sites, will not materially affect its consolidated financial
condition or liquidity, the identification of additional sites,
increases in remediation costs with respect to identified sites, the
failure of other potentially responsible parties to contribute their
share of remediation costs, decisions to dispose of additional
properties and other changed circumstances may result in increased
costs to Armco, which could have a material effect on its financial
condition, liquidity and results of operations.
At June 30, 1994, Armco had recorded on its Condensed Statement of
Consolidated Financial Position, legal and environmental reserves of
$79.8, of which $17.1 was classified as current.
10. In the six months ended June 30, 1993, Armco recognized income of $6.0
as the result of a settlement of state income taxes related to a
former Armco subsidiary. Of the total amount, $2.4 was recorded in
Credit for income taxes and $3.6, representing interest on the
settlement, was recorded in Sundry other - net. In addition, Armco
reversed a federal tax reserve of $4.3 as a result of the resolution
of certain tax issues. This amount was recorded in Credit for income
taxes.
11. Effective January 1, 1993, Armco adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" (SFAS 106), which
required accrual of the estimated cost of these benefits during the
years an employee is actively employed, rather than the previous
practice of expensing these benefits on a pay-as-you-go
basis after the participant is retired. Armco elected to recognize
immediately the
-9-
11
cumulative effect of this obligation and as a result
recognized a net of tax charge of $440.0, or $4.25 per share, as of
January 1, 1993.
Armco adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109) effective January 1, 1993.
The cumulative effect of adopting SFAS 109, excluding a tax benefit of
$170.3 for the cumulative effect of adoption of SFAS 106, was a
benefit of $135.6, or $1.31 per share, as of January 1, 1993.
Effective January 1, 1993, Armco adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits" and recorded $3.1, or $.03 per share, of
expense for the cumulative effect of establishing additional
liabilities for certain short-term and long-term disability benefit
plans.
12. Information relating to Armco's industry segments can be found on page
18.
- --------------------------------
-10-
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
-------------------------------------------
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
(Dollars in millions, except per share data)
GENERAL
- -------
Armco's results in the second quarter and first six months of 1994 and
1993 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1994 1993 1994 1993
---- ---- ---- ----
Net sales $ 354.9 $ 454.1 $ 734.5 $ 880.7
Operating profit 14.0 17.0 3.1 24.9
Income (loss) before cumulative
effect of accounting changes 69.9 8.7 42.7 (13.3)
Net income (loss) 69.9 8.7 42.7 (320.8)
Sales in the three and six months ended June 30, 1994 decreased 22%
and 17%, respectively, from the same periods in 1993, primarily
because of the absence in 1994 of businesses that were sold or are no
longer consolidated and the idling of operations at the Empire-Detroit
Steel Division (Empire-Detroit) in the second quarter of this year.
The businesses which have been sold or are no longer consolidated in
Armco's financial statements represented $68.2 and $132.6 of sales in
the second quarter and first six months, respectively, of 1993.
Excluding those businesses from 1993, sales would have decreased 8%
and 2% in the second quarter and first six months, respectively, of
1994 versus 1993, primarily as a result of the actions taken at
Empire-Detroit.
The second quarter operating profit was primarily attributable to
strong performances at Armco Advanced Materials Company, Coshocton
Stainless and Douglas Dynamics, Inc., partially offset by losses at
Empire-Detroit. (see Business Segment Results). Operating profit for
the three and six months ended June 30, 1993 included $7.7 and $13.0,
respectively, from businesses which Armco has sold or no longer
consolidates.
Net income in the second quarter and first six months of 1994 included
a $66.5 gain recognized as a result of the completion of an initial
public offering by Armco's former joint venture, Armco Steel Company,
L.P. (ASC). In the same periods, Armco recognized $4.4 in equity
income representing half of a net gain realized by National-Oilwell on
the sale of certain production equipment and lines of business held by
that joint venture. Net income for the first six months of 1994 also
included a $20.0 special charge for expenses related to the temporary
idling and restructuring of Empire-Detroit's steelmaking facilities.
In the second quarter of 1993, Armco reported net income of $8.7,
which included $4.6 in nonrecurring federal tax credits and $10.1 of
income from Worldwide Grinding Systems, a business which was divested
in the second half of 1993. The net loss in the six months ended June
30, 1993 included a cumulative effect charge of $307.5 for adopting
new accounting standards for postretirement and postemployment
benefits and income taxes, $9.2 of income from Worldwide Grinding
Systems, federal and state tax-related credits of $14.9, and an equity
loss of $17.9 from ASC.
