UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 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 Street, Pittsburgh, Pennsylvania 15219-1415
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 412/255-9800
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Class A Preferred Stock, without par value New York Stock Exchange
Class B Preferred Stock, $1 par value each New York Stock Exchange
Common Stock, $.01 par value each/ New York Stock Exchange
Rights to Purchase Participating Preferred
Stock of Class A Preferred Stock New York Stock Exchange
9% Senior Notes, due 2007 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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
such filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of Armco
Inc. (assuming solely for purposes of this Form, that all members of
registrant's Board of Directors are "affiliates") was approximately
$739,157,803 as of February 27, 1998.
As of the close of business on February 27, 1998, there were 107,843,544
shares of Common Stock outstanding.
Documents incorporated by reference herein include:
Annual Report to Shareholders for the year ended December 31, 1997 --
Parts I, II, and IV of this report.
Proxy Statement for the 1998 Annual Meeting of Shareholders filed with
the Commission under Rule 14a-6 of the Securities Exchange Act of 1934 in
connection with the Company's 1998 Annual Meeting of Shareholders -- Part III
of this report.
PART I
ITEM 1. BUSINESS
General
Armco Inc. ("Armco" or the "Company") was incorporated as an Ohio
corporation in 1917 as a successor to a New Jersey corporation incorporated in
1899. Armco is the largest domestic producer of stainless sheet and strip and
electrical steels, based on tons shipped. Armco's Sawhill Tubular Division
manufactures a wide range of steel pipe and tubing products for use in the
construction, industrial and plumbing fields. The Company also owns Douglas
Dynamics, L.L.C. ("Douglas Dynamics"), the largest North American manufacturer
of snowplows for four-wheel drive pick-up trucks.
Armco's strategic objective is to enhance its position as a leading
domestic producer of specialty flat-rolled steels by focusing on its strong
market position, especially in the automotive chrome and electrical steel
markets. Armco intends to strengthen its position in these markets by
continuing to focus on its core specialty steel business, by utilizing its
recently upgraded and improved facilities to produce higher quality products
and by providing improved customer service.
Business Segments
The Company operates in two business segments: Specialty Flat-Rolled
Steels and Fabricated Products. Information on the amounts of revenue,
operating results and identifiable assets attributable to each of Armco's
business segments, set forth in Note 8 of the Notes to Financial Statements in
Armco's Annual Report to Shareholders for the year ended December 31, 1997, is
incorporated by reference herein.
Additional information about Armco's business segments is set forth in
Management's Discussion and Analysis in Armco's Annual Report to Shareholders
for the year ended December 31, 1997, which is incorporated by reference
herein.
Specialty Flat-Rolled Steels Segment
Armco's Specialty Flat-Rolled Steels businesses produce and finish flat-
rolled stainless, electrical and carbon steels at manufacturing operations
located in Butler, Pennsylvania, and Coshocton, Dover, Mansfield and
Zanesville, Ohio. The Butler and Mansfield Operations produce both semi-
finished and finished stainless and electrical steels in sheet and hot band
form. The Coshocton Operations finish stainless steel in sheet and strip form
and the Zanesville Operations finish stainless and electrical sheet and strip.
In addition, until the end of 1997, the Mansfield Operations produced
commodity grades of carbon steel sheet, most of which was coated at a
galvanizing facility at the Dover Operations. Currently, Dover is buying
carbon steel for its galvanizing operations from other sources. The segment
also includes the results of European trading companies that buy and sell
steel and manufactured steel products.
The stainless and electrical steel industry is a relatively small but
distinct segment of the overall steel industry that represented approximately
2.4% of domestic steel tonnage but accounted for approximately 14% of domestic
steel revenues in 1997. These steels differ from basic carbon steel by their
metallurgical composition. Electrical steels have properties that make them
desirable in the generation and distribution of electricity. Stainless steels
are made with a high alloy content, which
1
permits their use in environments that demand exceptional hardness, toughness,
strength and resistance to heat, corrosion or abrasion, or combinations
thereof. Unlike high-volume carbon steel, stainless and electrical steels are
generally produced in relatively small quantities utilizing special processing
techniques designed to meet more exacting specifications and tolerances.
Stainless and electrical steel products sell at higher prices and generate
higher average profit margins than carbon steel products.
Stainless steel contains elements such as chromium, nickel and molybdenum
that give it the unique qualities of resistance to rust, corrosion and heat;
high strength; good wear characteristics; natural attractiveness; and ease of
maintenance. Stainless steel is used in the automotive and aerospace
industries, and in the manufacture of food handling, chemical processing,
pollution control, medical and health equipment and other products where its
combination of strength, durability and attractiveness is desirable.
Electrical steels are iron-silicon alloys which, through special production
techniques, possess unique magnetic properties that make them desirable for
use as energy efficient material in such applications as electrical
transformers, motors and generators.
