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 March 31, 1995
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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 X 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 March 31, 1995: 105,918,066
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ARMCO INC.
INDEX
Page
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Part I. Financial Information
Condensed Statement of Consolidated Financial Position -
March 31, 1995 and December 31, 1994 2
Condensed Statement of Consolidated Operations and
Retained Deficit -
Three Months Ended March 31, 1995 and 1994 3
Condensed Statement of Consolidated Cash Flows -
Three Months Ended March 31, 1995 and 1994 4
Notes to Condensed Consolidated Financial Statements 5-7
Management's Discussion and Analysis of the Condensed
Consolidated Financial Statements 8-12
Segment Report 13
Part II. Other Information
Item 1 Legal Proceedings 14
Item 4 Submission of Matters to a Vote of Security Holders 14
Item 6 Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibit 11 Computation of Loss Per Common Share
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ARMCO INC.
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(Unaudited)
(Dollars in millions) March 31, December 31,
1995 1994
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ASSETS
Current assets
Cash and cash equivalents $ 211.4 $ 202.8
Short-term liquid investments 1.5 25.8
Receivables, less allowance for
doubtful accounts 196.4 183.3
Inventories (Note 2) 182.9 165.5
Net assets held for sale 2.4 25.6
Other (Note 10) 41.7 46.0
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Total current assets 636.3 649.0
Investments
Investment in National-Oilwell (Note 5) 79.9 79.5
Investment in AFSG (Note 6) 97.1 97.1
Other, less allowance for impairment 38.4 39.9
Property, plant and equipment 1,108.0 1,064.2
Accumulated depreciation (511.6) (499.6)
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Property, plant and equipment - net 596.4 564.6
Deferred tax asset 321.8 321.8
Goodwill and other intangible assets 153.1 156.4
Other assets 16.8 26.6
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Total assets $ 1,939.8 $ 1,934.9
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LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Accounts and notes payable $ 126.0 $ 122.6
Employee benefit obligations 121.3 133.8
Accrued salaries and wages 31.4 32.7
Other accrued liabilities 92.0 90.8
Current portion of long-term debt 10.4 10.5
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Total current liabilities 381.1 390.4
Long-term debt, less current portion 375.4 363.8
Long-term employee benefit obligations 1,269.6 1,255.3
Other liabilities 135.5 143.9
Commitments and contingencies (Notes 6 and 8)
Shareholders' deficit (Note 7)
Preferred stock - Class A 137.6 137.6
Preferred stock - Class B 48.3 48.3
Common stock 1.1 1.1
Additional paid-in capital 961.8 956.3
Retained deficit (1,392.5) (1,390.4)
Unrealized gain on equity securities (Note 10) 26.5 31.6
Other (4.6) (3.0)
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Total shareholders' deficit (221.8) (218.5)
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Total liabilities and
shareholders' deficit $ 1,939.8 $ 1,934.9
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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
March 31,
1995 1994
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Net sales $ 368.4 $ 379.6
Cost of products sold (327.7) (346.7)
Selling and administrative expenses (24.2) (23.8)
Special charge (Note 3) - (20.0)
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Operating profit (loss) 16.5 (10.9)
Interest income 3.7 1.9
Interest expense (7.5) (8.9)
Sundry other - net (Note 4) (11.2) (10.7)
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Income (loss) before income taxes 1.5 (28.6)
Provision for income taxes (0.2) (0.2)
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Income (loss) from Armco and consolidated
subsidiaries 1.3 (28.8)
Equity in income of equity companies (Note 5) 1.1 1.6
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Net income (loss) 2.4 (27.2)
Retained deficit, beginning of period (1,390.4) (1,450.3)
Preferred stock dividends (4.5) (4.5)
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Retained deficit, end of period $(1,392.5) $(1,482.0)
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Weighted average number of common and common
equivalent shares outstanding - primary 105.6 104.1
Net loss applicable to common stock $ (2.1) $ (31.7)
Net loss per common share - primary $ (0.02) $ (0.30)
Net loss per common share - fully dilutive * *
Cash dividends per share
$2.10 Class A $ 0.525 $ 0.525
$3.625 Class A 0.906 0.906
$4.50 Class B 1.125 1.125
<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)
Three Months Ended
March 31,
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1995 1994