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13
BUSINESS SEGMENT RESULTS
- ------------------------
Specialty Flat-Rolled Steel
- ---------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ----------------
1994 1993 1994 1993
---- ---- ---- ----
Net sales $ 269.2 $ 274.8 $ 532.4 $ 535.7
Operating profit 34.7 24.7 64.8 44.6
Shipments (000s of net tons) 174 178 351 347
Production (000s of net tons) 226 247 438 491
Capability utilization 105% 98% 102% 98%
Customer sales and tons shipped decreased by 2% in the second quarter
of 1994 versus 1993, as increases driven by demand for automotive
chrome stainless, electrical steel and stainless strip were offset by
declines in shipments in stainless flat plate and slabs, and chrome
nickel stainless sheet. The restructuring activity at Eastern
Stainless Corporation continues as Eastern's management searches for
ways to reduce losses.
For the first six months of 1994 compared to 1993, customer sales were
relatively flat on a small increase in shipments. A decrease in slab
sales due to closing the melt shop at Eastern Stainless Corporation
more than offset increased sales of stainless sheet and strip and
electrical steel. A work stoppage at Allegheny Ludlum in the second
quarter of 1994 increased demand for Armco products. The strike has
since been settled.
Operating profit increased 40% and 45%, respectively, for the second
quarter and first six months of 1994 versus 1993. In spite of a fire,
which caused an 11-day unplanned caster outage, production at the
Butler, Pennsylvania melt facility set new records in 1994,
significantly reducing the cost of products shipped from Armco
Advanced Materials Company and Coshocton Stainless Division. In
addition, reduced low-margin export sales and higher prices for
electrical steels bolstered operating profit in the segment.
Raw steel production of 226,000 tons in the second quarter of 1994 was
down 9% compared to the same period of 1993, due to the closing of the
Eastern Stainless Corporation melt shop in July 1993. However,
Butler's production in the quarter was 5% higher than production in
the second quarter of 1993. Butler's cast steel production capacity
is estimated to be 860,000 tons in 1994, versus 850,000 tons in 1993.
Outlook: Operating results are expected to continue to improve
relative to 1993 as a result of continued strong market conditions,
scheduled price increases and improved production efficiencies. Order
rates for stainless sheet and strip, particularly for the automotive
industry, are expected to remain strong through the remainder of the
year. Demand for oriented electrical steel for distribution
transformers and cold rolled non-oriented electrical steel for motors
and generators is also expected to remain strong. Expansion of sales
of these products, however, may be constrained by Butler's melting
capacity.
Through the first four months of 1994, imports of all specialty flat-
rolled steel products increased sharply compared with a year ago.
Imports of stainless sheet and strip increased 24% from the period
January through April 1993 to the same period in 1994, while domestic
shipments rose only 7%. The sharper increase in imports vis-a-vis
shipments caused import penetration to jump from 22.6% to 25.2%.
Imports of stainless plate were 44% higher in the first four months of
1994 than in 1993, while domestic shipments were only 5% higher. As a
result, import penetration of plate increased from 13.5% to 17.8%.
Electrical steel domestic shipments and imports declined approximately
4% for the four month period ended April 30, 1994 compared to the same
period in 1993, with import penetration holding at a little over
18.5%.
With respect to grain-oriented electrical steel, in 1993, Armco and a
domestic competitor, as well as several labor unions representing work
forces at specialty steelmaking plants, filed countervailing and
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14
anti-dumping petitions against Italy. There was also an anti-dumping
duty petition filed against Japan, in which Armco was not a party. In
October 1993, the International Trade Commission (ITC) issued a
preliminary finding of injury. On January 25, 1994, the U.S.
Department of Commerce announced a preliminary countervailing duty
margin of 23.14% on imports of grain-oriented electrical steel from
Italy. On February 3, the Department of Commerce announced
preliminary anti-dumping duties of 5.62% against Italy and 31.08%
against Japan. Subsequently, the Department of Commerce announced a
final countervailing duty margin of 24.42% and anti-dumping duties of
60.79% on imports of grain-oriented electrical steel from Italy. The
anti-dumping duty of 31.08% against Japan did not change. On May 18,
1994, the ITC gave a positive injury determination on the Italian
countervailing and Japanese anti-dumping petitions. On July 29, 1994,
the ITC ruled in favor of the petitioners in the Italian anti-dumping
case.