Armco expects that long-term demand for stainless steel will continue to
grow due to increasing use in the manufacture of consumer durable goods and
industrial applications. Per capita stainless steel usage in many developed
countries significantly exceeds per capita usage in the United States and
Armco believes that this is an indication of the growth potential of demand
for stainless steel in the United States. In addition, the 1990 amendments to
the Clean Air Act have resulted in the increasing use of corrosion-resistant
materials in a number of applications for which stainless steel is well
suited, including industrial pollution control devices and motor vehicle
exhaust systems for use in the United States, where Armco now has the leading
market share. Another factor that Armco believes will affect demand
positively is the increasing issuance of new car bumper-to-bumper warranties
and the use of stainless steel in passenger restraint systems and other
functional components.
Armco produces flat-rolled stainless steel and electrical steel sheet and
strip products that are used in a diverse range of consumer durables and
industrial applications. During the last three years, approximately 77% of
Armco's sales of specialty flat-rolled steel has been finished stainless and
electrical steels, 11% has been specialty semi-finished and 10% has been
carbon steel. The remaining sales in this segment of Armco's business are
primarily related to the foreign subsidiaries that buy, warehouse, and sell
specialty steel products. Major markets served are industrial machinery and
electrical equipment, automotive, construction and service centers.
Armco is the leading producer of chrome stainless grades used primarily
in the domestic market for automotive exhaust components. Stainless steel,
which formerly was not used in parts of the exhaust system other than the
catalytic converter, is now used in the entire exhaust system, from manifold
to tailpipe, by many auto manufacturers. Armco has developed a number of
specialty grades for this application. Armco is also known for its "bright
anneal" finish utilized for automotive and appliance trim and chrome grades
used for cutlery, kitchen utensils, scissors and surgical instruments.
Specialty chrome nickel grades produced by Armco are used in household
cookware, restaurant and food processing equipment and medical equipment.
Other Armco stainless products include functional stainless steel manufactured
for automotive, agricultural, heating, air conditioning and various industrial
uses.
Armco is the only United States manufacturer of a complete line of flat-
rolled electrical steel products. It is also the only domestic manufacturer
utilizing laser scribing technology. In this process, the surface of
electrical steel is etched with high-technology lasers that refine the
magnetic domains of the steels, resulting in superior electrical efficiency.
Major electrical product categories are: Regular Grain Oriented ("RGO"), used
in the cores of power and distribution transformers; Cold Rolled Non-
2
Oriented ("CRNO"), used for electrical motors, generators and lighting
ballasts; and TRAN COR[registered trademark]H, which is used in power
transformers and is the only high permeability electrical steel made
domestically.
Additionally, Armco produces a full range of hot-dipped galvanized
products primarily for use in the heating, ventilation and air conditioning
("HVAC") market.
Armco's order backlog for its Specialty Flat-Rolled Steels segment was
$188.5 million at December 31, 1997, and $205.8 million at December 31, 1996.
The decrease in 1997 was due to a reduction in carbon steel volume and lower
stainless and electrical steel prices. While substantially all of the orders
on hand at year-end 1997 are expected to be shipped in 1998, such orders, as
is customary in the industry, are subject to modification, extension or
cancellation.
Armco's specialty steelmaking operations are located in Pennsylvania and
Ohio, which permits cost-efficient materials flow between plants. Armco's
Butler, Pennsylvania facility, which is situated on 1,300 acres with 3.2
million square feet of buildings, continuously casts 100% of its steel. At
Butler, melting takes place in three 175-ton electric arc furnaces that feed
the world's largest (175-ton) argon-oxygen decarburization unit and a 175-ton
vacuum degassing unit for refining molten metal that, in turn, feed two double
strand continuous casters. The melt capacity at Butler is approximately
950,000 cast tons. Butler operates a hot-strip mill, anneal and pickle units
and two fully-automated tandem cold-rolling mills. It also has various
intermediate and finishing operations for both stainless and electrical
steels.
The finishing plant in Coshocton, Ohio, located on 650 acres, is housed
in a 600,000 square-foot plant and has three Sendzimer mills and two z-high
mills for cold reduction, four anneal and pickle lines, stack annealing
furnaces, three bright anneal lines and other processing equipment, including
temper rolling, slitting and packaging facilities.
The Mansfield, Ohio plant consists of a 1.4 million square-foot facility,
including a melt shop with two electric arc furnaces (170-ton and 120-ton), a
120-ton argon-oxygen decarburization unit, a thin-slab continuous caster, a
six-stand hot strip mill, a five-stand tandem cold rolling mill and a pickle
line.
The Dover, Ohio plant consists of a 600,000 square foot facility
including a galvanizing line, stack anneal furnaces and a temper mill.
Armco's Zanesville, Ohio plant, with 508,000 square feet of buildings on
88 acres, is a finishing plant for some of the steel produced at Butler and
Mansfield and has a Sendzimer cold-rolling mill, anneal and pickle lines, high
temperature box anneal and other decarburization and coating units.