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Cash flows from operating activities:
Net income (loss) $ 2.4 $ (27.2)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and lease-right amortization 12.5 12.2
Gain on sales of investments and facilities (1.5) -
Equity in net undistributed earnings of associated companies (0.1) (0.6)
Special charge - 20.0
Other 3.4 3.1
Change in assets and liabilities, net of effects of dispositions:
Accounts receivable (15.0) (10.4)
Inventory (16.8) 15.0
Payables and accrued expenses 9.0 8.0
Other assets and liabilities - net 8.7 (9.3)
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Net cash provided by operating activities 2.6 10.8
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Cash flows from investing activities:
Net proceeds from the sale of businesses and assets 15.7 0.8
Proceeds from the sale and maturity of liquid investments 24.7 -
Proceeds from the sale of investments 1.3 4.6
Purchase of investments (1.0) (6.9)
Capital expenditures (33.1) (15.4)
Net cash provided by (used in) businesses held for sale 4.4 (0.7)
Other 0.1 2.8
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Net cash provided by (used in) investing activities 12.1 (14.8)
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Cash flows from financing activities:
Proceeds from drawdown of construction debt - 7.5
Principal payments on debt - (5.6)
Dividends paid (7.5) (4.5)
Other 1.4 (1.0)
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Net cash used in financing activities (6.1) (3.6)
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Net change in cash and cash equivalents 8.6 (7.6)
Cash and cash equivalents:
Beginning of period 202.8 183.5
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End of period $ 211.4 $ 175.9
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Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of capitalization) $ 4.0 $ 4.8
Income taxes 0.1 0.1
Supplemental schedule of noncash investing and financing activities:
Issuance of restricted stock 4.4 -
Debt incurred directly for property 11.6 -
<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, 1994. 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 March 31, 1995 and the results of operations and cash flows for the
three months ended March 31, 1995 and 1994. The results of operations for
the three months ended March 31, 1995 are not necessarily indicative of the
results to be expected for the year 1995.
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.
March 31, December 31,
1995 1994
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Inventories on LIFO:
Finished and semi-finished $ 172.4 $ 158.7
Raw materials and supplies 29.7 24.8
Adjustment to state inventories
at LIFO value (43.5) (41.1)
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Total 158.6 142.4
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Inventories on average cost:
Finished and semi-finished 15.5 14.8
Raw materials and supplies 8.8 8.3
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Total 24.3 23.1
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Total inventories $ 182.9 $ 165.5
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3. In the three months ended March 31, 1994, Armco recorded a special charge
of $20.0 for expenses associated with the temporary idling and restructuring
of its Mansfield and Dover, Ohio steelmaking and finishing facilities. These
facilities were idled in March of 1994. Approximately two-thirds of the
charge was associated with group insurance and other benefits for employees
while the plant was idled. The remainder of the charge related to asset
writedowns. The Dover plant started limited production in early 1995 and the
Mansfield facility resumed operating in early April 1995, coinciding with the
start-up of its new thin-slab caster.
4. Sundry other - net in Armco's Condensed Statement of Consolidated
Operations and Retained Deficit includes expense of $9.6 and $8.3 for the
three months ended March 31, 1995 and 1994, respectively, for interest on
employees benefit obligations related to facilities which have been
discontinued. The increase is primarily due to the additional obligations
recorded for units closed or sold in 1994.
5. Armco owns a 50% interest in National-Oilwell, an oil field equipment and
supply joint venture with USX Corporation. National-Oilwell's results of
operations for the three months ended March 31, 1995 and 1994 were as
follows:
March 31, March 31,
1995 1994
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Net revenues $ 135.9 $ 129.4
Gross profit 17.7 19.5
Net income 3.0 0.5
6. At March 31, 1995, Armco Financial Services Group (AFSG) consisted
primarily of insurance companies which Armco intended to sell and which
continued underwriting activities (AFSG companies to be sold) and insurance
companies that had stopped writing new business and are being liquidated
(runoff companies).