Other Steel and Fabricated Products
- -----------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ----------------
1994 1993 1994 1993
---- ---- ---- ----
Net sales $ 85.7 $ 179.3 $ 202.1 $ 345.0
Special charge - - (20.0) -
Operating profit (loss) (13.1) 2.4 (47.2) 0.3
Net sales decreased by 52% and 41% in the second quarter and first six
months, respectively, of 1994 compared to the same periods in 1993.
The shortfall was due to the absence, in 1994, of businesses that were
sold or no longer consolidated. Those businesses represented $68.2
and $132.6 in sales in the second quarter and first six months,
respectively, of 1993. Excluding those sales from the comparison, net
sales in the second quarter of 1994 would have been 23% less than in
the second quarter of 1993, primarily due to the idling of operations
at Empire-Detroit, partially offset by higher snowplow shipments at
Douglas Dynamics.
Contributing to the increased operating losses for this segment were
operating losses at Empire-Detroit of $17.9 and $59.5 in the second
quarter and first six months of 1994, respectively, compared to losses
of $7.9 and $16.0 in the same periods, respectively, in 1993. The
1994 year-to-date loss at Empire-Detroit included a special charge of
$20.0 in connection with expenses related to the temporary idling and
restructuring of Empire-Detroit's steelmaking facilities in Mansfield
and Dover, Ohio. These facilities will be idled until the installation
of a new thin-slab continuous caster at the Mansfield facility is
completed, currently scheduled for the second quarter of 1995.
Excluding the special charge, Empire-Detroit's operating loss was
reduced from $21.6 in the first quarter of 1994 to $17.9 in the second
quarter. Losses at Empire-Detroit in the first quarter of 1994
reflected the loss of the main drive motor in the blooming mill at
Mansfield in early March, increases in scrap prices of nearly $50 per
ton over prices a year ago without a corresponding increase in selling
prices and operational inefficiencies due to the extreme cold weather.
The lower losses in the second quarter are due to idling the
facilities.
Douglas Dynamics had a significant increase in operating profit due to
higher sales of snowplows as a result of record snowfalls last winter,
low customer inventory and continued strong demand for four-wheel
drive vehicles. Sawhill Tubular showed slight losses on a year-to-
date basis, reflecting continued operational difficulties experienced
with new equipment at the Sharon, Pennsylvania plant, as well as
higher hot band costs.
Outlook: Empire-Detroit is expected to incur operating losses until
the start-up of the thin-slab caster in the second quarter of 1995.
However, losses should drop below the level seen in the first half of
1994 as the full benefits of idling are realized.
Douglas Dynamics' sales and earnings are expected to grow further in
1994, driven by strong demand for four-wheel drive vehicles,
distributors' need to replace inventory, a price increase effective
with orders received after June 30, 1994 and sales of new products.
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15
DISCONTINUED OPERATIONS
- -----------------------
Armco Financial Services Group
- ------------------------------
The Armco Financial Services Group consists primarily of insurance
companies which Armco intends to sell and which continue underwriting
activities (AFSG companies to be sold) and insurance companies that
have stopped writing new business for retention and are being
liquidated (runoff companies).
Armco signed a definitive agreement, dated August 2, 1994, to sell the
AFSG companies to be sold. The sale is subject to a number of
conditions, including approvals by regulatory authorities. Armco
accounts for these businesses as discontinued operations and, as such,
does not recognize, in is financial statements, AFSG's results of
operations. Armco has an investment in the AFSG companies to be sold
of $73.9 at June 30, 1994. Proceeds from the sale will remain
committed to the support of Armco's runoff insurance subsidiaries.
AFSG companies to be sold
Direct written premiums in the second quarter and first six months of
1994 were $52.5 and $106.2, which was 6% and 5% lower than the second
quarter and first six months, respectively, of 1993. Soft markets in
commercial lines plus the decision to exit the Southwest Region
(Texas) in 1993 reduced commercial lines writings.
The loss from underwriting was $7.3 in the second quarter of 1994
compared to an $8.6 loss in the second quarter of 1993. Losses
incurred were down as a result of both a decline in the earned premium
base and focused attention to improve personal auto profitability.