Fabricated Products Segment
The businesses currently included in the Fabricated Products segment are
described below:
-- Douglas Dynamics is the largest North American manufacturer of
snowplows for four-wheel drive pick-up trucks. Douglas Dynamics, which is
headquartered in Milwaukee, Wisconsin, and has manufacturing plants in
Rockland, Maine, Milwaukee, Wisconsin and Johnson City, Tennessee, sells its
snowplows and ice control products under the names Western and Fisher through
independent distributors in the United States and Canada.
3
-- Sawhill Tubular manufactures a wide range of steel pipe and tubular
products for use in the non-residential construction, industrial, plumbing and
heating markets at plants in Sharon and Wheatland, Pennsylvania and Warren,
Ohio.
-- Greens Port Industrial Park consists of 500 acres on the Houston Ship
Channel and leases land, buildings and rail car storage facilities to third
parties and operates a deep water loading dock on the channel.
Armco's order backlog for its Fabricated Products segment was $24 million
at December 31, 1997 and $34 million at December 31, 1996. The 1997 backlog
included backordered snowplow and ice control products. The backlog orders
decreased this year as production kept pace with demand for snowplow and ice
control products. While substantially all of the orders in hand at year-end
1997 are expected to be shipped in 1998, such orders, as is customary in these
industries, are subject to modification, extension or cancellation.
Employees
At December 31, 1997, Armco had approximately 6,000 employees. Most of
Armco's domestic production and maintenance employees are represented by
international, national or independent local unions, although some operations
are not unionized.
Competition
The Company faces intense competition from domestic and foreign steel
producers, foreign producers of components and other products and
manufacturers of competing products other than steel, including aluminum,
plastics, composites and ceramics. Competition is based primarily on price,
with factors such as reliability of supply, service and quality also being
important in certain segments.
In addition to existing competition, a carbon steel company has announced
plans to enter the specialty steel market. In late 1996, AK Steel
Corporation, an integrated steel company, announced plans to build a steel
finishing facility in Rockport, Indiana that will include equipment capable of
processing specialty steel. When completed, this facility will provide AK
Steel with substantial stainless steel processing and finishing capacity.
Increases in the production capacity and efficiency of AK Steel and other
domestic producers, together with possible new entrants into the specialty
steel market, are expected to result in intensified competition that could
exert downward pressure on price and market share.
Armco's competitors in the domestic galvanized carbon steel market
include many of the large integrated and mini-mill flat rolled producers.
Since 1989, significant flat-rolled mini-mill capacity has been constructed
and these mini-mills now compete with integrated domestic steel producers in
most flat-rolled steel markets. Mini-mills generally rely on less capital-
intensive hot metal sources, have smaller, non-unionized workforces resulting
in lower employment costs per ton shipped and are relatively free of many of
the employee, environmental and other obligations that have traditionally
burdened non-mini-mill steel producers. There is significant flat-rolled and
galvanized capacity under construction or announced with various planned
commissioning dates in the next several years. Given the increased competition
that is expected as the new capacity comes on line, the Company decided to
eliminate production of carbon steel products at its Mansfield Operations.
Armco's Dover Operations, which previously used carbon steel produced at
Mansfield, is purchasing carbon steel from other sources.
4
Competition is also presented by foreign producers. Some of these
foreign producers have lower labor costs and are subsidized by their
governments. Their decisions with regard to production and sales may be
influenced more by political and social considerations than prevailing market
forces. Many foreign steel producers continue to ship into the United States
market despite decreasing profit margins. Depending on a number of market
factors, including the strength of the dollar, import levels, and the
effectiveness of U.S. trade laws, pricing of the Company's products could be
adversely affected.
Low-priced foreign imports of specialty steels were at record high
volumes for 1997, adversely affecting volume and pricing experienced by
domestic companies like Armco. As a result, industry trade groups are
gathering data to determine whether there are grounds for trade cases against
some foreign producers. However, no trade cases have been filed to date and
there can be no assurance of the outcome if cases are filed.
Raw Materials and Energy Sources
Raw materials represent a major component of production costs in the
steel industry. The principal raw materials used by Armco in the production
of steels are iron and carbon steel scrap, chrome and nickel and their
ferroalloys, stainless steel scrap, silicon, molybdenum and zinc. These
materials are purchased in the open market from various outside sources.
Since much of this purchased raw material is not covered by long-term
contracts, availability and price are subject to world market conditions.
Chrome, nickel and certain other materials in mined alloy form can be acquired
only from foreign sources, many of them located in developing countries that
may be subject to unstable political and economic conditions that might
disrupt supplies or affect the price of these materials. A significant
portion of Armco's chrome and nickel requirements, however, is obtained from
stainless steel scrap rather than mined alloys. While certain raw materials
have been in short supply from time to time, Armco currently is not
experiencing and does not anticipate any problems obtaining appropriate
materials in amounts sufficient to meet its production needs. Armco also uses
large amounts of electricity and natural gas in the manufacture of its
products. It is expected that such energy sources will continue to be
reasonably available in the foreseeable future.