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On April 7, 1995, the sale of the AFSG companies to be sold was completed.
The proceeds from the sale consisted of $64.2 in cash at the closing and
$15.0 to be received in three years. The latter amount is subject to
potential adjustment for adverse experience in certain insurance reserves.
Substantially all of these proceeds have been pledged as security for certain
note obligations due to the runoff companies and will be retained in the
investment portfolio of those companies. At March 31, 1995 and December 31,
1994, Armco's investment in the AFSG companies to be sold was recorded at
estimated net realizable value of $73.9. Upon completion of the sale, this
amount became part of Armco's investment in the runoff companies.
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 management continues to believe, based on
current facts and circumstances and the views of outside counsel and
advisors, that future charges, if any, resulting from the runoff companies
will not be material to Armco's financial condition 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 one or more
future interim or annual periods. As of March 31, 1995 and December 31,
1994, 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 March 31, 1995 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. Under the terms of Armco's $170.0 amended credit agreement, 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.
At its April 1995 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.
8. 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 Holding
Corporation (formerly Armco Steel Company, L.P.) 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 and Armco expects that either the purchase of such specified
quantities or the approved modification will occur in 1995.
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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, based on current facts and circumstances,
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.
Like other manufacturers, Armco is subject to various environmental laws.
These laws require expenditures to assure Armco's compliance 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. Armco believes, based on current facts and circumstances, that its
ultimate liability for environmental matters 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 environmental matters could have a material
effect on the results of operations of future interim or annual periods.
At March 31, 1995, Armco had recorded on its Condensed Statement of
Consolidated Financial Position, legal and environmental reserves of $86.0,
of which $22.1 was classified as current.
9. In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, Accounting for the Impairment of
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Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This
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statement establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets
to be held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of. The statement requires that such assets, that
are to be held and used by an entity, be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable; and that such assets, that are to be disposed
of, be reported at the lower of carrying amount or fair value less cost to
sell, unless the assets are considered a discontinued operation as defined by
Accounting Principle Board Opinion No. 30. Armco is required to adopt this
statement no later than 1996. While a study of the effects of this statement
has not been completed, Armco believes that there will be no material impact
on its Condensed Statement of Consolidated Financial Position or Condensed
Statement of Consolidated Operations as a result of adoption of this
statement.
10. On May 4, 1995, Armco announced that it had completed a series of trades
resulting in the sale of 1,023,987 shares of AK Steel Holding Corporation (AK
Steel) common stock. As a result of the sales, Armco realized total net
proceeds of $27.2. Armco had received the stock, which represented
approximately four percent of the outstanding common stock of AK Steel, in
April 1994 as part of the initial public offering and recapitalization of
that company. With the completion of these transactions, Armco no longer
owns any stock in AK Steel.
In connection with the sales, Armco will record a gain of $25.9 or $0.24 per
share in the second quarter of 1995. Armco will use available capital loss
carryforwards to offset federal and state income taxes on this gain.
At March 31, 1995 and December 31, 1994, the investment in AK Steel stock was
recorded in Other current assets with a corresponding credit in Unrealized
gain on equity securities, in the Condensed Statement of Consolidated
Financial Position.
11. Information relating to Armco's industry segments can be found on page
13.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
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CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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(Dollars in millions, except per share data)
GENERAL
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During the first three months of 1995, the previously announced asset sale by
Eastern Stainless Corporation (Eastern Stainless) was completed. Eastern
Stainless, an 84%-owned subsidiary of Armco Inc. (Armco), completed the sale
of substantially all of its assets to Avesta Sheffield Holding Company (Avesta
Sheffield) on March 14, 1995, receiving approximately $10.1 in cash and the
assumption of certain Eastern Stainless liabilities. Cash received on the
sale will be used to satisfy normal operating and employee benefit obligations
not assumed by Avesta Sheffield. Net liabilities not satisfied by the sale
proceeds or assumed by Avesta Sheffield have been retained by Armco. Such
liabilities retained by Armco totaled approximately $50.0. Upon completion of
the transaction, Eastern Stainless had no assets remaining as a corporate
legal entity and was dissolved and its corporate existence terminated without
any shareholder distribution.