The underwriting loss for the first half of 1994 was $19.2 or $4.2
more than the same period in 1993. Lower losses incurred in the
second quarter of 1994 were offset by a $5.0 increase in underwriting
loss primarily due to losses associated with the first quarter 1994
winter storms in the Northeast and Midwest.
Net investment income, including realized gains, in the second quarter
of 1994 was $7.3, a decrease of $3.0 or 29% from the second quarter of
1993. The decline in investment income was primarily a result of $0.3
in realized losses in 1994 compared to $1.8 in realized gains in 1993
and a decline in investment yield of the base portfolio, due to the
erosion of market interest rates over the last two years.
The net loss in the first six months of 1994 was $4.7, which was $3.8
less than the $8.5 loss recorded in the first half of 1993. The net
loss in 1993 included a one-time charge of $14.0 for the full
postretirement benefit transition obligation, recognized upon adoption
of Statement of Financial Accounting Standards No. 106.
Liquidity and Financial Position: At June 30, 1994 and December 31,
1993, the companies to be sold had total assets of $537.2 and $571.4,
respectively, including cash and invested assets of $408.4 and $440.7.
Net assets at June 30, 1994 were $107.7, which was $28.2 below the
December 31, 1993 balance of $135.9. The lower net assets were due to
1994 unrealized losses totaling $23.5 as a result of an increase in
market interest rates which reduced the market value of the bond
portfolio.
Insurance premiums and interest are the AFSG companies' primary
sources of cash. Total cash used by operating activities during the
first six months of 1994 was $5.2, compared to $1.8 used in the first
half of 1993. The increase in cash used in 1994 is primarily due to a
$7.8 drop in premiums collected and a $1.3 decline in interest
received. In the first six months of 1993, investing activities
provided $13.7 and financing activities used $2.8 for payment on a
note.
Outlook: Earnings for the property and casualty industry are expected
to remain flat in 1994. Pricing for normal commercial lines remains
soft. There is some expectation that firming of prices will occur in
1994 as interest rates stabilize and capital gain opportunities
lessen. Operating income for the AFSG companies to be sold is
expected to improve modestly in 1994, despite significant catastrophe
losses incurred in the first quarter. However, the increase in long-
term market interest rates during the first half of 1994 is expected
to limit capital gain opportunities. As a result, net income for AFSG
companies to be sold is expected to decline compared to 1993.
-14-
16
Runoff companies
No charges have been recorded with respect to the runoff companies
since the second quarter of 1990. Armco management continues to
believe that future charges, if any, resulting from the runoff
companies will not be material to Armco's financial position or
liquidity. However, it is possible that due to fluctuations in
Armco's results, future developments could have a material effect on
the results of operations in one or more future interim or annual
periods.
EQUITY AND OTHER INVESTMENTS
- ----------------------------
Armco Steel Company, L.P. (ASC)
- -------------------------------
ASC was an equally owned limited partnership, formed in 1989, between
subsidiaries of Armco and Kawasaki Steel Corporation. Losses incurred
by ASC in subsequent years through 1993 reduced Armco's investment to
zero, after which Armco stopped recording its equity in profits or
losses related to the operations of ASC.
On April 7, 1994, ASC completed an initial public offering and
recapitalization. As part of this transaction, the business and
assets of ASC were transferred to AK Steel Corporation (AK Steel), a
newly formed, publicly traded company. In exchange for its interest
in ASC, Armco received 1,023,987 shares of stock in AK Steel with a
market value, based on the initial offering price, of approximately
$24.0. The stock represents approximately four percent of the
outstanding shares of AK Steel. In addition, Armco was released from
certain obligations to make future cash payments to the former joint
venture. The number of shares received and other terms of the
restructuring and recapitalization were determined by arm's-length
negotiations.
As a result of the transaction, Armco recognized a nonrecurring gain
in the second quarter of 1994 totaling $66.5, or $0.64 per share,
primarily as a result of release from certain obligations discussed
above, recognition of deferred pension curtailment gains established
at ASC's formation and a $30.0 tax benefit related to the effect of
this transaction on Armco's deferred tax asset position. In addition,
should Armco decide to sell its shares in AK Steel, following the 180-
day waiting period included in the transaction agreement, it would
recognize a gain equal to the net proceeds received upon such sale.