Environmental Matters
A discussion of environmental matters is incorporated herein by reference
from pages 23, 29 and 37 under the captions "Environmental Matters",
"Environmental Liabilities" and "Litigation and Environmental Matters",
respectively, of the Annual Report to Shareholders for the year ended December
31, 1997.
Research and Development
Armco carries on a broad range of research and development activities
aimed at improving its existing products and manufacturing processes and
developing new products and processes. Armco's research and development
activities are carried out primarily at a central technology center located in
Middletown, Ohio. This center is engaged in applied materials research
related to iron and steel, non-ferrous materials and new materials. In
addition, the materials and metallurgy departments at each operating unit
develop and implement improvements to products and processes that are directly
connected with the activities of such operating unit. Armco spent $15.3
million, $13.1 million and $14 million, respectively, on research in the years
1997, 1996 and 1995.
5
Discontinued Operations
Armco Financial Services Group ("AFSG")
AFSG consists of insurance companies that have ceased writing new
business and are being liquidated. These companies have not written any new
business for retention except for an immaterial amount of guaranteed renewable
accident and health business since 1986. The number of policyholders of this
business has decreased from approximately 4,000 at December 31, 1986 to 870 at
December 31, 1996 and 713 at December 31, 1997.
Claims are paid from AFSG's investment portfolio and the related
investment income from such portfolio. The portfolio had a market value of
$174.9 million at December 31, 1997. AFSG believes the existing invested
assets, related future income and other assets will provide sufficient funds
to meet all future claims payments.
AFSG estimates that 67% of future claims will be paid in the next five
years and that substantially all of the claims will be paid by the year 2017.
The ultimate amount of the claims as well as the timing of the claims payments
are estimated based on the annual review of loss reserves performed by AFSG's
independent and consulting actuaries. While there have been no charges
recorded with respect to these companies since 1990, in the future there may
be further adverse developments with respect to the AFSG companies, which, if
not otherwise offset through favorable commutations or other actions, will
require additional charges to income. Armco does not believe that any such
charges would have a material adverse effect on its liquidity or financial
condition.
There are various pending matters relating to litigation, arbitration and
regulatory affairs arising out of the runoff operations of AFSG companies,
including matters related to Northwestern National Insurance Company ("NNIC"),
a runoff company involved in, among other matters, litigation with respect to
certain reinsurance programs.
In March, 1997 a group of international companies, previously affiliated
with AFSG and sold in 1991, filed an application for voluntary liquidation in
the United Kingdom. NNIC is currently investigating its exposure with respect
to transactions entered into with these companies. Armco believes that its
investment in AFSG will not be materially affected as a result of pending
claims, contingent liabilities or matters related to this matter.
ITEM 2. PROPERTIES
Armco owns and leases property primarily in the United States. This
property includes manufacturing facilities, offices and undeveloped property.
The locations of Armco's principal plants and materially important physical
properties are described in "ITEM 1. BUSINESS". Armco believes that all its
operating facilities are being adequately maintained and are in good operating
condition.
ITEM 3. LEGAL PROCEEDINGS
There are various claims pending against Armco and its subsidiaries
involving product liability, reinsurance and insurance arrangements,
environmental, antitrust, employee benefits and other matters arising out of
the conduct of the business of Armco.
6
Reserve Mining Litigation. In August 1992, an action styled Warner,
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Donovan, et al. v. Armco was filed in the U.S. District Court, District of
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Minnesota by members of the United Steelworkers of America ("USWA") who
declined to participate in the USWA v. Armco settlement. The complaint
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alleges breaches of the Basic Labor Agreement, Supplemental Unemployment
Benefit Plan ("SUB"), Insurance Agreement, Pension Agreement and Program of
Hospital-Medical Benefits for Pensioners and Surviving Spouses and sought an
unspecified amount of damages. On February 17, 1993, the Court granted
Armco's motion to dismiss plaintiffs' state law claims. The plaintiffs'
claims based on the labor agreements remained pending. Plaintiffs filed an
amended complaint, in response to which Armco filed a motion to dismiss
certain claims therein. On October 22, 1993, the Court granted Armco's
motion. On November 8, 1993, Armco filed an answer to the allegations in the
amended complaint not subject to the motion to dismiss. The court ordered
that the claims of the Warner plaintiffs for pension benefits in addition to
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those guaranteed by the Pension Benefit Guaranty Corporation ("PBGC") may be
brought only in the Ricke case, discussed below. Further, as a result of the
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Court's decision in Ricke concerning non-PBGC guaranteed pension benefits, the
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only claims that remained in Warner were for welfare benefits (e.g., medical
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benefits, SUB benefits, life insurance benefits, vacation pay, etc.) under
collective bargaining agreements. The parties agreed to settle all claims on
December 30, 1997. Final settlement agreements are being prepared for
execution by each plaintiff. The case will be dismissed with prejudice upon
execution of the agreements by all parties.