On April 7, 1995, the sale of the Armco Financial Services Group ongoing
insurance companies was completed. The sale is more fully described under
DISCONTINUED OPERATIONS, below.
Armco's results in the first quarter of 1995 and 1994 were as follows:
Three Months Ended
March 31,
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1995 1994
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Net sales $368.4 $379.6
Special charge -- (20.0)
Operating profit (loss) 16.5 (10.9)
Net income (loss) 2.4 (27.2)
Net loss per common share (0.02) (0.30)
Sales in the three months ended March 31, 1995 decreased 3% from the same
period in 1994, primarily because of the idling of operations at the Mansfield
and Dover, Ohio steelmaking and finishing plants in March of last year. This
decrease was largely offset by an 11% increase in sales from the Specialty
Flat-Rolled Steel segment. The increase was achieved despite the divestiture
of Eastern Stainless which had $19.2 of sales in the first quarter of 1994 and
was not consolidated in the three months ended March 31, 1995.
As a result of the decision to idle and restructure Mansfield and Dover, Armco
recognized a $20.0 special charge in the first quarter of 1994. Excluding the
effects of the special charge, operating profit increased 81% in 1995 compared
to first quarter 1994 as a result of improved volume, pricing and productivity
in the Specialty Flat-Rolled Steel segment.
Net loss per common share reflects the deduction of $4.5 per quarter for
preferred stock dividends declared.
BUSINESS SEGMENT RESULTS
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Specialty Flat-Rolled Steel
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Three Months Ended
March 31,
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1995 1994
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Net sales $293.3 $263.2
Operating profit 47.1 30.1
Shipments (tons 000s) 187 177
Raw steel produced (tons 000s) 239 212
Capability utilization 109 % 99 %
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Customer sales and tons shipped increased by 11% and 6%, respectively, in the
first quarter of 1995 versus 1994, as strong market demand for all product
lines in this business segment continued. While the Butler, Pennsylvania, and
Zanesville and Coshocton, Ohio plants produced at full capability in both
periods, productivity improvements increased output in 1995.
On January 2, 1995, price increases of 5% to 7% went into effect for
electrical steels. Due to the strong market conditions, these increases, as
well as increases in stainless steel prices announced in late 1994 and early
1995, are expected to remain in effect. Prices for products containing
molybdenum, nickel and chrome have also been favorably impacted by raw
material price surcharges placed in effect in the first quarter of 1995.
Operating profit as a percent of sales for the three months ended March 31,
1995 and 1994 was 16% and 11%, respectively, reflecting improved volume,
productivity and a favorable product mix, as well as elimination of the
operating losses of Eastern Stainless. In the third quarter of 1994, Armco
announced that Eastern Stainless was selling its assets to Avesta Sheffield, a
stainless steel plate manufacturer. As of September 30, 1994, Armco stopped
recording Eastern Stainless' results; and the sale was completed on March 14,
1995. During the first quarter of 1994, Armco recognized $19.2 of sales and a
small operating loss from Eastern Stainless. Partially offsetting the
favorable effects on operating profit were higher raw material costs,
including those on scrap steel and alloys.
Outlook: Operating results are expected to continue to improve relative to
1994 as a result of continued strong market conditions, improved production
efficiencies and scheduled price increases. Until Mansfield become fully
operational, demand for electrical steel is expected to exceed Armco's ability
to supply. At March 31, 1995, order backlog for all products was 59% higher
than one year ago and 22% higher than December 31, 1994. However, Armco is
cautious regarding its automotive-related business based on that industry's
disappointing first quarter sales.
The Mansfield Operations, while still part of the Other Steel and Fabricated
Products segment, will use a portion of its capacity to melt and finish
specialty steels following the successful start-up of the thin-slab caster and
hot strip mill. Sales of these specialty steel products will be reported in
the Specialty Flat-Rolled Steel business segment. Mansfield's specialty steel
production is expected to relieve some of Armco's melt constraints. Testing
of the Mansfield equipment for the production of specialty steels is expected
to occur in the latter part of the second quarter of this year.