At June 30, 1994, the stock held by Armco had a market value of $26.1.
AK Steel currently hot rolls stainless steel for Armco under a toll
rolling agreement, which is in effect through the year 2002.
National-Oilwell
Armco's equity in the income of National-Oilwell was $4.4 and $4.1 in
the second quarter and first six months of 1994 compared to equity
losses of $0.2 and $1.5 in the comparable 1993 periods. Included in
the second quarter equity income was a $4.4 net gain on the disposal
of assets associated with businesses which National-Oilwell is
exiting. Absent these gains, the joint venture would have broken even
for the quarter. In the first quarter of 1994, National-Oilwell
completed the divestiture of its unprofitable wellhead business, for
which Armco recognized a $5.0 charge against its equity income in the
fourth quarter of 1993. Improved demand for National-Oilwell core
products is anticipated over the next twelve months as oil and gas
prices begin to strengthen.
National-Oilwell maintains its own cash and credit lines and funds its
own operations, liabilities and capital expenditures. National-
Oilwell has a $96.0 credit facility which matures on March 31, 1995.
North American Stainless (NAS)
Armco and Acerinox S.A. of Spain each own a 50% partnership interest
in North American Stainless (NAS) through their respective
subsidiaries, First Stainless Inc. and Stainless Steel Invest, Inc.
On July 18, 1994, Armco announced the signing of a letter of intent to
sell 90% of its 50% equity interest in NAS for $73.0 in cash. Armco
expects to record a gain of approximately $27.0 on completion of the
sale, which is expected to occur in the third quarter of this year.
In connection with the
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17
transaction, Armco will enter into a supply contract with NAS to
provide NAS with semi-finished stainless steel.
Armco's equity income from its 50% interest in NAS was $0.5 for the
second quarter of 1994 and $0.1 for the first six months of 1994,
compared to losses of $0.3 and $2.1 in the second quarter and first
six months, respectively, of 1993. NAS shipped approximately 29,000
prime tons of product in the second quarter of 1994, operating at
close to 90% capability. Orders for chrome nickel stainless products
continue to grow, in particular, in advance of the 5% price increase
effective May 1, 1994 and as a result of the recent Allegheny Ludlum
strike. The strike has since ended. NAS continues to gain market
share and is expected to be profitable for the year.
NAS had long-term debt outstanding totaling $117.9 at June 30, 1994 as
well as a revolving bank credit facility totaling $40.0, of which
$39.0 was used as of June 30, 1994. At December 31, 1993 and March
31, 1994, NAS was not in compliance with certain covenants contained
in these loan agreements. Lenders agreed to waive compliance with
these covenants as of December 31, 1993 and March 31, 1994 and, during
the second quarter of 1994, agreed to amendments to the covenants,
which bring the joint venture back into compliance.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At June 30, 1994, Armco had $152.1 of cash and cash equivalents
compared to $183.5 at December 31, 1993. Total cash and cash
equivalents decreased $31.4 during the first six months of 1994,
primarily due to capital expenditures for the thin-slab caster at
Empire-Detroit's Mansfield, Ohio facility. Net cash used in investing
activities, including capital expenditures, was $37.5. Cash generated
by operating activities was $20.7, while financing activities used
$14.8, primarily for preferred stock dividends.
In addition to the cash on hand, Armco has a $170.0 revolving credit
facility that matures on December 31, 1995. At June 30, 1994, $83.8
of the credit facility was used as support for letters of credit and
$86.2 was available. As amended in the second quarter of 1994, the
credit agreement requires Armco to maintain a minimum working capital
of $150.0 from May 1, 1994 through August 31, 1994, dropping to $130.0
from September 1, 1994 through December 31, 1994. At June 30, 1994,
Armco's working capital, as defined, was $212.7. Beginning January 1,
1994, a cumulative net income test, as defined, became effective,
which requires Armco to have a minimum cumulative net income greater
than zero for the year 1994, increasing by $10.0 per quarter in 1995.
In addition, Armco must meet certain ratio requirements.
Noncompliance with any of these covenants or the occurrence of any
other event of default could result in the lending banks terminating
their commitments under the amended credit agreement and/or
accelerating the payments of amounts due thereunder.