On April 25, 1994, an action entitled Larry B. Ricke, Trustee v. Armco
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was filed in the United States District Court for the District of Minnesota by
the Trustee appointed by the Pension Benefit Guaranty Corporation for the
purpose of recovering from Reserve Mining Company ("Reserve") assets to
satisfy Reserve's liability for pension benefit entitlements which were in
addition to those guaranteed by the PBGC. The complaint alleged that Armco
was liable for the unfunded nonguaranteed benefits under the Pension Plan of
Reserve in the amount of $9.2 million plus interest. The pension benefits
which were the subject of this action were part of the class settlement of
USWA v. Armco. Approximately 1,500 members of the class signed individual
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releases (19 members who did not were plaintiffs in Warner) releasing Armco
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from all claims, liabilities, etc. based upon or which arose 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 filed a motion seeking interlocutory appellate review. This
motion was granted on June 6, 1995. The U.S. Court of Appeals affirmed the
District's Court's decision denying Armco's motion for summary judgment on
August 13, 1996. Armco filed a petition for rehearing on September 26, 1996,
which was denied on October 21, 1996. The parties in the Ricke action agreed
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to a settlement of all issues on November 3, 1997. The case has been
dismissed with prejudice and the matter is concluded.
Cornerstones Litigation. An action was filed by Cornerstones Municipal
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Utility District ("Cornerstones") and William St. John, as representative of
a class of owners of real property situated within Cornerstones, in the
District Court of Harris County, Texas, in July 1989, seeking damages in
excess of $40 million for allegedly defective pipe supplied by Armco
Construction Products for a sanitary sewer system in three residential
subdivisions. In May 1991, the Cornerstones plaintiffs amended their petition
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to add owners of some 1,500 residences within the Kingsbridge Municipal
Utility District ("Kingsbridge"). Subsequently, the Kingsbridge claims were
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severed into a separate action. In January 1992, the trial court granted
Armco's motion for summary judgment, dismissing all claims asserted by the
Cornerstones plaintiffs as barred by the statute of limitations. In January
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1993, the Court of Appeals reversed the dismissal. Upon Armco's petition, the
Supreme Court of Texas reversed and summary judgment in favor of Armco was
reinstated by the Court of Appeals in November 1994. In March 1995, the
Cornerstones plaintiffs sought writ of error to the Supreme Court of Texas.
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On May 11, 1995, the Supreme Court of Texas denied plaintiffs' application for
writ of error, concluding the
7
Cornerstones matter in favor of Armco. On February 22, 1996, the District
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Court of Harris County granted summary judgment in favor of Armco in the
severed Kingsbridge action. On April 10, 1996, an amended summary judgment
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order was entered by the District Court clarifying that summary judgment had
been granted in favor of Armco and against only the claims of Kingsbridge and
John Kepplinger, individually. A motion for class certification was denied by
the court with respect to the claims of the remaining homeowners in the
Kingsbridge District. The Kingsbridge homeowners have filed an appeal, which
is currently pending before the Court of Appeals in Houston, Texas.
In addition, there are three multiple-party homeowners actions that
remain pending on behalf of property owners in the Cornerstones Municipal
Utility District. The first of these actions, Vincent and Linda Adduci, et
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al. v. Armco Steel Corporation, et al., was filed in the 127th District Court
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of Harris County, Texas on or about April 3, 1992, by approximately 87
residents, including the lead plaintiffs, against the same defendants as in
the Cornerstones case. On or about September 11, 1992, Harris W. Arthur and
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other plaintiff homeowners commenced a similar action, styled Harris W.
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Arthur, et al. v. Monsanto Company, et al., in the 133rd Judicial District
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Court of Harris County. On or about March 22, 1993, a third action, captioned
William C. Irons, et al. v. Turner, Collie & Braden, Inc., et al., was filed
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in the 152nd Judicial District Court of Harris County by the lead plaintiff
and approximately 100 additional residents. All three cases are substantially
based upon the same theories as the Cornerstones case and were separately
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filed after an effort to have the Cornerstones complaints certified as a class
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action was denied by the court. These three actions each seek an unspecified
amount of damages. Arthur and Adduci have been consolidated into one case
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before the 127th District Court. On January 28, 1997, a majority of the
homeowners in Irons were nonsuited and dismissed their claims against Armco.
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Environmental Proceedings. Most environmental actions involving Armco
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relate to alleged contamination at off-site treatment and disposal sites.