In 1994, Armco announced an expanded capital improvement program under which
it will spend up to $95.0 over the next two years to upgrade and expand its
specialty steel finishing facilities. The program is intended to reduce
existing production constraints by increasing specialty steel finishing
capacity approximately 180,000 tons per year, particularly in electrical
steels, specialty sheet and strip products, and nonautomotive chrome
stainless.
Other Steel and Fabricated Products
- -----------------------------------
Three Months Ended
March 31,
------------------
1995 1994
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Net sales $ 75.1 $116.4
Special charge -- (20.0)
Operating loss (23.1) (34.1)
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Net sales decreased by 35% in the first quarter of 1995 compared to the same
period in 1994. The shortfall was primarily due to the continued idling of
the Mansfield Operations. As a result of the temporary idling and
restructuring of the steelmaking facilities in Mansfield and Dover, Ohio,
first quarter sales were down $44.6 from last year.
Excluding the $20.0 special charge recorded in the first quarter of 1994 for
the temporary idling and restructuring of Mansfield and Dover, the operating
loss in this segment increased 64%. Armco's Mansfield Operations' operating
loss increased $2.4 from the first quarter last year. As a result of losses
generated as an idled facility in addition to higher costs incurred as the
plant prepared to start-up with its new and modernized equipment, this
facility's operating loss was $24.0 in the first quarter of 1995.
Douglas Dynamics' operating profit was down substantially from the record-
setting results of last year due to lower sales as a result of the recent mild
winter. The first quarter is traditionally the slowest for the snowplow
manufacturer, but last year's near record snowfall caused much higher than
normal sales in the 1994 first quarter. The first quarter 1995 results are
considered normal for this business. Despite an increase in sales, Sawhill
Tubular had slightly lower operating profit in the first quarter of 1995,
primarily due to higher carbon steel prices.
Outlook: The Mansfield Operations started up at the beginning of April,
successfully casting and hot rolling carbon steel. However, for the second
quarter, losses approximating the levels experienced in the first quarter are
expected. And while anticipating losses at Mansfield into the third quarter,
Armco expects the facility to be fully operational in carbon and automotive
chrome steels, and be able to return to profitability sometime in the fourth
quarter.
Douglas Dynamics' sales and earnings are expected to be lower in 1995 than in
1994, driven by the lack of snow last winter compared to the prior two years.
Sawhill Tubular's sales and profits are expected to remain flat or rise
slightly through the end of the year. Armco continues to review the
operations and prospects of Sawhill Tubular to determine how these operations
fit into Armco's future.
EQUITY AND OTHER INVESTMENTS
- ----------------------------
In the three months ended March 31, 1995 and 1994, Armco recognized $1.1 and
$1.6, respectively, of equity income from its investments in joint ventures
and equity companies. The 1994 first quarter income primarily represented the
results of, and commission income from, North American Stainless (NAS), a
former 50%-owned joint venture with Acerinox S.A. Armco sold 90% of its
investment in NAS in the third quarter of 1994. First quarter 1995 equity
income consisted primarily of the results of National-Oilwell, a 50%-owned
joint venture with USX Corporation. National-Oilwell sells oil field tubular
pipe, and produces and sells drilling and production equipment and process
pumps used in the world's oil and gas services industry. National-Oilwell
recorded sales and net income of $135.9 and $3.0, respectively, compared to
first quarter 1994 sales and net income of $129.4 and $0.5. The higher net
income relative to the 5% increase in revenues reflects the benefits of
rationalization and restructuring efforts undertaken by the joint venture in
the past few years. In the first quarter of 1995, Armco received a $1.0 cash
dividend from National-Oilwell.
National-Oilwell maintains its own cash and credit lines and funds its own
operations, liabilities and capital expenditures. National-Oilwell has a
$60.0 credit facility which expires in the first quarter of 1998.
Armco does not consider National-Oilwell part of its core business and,
therefore, continues to evaluate its options with respect to the investment in
this joint venture.