On June 30, 1994, Armco settled a lawsuit with the Pension Benefit
Guaranty Corporation (PBGC) related to the alleged underfunding of
guaranteed benefits under Reserve Mining Company's pension plan (see
Note 9 of the Notes to Condensed Consolidated Financial Statements).
Under the settlement, on June 30, 1994, Armco paid $10.0 to the PBGC
in connection with the Reserve Mining pension liability and, on July
15, 1994, made a $17.5 contribution to the Armco Inc. Pension
Agreements Plan. Both amounts had been accrued for in Armco's
financial statements. In the third quarter of 1994, Armco expects to
realize approximately $73.0 on the sale of most of its interest in
NAS, as discussed above. Except for capital projects and normal
operating expenditures, Armco has no significant amounts of debt or
other cash commitments due through the remainder of the year.
Armco anticipates that its capital expenditures for 1994 will be
approximately $100.0, including $40.0 for normal ongoing maintenance,
environmental and expansion capital as well as about $60.0 of
expenditures on the $100.0 thin-slab caster project at the Mansfield,
Ohio plant, which was discussed in the Other Steel and Fabricated
Products section. Financing for a significant portion of this project
has been obtained, and installation of the caster is expected to be
completed in the second quarter of 1995.
On July 15, 1994, 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
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$3.625 Cumulative Convertible Preferred Stock, Class A, each payable
September 30, 1994 to shareholders of record on August 26, 1994. 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 3, 1994, to shareholders of record on August
26, 1994. Payment of dividends on Armco's common stock is currently
prohibited under the terms of certain of Armco's debt instruments.
Under the terms of the amended credit agreement, Armco is not
permitted to pay dividends on its common stock.
-17-
19
ARMCO INC.
SEGMENT REPORT
(Unaudited)
(Dollars in millions)
1994 1993
------------- -----------------------------
2nd 1st 4th 3rd 2nd 1st
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
----- ----- ----- ----- ----- -----
Specialty Flat-Rolled Steel:
Customer sales $269.2 $263.2 $225.5 $240.3 $274.8 $260.9
Operating profit 34.7 30.1 12.2 18.7 24.7 19.9
Other Steel and Fabricated Products:
Customer sales 85.7 116.4 138.0 179.5 179.3 165.7
Special charges - (20.0) - (165.5) - -
Operating profit (loss) (13.1) (34.1) (11.8) (172.0) 2.4 (2.1)
Corporate General (7.6) (6.9) (10.6) (7.4) (10.1) (9.9)
- -----------------------------------------------------------------------------
Total operating profit (loss) 14.0 (10.9) (10.2) (160.7) 17.0 7.9
- -----------------------------------------------------------------------------
Interest income 1.9 1.9 1.4 0.7 1.3 1.6
Interest expense (8.4) (8.9) (10.3) (11.0) (10.6) (10.8)
Sundry other - net (10.4) (10.7) (6.5) (12.8) (11.1) (5.7)
Credit (provision) for
income taxes 29.8 (0.2) (0.2) (1.6) 2.2 6.9
- -----------------------------------------------------------------------------
Income (loss) of Armco and
consolidated subsidiaries 26.9 (28.8) (25.8) (185.4) (1.2) (0.1)
Equity in losses of Armco Steel
Company, L.P. - - (10.0) - - (17.9)
Gain on investment in Armco
Steel Company, L.P. 36.5 - - - - -
Equity in income (loss) of other
equity companies 6.5 1.6 (9.9) (2.6) (0.2) (3.1)
- -----------------------------------------------------------------------------
Income (loss) from continuing
operations 69.9 (27.2) (45.7) (188.0) (1.4) (21.1)
Discontinued operations
- Worldwide Grinding Systems
Income (loss) from
operations - - - 5.0 10.1 (0.9)
Loss on disposal of business - - - (40.0) - -
- AFSG companies to be sold
Loss on disposal of business - - (45.0) - - -
- -----------------------------------------------------------------------------
Income (loss) before extraordinary
items and cumulative effect of
accounting changes 69.9 (27.2) (90.7) (223.0) 8.7 (22.0)
Extraordinary items - - (7.3) - - -
Cumulative effect of changes in
accounting for postretirement
and postemployment benefits
and income taxes - - - - - (307.5)
- -----------------------------------------------------------------------------
Net income (loss) $ 69.9 $(27.2) $(98.0) $(223.0) $ 8.7 $(329.5)
==============================================================================
<FN>
See Notes to Condensed Consolidated Financial Statements.