Other claims sometimes arise from contractual obligations for properties Armco
previously owned or leased and from regulatory actions. In most of these
cases, Armco is one of several hundred companies who have been identified as
potentially responsible parties ("PRPs"). In a few instances, Armco is one of
only a few parties or is alleged to be solely liable. It is routinely
asserted that joint and several liability will be applied in such cases; thus,
a single party could be held liable for all costs related to a site. However,
Armco's experience has been that liability is apportioned on the basis of
volume and/or toxicity of materials sent to a site and Armco expects that any
ultimate liability will be apportioned among Armco and other financially
viable parties. Armco intends to assert all meritorious legal and equitable
defenses that are available to it with respect to environmental matters.
Based on Armco's analysis of the claims against it for contamination,
including the presence of other PRPs, Armco's experience in resolving similar
claims, and in some instances the type of contamination and expected
remediation costs, Armco does not believe that its liability, if any, for
these claims will materially impact its consolidated financial position or
liquidity. However, it is possible that due to fluctuations in Armco's
operating results, future developments with respect to such matters could have
a material effect on the results of operations in future interim or annual
periods. See information on Environmental Matters set forth on pages 23, 29
and 37 under the respective captions "Environmental Matters", "Environmental
Liabilities" and "Litigation and Environmental Matters" of the Annual Report
to Shareholders for the year ended December 31, 1997.
On July 21, 1995, the Department of Justice ("DOJ") filed a complaint in
the U.S. District Court for the Southern District of Ohio alleging Armco's
liability for remediation costs at the Fultz Landfill Superfund Site in
Byesville, Ohio. In late 1996 Armco filed a third-party complaint against
eight other PRPs. Armco has entered into a settlement with the DOJ and the
United States Environmental Protection Agency which resolves Armco's liability
regarding this matter.
8
On February 27, 1995, the Ohio Environmental Protection Agency ("OEPA")
issued a Notice of Violation ("NOV") to Armco's Zanesville, Ohio operations
alleging noncompliance with both a 1993 Order and various state regulations
regarding hazardous waste management. Armco is working with OEPA to achieve
final resolution of this matter. No proposed penalties were included in the
NOV and Armco cannot reasonably estimate potential penalties, if any, based on
current information.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders of
Armco during the fourth quarter of the year ended December 31, 1997.
Executive Officers of Armco
The executive officers of Armco as of March 17, 1998, were as follows:
Years
Age as of Tenure in of Service
Name March 17, 1998 Office Office(1) with Armco
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James F. Will 59 Chairman, President and
Chief Executive Officer 1994 (2) 6
Jerry W. Albright 61 Vice President and
Chief Financial Officer 1997 1
James L. Bertsch 54 Vice President and Treasurer 1989 32
John B. Corey 54 Vice President, President - 1994 19
Douglas Dynamics, L.L.C.
John N. Davis 39 Vice President and Controller 1996 6
Gary R. Hildreth 59 Vice President, General Counsel
and Secretary 1993 27
Gary L. McDaniel 51 Vice President - Operations 1996 5
M. Dennis McGlone 48 Vice President - Commercial 1996 6
Pat J. Meneely 46 Vice President - Information
and Organizational
Effectiveness 1995 3
DeWayne W. Tuthill 61 Vice President - Purchasing,
Materials Management and
Coated Products 1998 (3) 0
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9
<FN>
(1) All officers are elected annually by the Board of Directors and
hold office until their successors are elected and qualified. Each of the
officers named above has held responsible positions with Armco or its
subsidiaries during all of the past five years, with the exceptions of
Messrs. Albright, Meneely and Tuthill. Prior to joining Armco, Mr. Albright
was a consultant and small business owner. Prior to that he was Assistant to
the President of Armco Inc. and prior to that he was Vice President and Chief
Financial Officer of Cyclops Industries, Inc. Immediately prior to joining
Armco, Mr. Meneely worked as an executive consultant and held executive
positions with Sara Lee Hosiery and Wheeling-Pittsburgh Steel Corporation (a
manufacturer of steel). Mr. Tuthill previously served as Group Executive Vice
President at Wheeling-Pittsburgh Steel Corporation since October of 1995.
Having been with Wheeling-Pittsburgh since 1989, Mr. Tuthill also held the
positions of executive vice president of operations and vice president -
purchasing, traffic and raw materials.
(2) Effective February 1, 1996, Mr. Will was elected Chairman of the
Board in addition to the positions of President and Chief Executive Officer.
(3) Effective January 1, 1998, Mr. Tuthill was elected Vice President
- - Purchasing, Materials Management and Coated Products.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Armco's common stock is sold principally on the New York Stock Exchange.
At February 27, 1998, there were 20,980 common stock shareholders of record.
Other information required by this item is incorporated herein by reference
from pages 35 and 39 of the Annual Report to Shareholders for the year ended
December 31, 1997.