On May 4, 1995, Armco announced that it had completed a series of trades
resulting in the sale of 1,023,987 shares of AK Steel Holding Corporation (AK
Steel) common stock. As a result of the sales, Armco realized total net
proceeds of $27.2. Armco had received the stock, which represented
approximately four percent of the outstanding common stock of AK Steel, in
April 1994 as part of the initial public offering and recapitalization of that
company. With the completion of these transactions, Armco no longer owns any
stock in AK Steel.
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In connection with the sales, Armco will record a gain of $25.9 or $0.24 per
share in the second quarter of 1995. Armco will use available capital loss
carryforwards to offset federal and state income taxes on this gain.
DISCONTINUED OPERATIONS
- -----------------------
Armco Financial Services Group
- ------------------------------
At March 31, 1995, the Armco Financial Services Group consisted primarily of
insurance companies which Armco intended to sell and which continued
underwriting policies (AFSG companies to be sold) and insurance companies that
have stopped writing new business for retention and are being liquidated
(runoff companies).
AFSG companies to be sold
On April 7, 1995, Armco completed the sale of the AFSG companies to be sold to
Vik Brothers Insurance Inc., a privately held, North Carolina-based property
and casualty insurance holding company. The proceeds from the sale, consisted
of $64.2 in cash at the closing and $15.0 to be received in three years. The
latter amount is subject to potential adjustment for adverse experience in
certain insurance reserves. Substantially all of the proceeds have been
pledged as security for certain note obligations due to the runoff companies
and will be retained in the investment portfolio of those companies.
Runoff companies
The addition of the proceeds from the sale of the AFSG companies to be sold to
the investment portfolio of the runoff companies is expected to have a long-
term positive effect on the liquidity and future strength of these companies.
Armco management continues to believe, based on current facts and
circumstances and the views of outside counsel and advisors, that future
charges, if any, resulting from the runoff companies will not be material to
Armco's financial condition 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 one or more future interim or annual periods.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At March 31, 1995, Armco had $211.4 of cash and cash equivalents compared to
$202.8 at December 31, 1994. In addition, Armco had $1.5 and $25.8 of short-
term liquid investments at March 31, 1995 and December 31, 1994, respectively.
Total cash and cash equivalents increased $8.6 during the first three months
of 1995, including $24.7 from the maturity of liquid investments and $17.0 for
proceeds on the sale of assets and investments. Partially offsetting these
cash inflows were capital expenditures and $7.5 for preferred stock dividends.
Capital expenditures totaling $44.7 are presented in the Condensed Statement
of Consolidated Cash Flows, net of $11.6 of direct project financing related
to the Mansfield thin-slab caster. Operating activities provided $2.6 in
cash.
In addition to the cash on hand, Armco has a $170.0 revolving credit facility
that expires on December 31, 1995. At March 31, 1995, $80.4 of the credit
facility was used as support for letters of credit and $89.6 was available for
borrowing. Borrowings under the credit facility are secured by certain of
Armco's inventories and receivables. As amended in 1994, the credit agreement
requires Armco to be in compliance with several covenants and meet certain
ratio requirements. Based on its current financial condition and internal
forecasts through the end of 1995, Armco believes that it will remain in
compliance with all covenants.
As discussed above Armco completed the divestments of Eastern Stainless and
the AFSG companies to be sold in 1995. The Eastern Stainless sale generated
approximately $10.1 in cash, which will be used to partially fund
approximately $50.0 of liabilities Armco retained as part of the transaction.
Proceeds from the April 7, 1995 sale of the AFSG companies to be sold,
totaling $64.2, have been retained in the investment portfolio of the runoff
companies and will not be available to Armco.
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13
Armco anticipates that its 1995 cash expenditures for capital projects will
total approximately $125.0, including $34.0 for expenditures to complete the
thin-slab caster at Mansfield, $40.0 of the $95.0 expanded capital improvement
program and the remainder for normal replacement, environmental and expansion
programs. In addition, Armco anticipates that for the year, a total of $16.2
of capital expenditures for the thin-slab caster will be paid by direct
project financing.
Armco has no significant debt commitments due through the end of the year.