-18-
20
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, 1993 (the Form 10-K) and Armco's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1994 (the Form 10-Q).
As previously discussed in the Form 10-K and Form 10-Q, on or about April 7,
1994, an action was filed in the United States District Court for the
District of Minnesota by the Pension Benefit Guaranty Corporation (PBGC), on
its own behalf as statutory trustee of the Pension Plan for Reserve Mining
Company (Reserve Mining). The PBGC sought judgment against Armco for the
liability of Reserve Mining, a Minnesota partnership between a subsidiary of
Armco and a subsidiary of LTV Steel Company, for the alleged underfunded
amount of guaranteed benefits to be paid by the PBGC. On June 30, 1994,
Armco settled this litigation. Under the settlement agreement, Armco paid
the PBGC $10.0 million in connection with the Reserve Mining pension
liability, and on July 15, 1994, Armco contributed $17.5 million in cash to
the Armco Inc. Pension Agreements Plan, of which all amounts had been
previously accrued.
An action entitled Larry B. Ricke, Trustee v. Armco was filed on April 25,
--------------------------------
1994 in the United States District Court for the District of Minnesota by
the Trustee appointed by the PBGC for the purpose of recovering from Reserve
Mining assets to satisfy Reserve Mining's liability for pension benefit
entitlements which are in addition to those guaranteed by the PBGC. As
previously discussed in the Form 10-Q, the complaint alleges that Armco is
liable for the unfunded nonguaranteed benefits under the Pension Plan of
Reserve Mining in the amount of $9.2 million plus interest. The pension
benefits which are the subject of this action were part of the class
settlement of United Steelworkers of America v. Armco. Approximately 1,500
---------------------------------------
members of the class signed individual releases (the 19 members who did not
are plaintiffs in the Warner, Donovan, et al. v. Armco litigation) releasing
--------------------------------
Armco from all claims, liabilities, etc. based upon or which arise out of
any Reserve Mining Employee Pension Benefit Plan. Armco believes these
releases bar the claims of the Trustee. A motion for summary judgment will
be filed on or before August 26, 1994.
As previously discussed in the Form 10-K, an action entitled Adamson, Harold
---------------
E., et al. v. Armco was filed in July 1992 in the United States District
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Court for the District of Minnesota by former Reserve Mining salaried
employees seeking damages arising from the welfare benefit plans of Reserve
Mining. Plaintiff's counsel has estimated the amount of such claims to be
approximately $12.0 million. Armco filed a Motion to Dismiss this action on
the basis of the statute of limitations. On February 17, 1993, the Court
dismissed plaintiffs' state law, ERISA and fiduciary claims with prejudice
and plaintiffs' independent fiduciary claims without prejudice. On October
22, 1993, the Court granted Armco's motion to dismiss in its entirety. On
November 22, 1993, plaintiffs filed a notice of appeal on the February 17
and October 22 decisions. The appeal was argued before the Eighth Circuit
Court of Appeals on June 13, 1994. No decision has been rendered to date.
As previously discussed in the Form 10-K, as a condition to the settlement
of the Avalos v. Atlantic Richfield Company, (ARCO), et al. action, about
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300 individuals who were not represented by counsel or who had only recently
had counsel appear on their behalf and who did not wish to settle their
claims were severed from that action and transferred to a separate action
styled Rosa Ann Barrett, et al. v. ARCO, et al. in the United States
----------------------------------------
District Court for the Southern District of Texas, Houston Division. In
June 1994, the court granted summary judgment against all but two of the
Barrett plaintiffs on the basis that they had not established a factual
basis for their claims. Final judgment has not been entered, but is
expected in this case. On December 13, 1993, Rhonda Sills, on behalf of
herself and two of her children, sued the same defendants as in the Avalos
------
action. In January 1994, a suit on behalf of Rod Luke Chambers and about 30
other plaintiffs was filed against the ARCO defendants. These suits are
based on the same theories as those asserted in the Avalos case and seek an
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unspecified amount of damages. Armco believes
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the Barrett, Sills and Chambers lawsuits are not well-founded and,
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accordingly, no liability has As previously discussed in the Form 10-K, on
February 2, 1994, the Missouri Department of Natural Resources (Missouri
DNR) issued a Notice of Violation to GS Technologies, Inc. (GS Technologies)
for failure to obtain permits prior to the construction/modification of ten
processes or pieces of equipment. These changes were made before the Kansas
City facility was sold to GS Technologies as part of Armco's sale of its
Worldwide Grinding Systems Division in late 1993. Full settlement of the
Notice of Violation has been reached with Missouri DNR, which will require
payment of $28,000 in penalties. Settlement documents are being drafted.