ITEM 6. SELECTED FINANCIAL DATA
(In millions, except per share amounts)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Net sales $1,829.3 $1,724.0 $1,559.9 $1,437.6 $1,664.0
Special charges - net (2) -- (8.8) -- (35.0) (165.5)
Income (loss) from continuing
operations 77.1 26.0 23.5 65.8 (247.5)
Income (loss) per common share
from continuing operations (3) 0.55 0.08 0.05 0.46 (2.56)
Total assets 1,881.3 1,867.8 1,896.6 1,934.9 1,904.7
Long-term debt and lease obligations 306.9 344.3 361.6 363.8 379.7
Long-term employee benefit obligations 1,178.1 1,200.2 1,165.9 1,221.9 1,249.9
Class B common stock of subsidiary (4) -- -- -- -- 9.7
- -------------------------------
<FN>
(1) The information in this Item should be read in conjunction with
Armco's financial statements and the notes thereto, which are incorporated by
reference in Item 8.
10
(2) Special charges primarily relate to the shutdown, sale and/or
rationalization of operating facilities.
(3) Basic and diluted earnings per share are equal.
(4) The Class B common stock was issued by Eastern Stainless prior
to Armco's acquisition of this 84%-owned former subsidiary of Cyclops
Industries, Inc. In 1994, Eastern Stainless reached a decision to sell
substantially all of its assets and, as a result, Armco stopped consolidating
the results of Eastern Stainless. The asset sale was completed on March 14,
1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain information required by this Item is incorporated herein by
reference from pages 18-23 following the caption "Management's Discussion and
Analysis" of the Consolidated Financial Statements in the Annual Report to
Shareholders for the three years ended December 31, 1997.
Other
Certain statements made or incorporated by reference in this Form 10-K,
or made in press releases or in oral presentations made by Company employees,
reflect management's estimates and beliefs and are intended to be, and are
hereby identified as, "forward-looking statements" for purposes of the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
These include statements in the paragraphs entitled Outlook for 1998, Armco
Financial Services Group (AFSG), Liquidity And Capital Resources,
Environmental Matters and The Year 2000 Issue in the section entitled
Management's Discussion and Analysis and in the Letter to Shareholders
contained in the Annual Report to Shareholders and in Note 1, Summary of
Significant Accounting Policies, relating to Concentration of Credit Risk;
Note 9, Litigation and Environmental Matters; and Note 11, Discontinued
Operations, relating to AFSG in the Notes to Consolidated Financial Statement
in the Annual Report to Shareholders incorporated herein by reference.
Armco cautions readers that such forward-looking statements involve risks
and uncertainties that could cause actual results to differ materially from
those expected by management. These factors include, but are not limited to,
the following: risks of a downturn in the general economy or in the highly
cyclical steel industry; changes in demand for Armco's products; unplanned
plant outages, equipment failures or labor difficulties; actions by Armco's
foreign and domestic competitors; unexpected outcomes of major litigation and
contingencies; changes in U.S. trade policy and actions respecting imports;
disruptions in the supply of raw materials; actions by reinsurance companies
with which AFSG does business or foreign or domestic insurance regulators; and
changes in application or scope of environmental regulations applicable to
Armco.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated herein by reference
from pages 24-38 of the Annual Report to Shareholders for the year ended
December 31, 1997.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
11
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item as to executive officers of Armco
is contained in Part I of this report under "Executive Officers of Armco" and
is incorporated herein by reference. The information required as to directors
is incorporated herein by reference from the information set forth under the
caption "ELECTION OF DIRECTORS" in the registrant's Proxy Statement for the
1998 Annual Meeting of Shareholders filed with the Securities and Exchange
Commission pursuant to Rule 14a-6 of the Securities Exchange Act of 1934, as
amended (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
from the information set forth in the Proxy Statement under the caption
"EXECUTIVE COMPENSATION".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The security ownership in Armco stock of directors, certain executive
officers and directors and executive officers as a group and of persons known
by Armco to be the beneficial owners of more than five percent of any class of
Armco's voting securities is incorporated herein by reference from the
information set forth in the Proxy Statement under the caption "MISCELLANEOUS
- -- Stock Ownership".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
I. Documents Filed as a Part of this Report
A. Financial Statements and Financial Statement Schedules Page
----
1. Consolidated Statements of Income for the Years Ended December 31,
1997, 1996 and 1995 *
2. Consolidated Balance Sheets as of December 31, 1997 and 1996 *
3. Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 *
12
4. Notes to Financial Statements *
5. Independent Auditors' Report *
6. Responsibility for Financial Reporting *
- ----------------
* Incorporated in this Annual Report on Form 10-K by reference to pages 24-38
of the Annual Report to Shareholders for the year ended December 31, 1997.
Financial Statements and Financial Statement Schedules Omitted
The financial statements and financial statement schedules for Armco Inc.
and subsidiaries, other than those listed above, are omitted because of the
absence of conditions under which they are required, or because the
information is set forth in the Notes to Financial Statements.
B. Exhibits
The following is an index of the exhibits included in the Annual Report
on Form 10-K.