However, Armco expects to contribute from $15.0 to $65.0 to its major pension
funds during the remainder of 1995. The capital expenditures and pension
funding will be paid out of existing cash balances, cash generated from
operations and the sales of assets, including the sale of Armco's investment
in AK Steel common stock.
On April 28, 1995, 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 June 30, 1995 to shareholders of record
on June 2, 1995. 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 July 3, 1995, to shareholders of record on June 2,
1995. 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
the amended bank credit agreement.
NEW ACCOUNTING STANDARD
- -----------------------
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of. This statement
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be
held and used, and for long-lived assets and certain identifiable intangibles
to be disposed of. The statement requires that such assets, that are to be
held and used by an entity, be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may
not be recoverable; and that such assets, that are to be disposed of, be
reported at the lower of carrying amount or fair value less cost to sell,
unless the assets are considered a discontinued operation as defined by
Accounting Principle Board Opinion No. 30. Armco is required to adopt this
statement by not later than 1996. While a study of the effects of this
statement has not been completed, Armco believes that there will be no
material impact on its Condensed Statement of Consolidated Financial Position
or Condensed Statement of Consolidated Operations as a result of adoption of
this statement.
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ARMCO INC.
SEGMENT REPORT
(Unaudited)
(Dollars in millions)
1995 1994
------- ---------------------------------
1st 4th 3rd 2nd 1st
Qtr. Qtr. Qtr. Qtr. Qtr.
------- ------- ------- ------- -------
Specialty Flat-Rolled Steel:
Customer sales $293.3 $237.0 $279.1 $269.2 $263.2
Special charge - - (15.0) - -
Operating profit 47.1 34.0 27.5 34.7 30.1
Other Steel and Fabricated Products:
Customer sales 75.1 98.1 88.9 85.7 116.4
Special charge - - - - (20.0)
Operating loss (23.1) (3.1) (4.6) (13.1) (34.1)
Corporate General (7.5) (8.5) (9.2) (7.6) (6.9)
- ------------------------------------------------------------------------------
Total operating profit (loss) 16.5 22.4 13.7 14.0 (10.9)
Interest income 3.7 3.3 3.4 1.9 1.9
Interest expense (7.5) (8.3) (8.2) (8.4) (8.9)
Gain on sale of investments in
joint ventures - - 26.1 36.5 -
Sundry other - net (11.2) (10.9) (12.8) (10.4) (10.7)
Credit (provision) for income taxes (0.2) (0.5) (0.4) 29.8 (0.2)
- ------------------------------------------------------------------------------
Income (loss) of Armco and
consolidated subsidiaries 1.3 6.0 21.8 63.4 (28.8)
Equity in income of equity companies 1.1 3.6 3.6 6.5 1.6
- ------------------------------------------------------------------------------
Net income (loss) $ 2.4 $ 9.6 $ 25.4 $ 69.9 $(27.2)
==============================================================================
<FN>
See Notes to Condensed Consolidated Financial Statements
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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, 1994 (the Form 10-
K).
As previously described in the Form 10-K, on April 25, 1994, an action
entitled Larry B. Ricke, Trustee v. Armco was filed in the United States
--------------------------------
District Court for the District of Minnesota by the Trustee appointed by the
Pension Benefit Guaranty Corporation (PBGC) for the purpose of recovering from
Reserve Mining Company assets to satisfy Reserve Mining Company's liability
for pension benefit entitlements which are in addition to those guaranteed by
the PBGC. The pension benefits which are the subject of this action were part
of the class settlement of United Steelworkers of America v. Armco.
---------------------------------------
Approximately fifteen hundred members of the class signed individual releases
(the 19 members who did not are plaintiffs in Warner, Donovan, et. al. v.
---------------------------
Armco) releasing Armco from all claims, liabilities, etc. based upon or which
- -----
arise out of any Reserve Employee Pension Benefit Plan. Armco filed a Motion
to Dismiss the complaint on the basis of said releases which the court denied
on March 28, 1995. Armco has filed a motion seeking interlocutory appellate
review of the denial of the Motion to Dismiss.