As previously discussed in the Form 10-K, on or about July 31, 1990, the
State of Connecticut filed an action entitled Leslie Carothers, Commissioner
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of Environmental Protection v. Cyclops Corporation, Detroit Strip Division
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in the Connecticut State Superior Court, Judicial District of Hartford/New
Britain at Hartford, seeking certain penalties and a permanent injunction
against Cyclops Corporation to restrain it from discharging wastewater into
the waters of the State of Connecticut without a permit. The claims involve
a closed facility in Hamden, Connecticut. Armco, as successor to Cyclops
Corporation, and the State of Connecticut have signed a Consent Order under
which Armco agreed to perform certain remedial investigations and
activities. The penalty claim in the litigation has been resolved by
payment of $60,000 in penalties.
As previously discussed in the Form 10-K, in September 1992, National Supply
Company, Inc., a wholly owned subsidiary of Armco (National Supply) and a
50% general partner in National-Oilwell, received a letter from the United
States Environmental Protection Agency, which asserted that National Supply
and/or National-Oilwell is a potentially responsible party (PRP) under the
Comprehensive Environmental Response, Compensation and Liability Act with
respect to the Odessa Drum Company, Inc. Superfund site, located in Odessa,
Ector County, Texas. Armco executed an agreement for de minimis settlement.
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Total payment is expected to be less than $1,000.
The estimated remediation costs for the Fultz Landfill Superfund Site
reported in the Form 10-K have been revised from $22.0 million to $15.0
million. Armco continues to be one of four main PRP's, at this site but the
Department of Justice has agreed to use its offices to bring other
appropriate parties into the case.
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
Forms 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 the Company'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
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A. The following is an index of the exhibits included in the Form
10-Q:
Exhibit 10 Stock Purchase Agreement among Armco, Armco
Financial Services Corporation and Vik Brothers
Insurance, Inc. Dated as of August 2, 1994, Sale of
Stock of Northwestern National Holding Company, Inc.
Exhibit 11 Computation of Income (Loss) Per Share
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B. The following Reports on Form 8-K were filed by Armco since March
31, 1994.
Report Date Description
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April 7, 1994 Reporting that Armco would record
nonrecurring gains in the second quarter
as a result of the initial public offering
and recapitalization of its former joint
venture ASC (now publicly owned and
renamed AK Steel Holding Corporation)
which was completed on April 7, 1994.
April 7, 1994 Reporting the pro forma financial
information on the completed initial
public offering and recapitalization of
ASC. As part of the transaction, the
business and assets of ASC were
transferred to AK Steel Holding
Corporation, a newly formed and
publicly traded company. In exchange for
its interest in ASC, Armco received
1,023,987 shares of stock in AK Steel
Holding Corporation with a market value,
based on the initial public offering
price, of approximately $24.0 million. In
addition, Armco was released from certain
obligations to make future cash payments
to the former joint venture.
June 30, 1994 Reporting that Armco settled the Reserve
Mining litigation with the PBGC. Under
the terms of the agreement, Armco was to
pay the PBGC $10.0 million in connection
with the Reserve Mining pension liability
and contribute $17.5 million in cash to
the Armco Inc. Pension Agreements Plan on
July 15, 1994.
July 15, 1994 Reporting that Armco signed a letter of
intent to sell most of its interest in
North American Stainless (NAS), a 50-
percent joint venture with Acerinox S.A.
of Spain (Acerinox). Under the terms of
the letter of intent, Armco will sell 90%
of its equity interest to Acerinox and
will retain a five percent ownership
interest in the venture and would continue
to supply NAS with chrome nickel stainless
steel coils for a period after the sale.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed on behalf of the registrant by the following
duly authorized persons.
Armco Inc.
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(Registrant)
Date August 12, 1994 /s/ D. G. Harmer
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D. G. Harmer
Vice President and Chief
Financial Officer
Date August 12, 1994 /s/ P. G. Leemputte
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P. G. Leemputte
Controller
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