3(a). Articles of Incorporation of Armco Inc., as amended as of April 4,
1996 (1)
3(b). Regulations of Armco Inc. (2)
4. Armco hereby agrees to furnish to the Securities and Exchange
Commission, upon its request, a copy of each instrument defining the rights of
holders of long-term debt of Armco and its subsidiaries, omitted pursuant to
Item 601(b)(4)(iii) of Regulation S-K.
10(a). Deferred Compensation Plan for Directors*
10(b). 1993 Long-Term Incentive Plan of Armco Inc. (3)*
10(c). Amended Severance Benefit Agreement
10(d). 1988 Restricted Stock Plan (4)*
10(e). Executive Supplemental Deferred Compensation Plan Trust (5)*
10(f). Executive Supplemental Deferred Compensation Plan (6)*
10(g). Pension Plan for Outside Directors (7)*
10(h). Key Management Severance Policy (8)*
10(i). Minimum Pension Plan (9)*
10(j). Stainless Steel Toll Rolling Services Agreement (10)
13
10(k). Rights Agreement dated as of February 23, 1996 between Armco Inc.
and Fifth Third Bank (11)
13. Annual Report to Shareholders for the year ended December 31, 1997.
(Filed for information only, except for those portions that are specifically
incorporated in this Form 10-K Annual Report for the year ended December 31,
1997.)
21. List of subsidiaries of Armco Inc.
23. Independent Auditors' Consents
27. Financial Data Schedule
99. Description of Armco Capital Stock
The annual reports (Form 11-K) for the year ended December 31, 1997 for
the Armco Inc. Retirement and Savings Plan and the Armco Inc. Thrift Plan for
Hourly Employees will be filed by amendment as exhibits hereto, as permitted
under Rule 15d-21.
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to the Annual Report on Form 10-K pursuant to Item 14(c)
of Form 10-K.
- ----------------------
(1) Incorporated by reference from Exhibit 3.1 to Armco's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1993.
(2) Incorporated by reference from Exhibit 3.2 to Armco's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1994.
(3) Incorporated by reference from Exhibit 10 to Armco's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1993.
(4) Incorporated by reference from Exhibit 10(i) to Armco's Annual Report
on Form 10-K for the year ended December 31, 1988 (SEC File No. 001-00873).
(5) Incorporated by reference from Exhibit 10(b) to Armco's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1988 (SEC File No. 001-
00873).
(6) Incorporated by reference from Exhibit 10(c) to Armco's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1988 (SEC File No. 001-
00873).
(7) Incorporated by reference from Exhibit 10(p) to Armco's Annual Report
on Form 10-K for the year ended December 31, 1989 (SEC File No. 001-00873).
(8) Incorporated by reference from Exhibit 10(p) to Armco's Annual Report
on Form 10-K for the year ended December 31, 1990.
(9) Incorporated by reference from Exhibit 10(r) to Armco's Annual Report
on Form 10-K for the year ended December 31, 1991.
14
(10) Incorporated by reference from Exhibit 10(s) to Armco's Annual Report
on Form 10-K for the year ended December 31, 1993.
(11) Incorporated by reference from Exhibit 10(p) to Armco's Form 10-K for
the year ended December 31, 1995.
- ----------------------
II. Reports on Form 8-K
No reports on Form 8-K were filed by Armco since September 30, 1997.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED AS OF MARCH 17,
1998.
ARMCO INC.
By JAMES F. WILL
-----------------------------------------
James F. Will
Chairman of the Board, President and
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED AS OF MARCH 17, 1998.
By JAMES F. WILL By DOROTHEA C. GILLIAM
- -------------------------------------- -------------------------------
James F. Will Dorothea C. Gilliam
Chairman of the Board, President, Director
Chief Executive Officer
and Director
By JERRY W. ALBRIGHT By JOHN C. HALEY
- -------------------------------------- ------------------------------
Jerry W. Albright John C. Haley
Vice President and Director
Chief Financial Officer
By JOHN N. DAVIS By BRUCE E. ROBBINS
- ------------------------------------- ------------------------------
John N. Davis Bruce E. Robbins
Vice President and Controller Director
By PAULA H.J. CHOLMONDELEY By BURNELL R. ROBERTS
- ------------------------------------- ------------------------------
Paula H.J. Cholmondeley Burnell R. Roberts
Director Director
By DAVID A. DUKE By JOHN D. TURNER
- -------------------------------------- ------------------------------
David A. Duke John D. Turner
Director Director
-18-
EXHIBIT INDEX
The following is an index of the exhibits included in the Annual Report
on Form 10-K.
10(c). Amended Severance Benefit Agreement
13. Annual Report to Shareholders for the year ended December 31, 1997.
(Filed for information only, except for those portions that are specifically
incorporated in this Form 10-K Annual Report for the year ended December 31,
1997.)
21. List of subsidiaries of Armco Inc.
23. Independent Auditors' Consents
27. Financial Data Schedule
99. Description of Armco Capital Stock
- ------------------------