As previously described in the Form 10-K, in the case Rosa Ann Barrett, et al.
-----------------------
v. Atlantic Richfield Company, et al., on September 20, 1994, the court
- -------------------------------------
entered a final order denying plaintiff's motion for rehearing or new trial
and dismissing all of plaintiffs' claims in this case. The Barrett plaintiffs
-------
filed a notice of appeal on October 19, 1994. On April 26, 1995, the Fifth
Circuit Court of Appeals dismissed the appeal for failure to prosecute.
The total liability on the foregoing claim and those other claims described
under ITEM 3. LEGAL PROCEEDINGS in the Form 10-K is not determinable; but, in
the opinion of management, the ultimate liability resulting will not
materially affect the consolidated financial condition or liquidity of Armco
and its subsidiaries; however, it is possible that due to fluctuations in
Armco's results, future developments with respect to changes in the ultimate
liability could have a material effect on future interim or annual results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Annual Meeting of Shareholders was held on April 28, 1995, and all eight
nominees to the Board of Directors named in Armco's Proxy Statement were
elected. Approximately 86% of the outstanding common and preferred shares
were voted. The vote on the election was as follows:
Name For Withheld
---- --- ---------
John J. Burns, Jr. 93,269,407 1,928,344
David A. Duke 93,226,286 1,971,465
John C. Haley 93,095,333 2,102,417
Paul H. Henson 91,632,786 3,565,405
Bruce E. Robbins 93,184,058 2,013,693
Burnell R. Roberts 93,153,937 2,043,813
John D. Turner 93,263,559 1,934,192
James F. Will 93,264,893 1,932,583
A resolution to consider and adopt the 1995 Directors Stock Purchase and
Deferred Compensation Plan (Director Plan) to give non-employee directors of
Armco a direct and personal financial stake in Armco by paying them up to 100%
(but not less than 25%) of the annual retainer fee for service on the Board in
shares of Armco common stock in lieu of cash during the term of the Director
Plan was submitted and approved by the shareholders. The vote on the
resolution was as follows:
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Broker
Voting Classes For Against Abstain Nonvotes
-------------- --- ------- ------- --------
Common, $2.10 and
$3.625 Preferred Stocks 90,175,907 4,232,269 788,473 1,102
In addition, a resolution to adopt the Annual Incentive Compensation Plan, a
performance based plan intended to enable Armco better to preserve tax
deductibility of compensation expenses under Section 162(m) of the Internal
Revenue Code, was submitted and approved by the shareholders. The vote on the
resolution was as follows:
Broker
Voting Classes For Against Abstain Nonvotes
-------------- --- ------- ------- --------
Common, $2.10 and
$3.625 Preferred Stocks 86,256,094 8,100,299 827,238 24,120
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 10 1995 Directors Stock Purchase and Deferred
Compensation Plan
Exhibit 10.1 Annual Incentive Compensation Plan
Exhibit 11 Computation of Loss Per Common Share
B. The following Reports on Form 8-K were filed by Armco since
December 31, 1994.
Report Date Description
----------- -----------
March 14, 1995 Reporting that on March 14, 1995,
Armco, Eastern Stainless, an 84%-owned
subsidiary of Armco, and Avesta
Sheffield completed the sale of
substantially all of the assets of
Eastern Stainless to Avesta Sheffield
and providing pro forma financial
information with respect to the sale.
Also reporting that a minority
shareholder of Eastern Stainless filed
a complaint against Armco and Eastern
Stainless seeking various relief based
upon Armco's relationship with Eastern
Stainless.
April 7, 1995 Reporting that on April 7, 1995, Armco
completed the sale of its ongoing
insurance operations, Northwestern
National Holding Company, Inc. and its
subsidiaries, to Vik Brothers
Insurance, Inc.
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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.
-----------------------------------------
(Registrant)
Date May 5, 1995 /s/ D. G. Harmer
----------------------- -----------------------------------------
D. G. Harmer
Vice President and Chief Financial Officer
Date May 5, 1995 /s/ P. G. Leemputte
----------------------- -----------------------------------------
P. G. Leemputte
Vice President and Controller
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