<PAGE>1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
--------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 1-873-2
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ARMCO INC.
----------
(Exact name of registrant as specified in its charter)
Ohio 31-0200500
- ------------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Oxford Centre, 301 Grant St., Pittsburgh, PA 15219-1415
-----------------------------------------------------------
(Address of principal executive offices, Zip Code)
(412) 255-9800
----------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
Yes X No
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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 September 30, 1996: 106,616,146
<PAGE>2
ARMCO INC.
INDEX
Page
----
Part I. Financial Information
Condensed Statement of Consolidated Financial Position -
September 30, 1996 and December 31, 1995 2
Condensed Statement of Consolidated Operations and
Retained Deficit - Three and Nine Months Ended
September 30, 1996 and 1995 3
Condensed Statement of Consolidated Cash Flows -
Nine Months Ended September 30, 1996 and 1995 4
Notes to Condensed Consolidated Financial Statements 5-7
Management's Discussion and Analysis of the Condensed
Consolidated Financial Statements 7-11
Segment Report 12
Part II. Other Information
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Exhibit 11 Computation of Income (Loss) Per Common Share
-1-
<PAGE>3
<TABLE>
ARMCO INC.
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(Unaudited)
<CAPTION>
(Dollars in millions) September 30, December 31,
1996 1995
------------ ------------
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 140.9 $ 136.8
Receivables, less allowance for doubtful
accounts 201.8 169.4
Inventories (Note 2) 246.8 216.2
Net assets held for sale (Note 5) - 85.5
Other 8.0 5.9
- ------------------------------------------------------------------------------
Total current assets 597.5 613.8
Investments
Investment in AFSG 85.6 85.6
Other, less allowance for impairment 54.6 37.2
Property, plant and equipment 1,251.9 1,208.3
Accumulated depreciation (584.0) (539.8)
- ------------------------------------------------------------------------------
Property, plant and equipment - net 667.9 668.5
Deferred tax asset 325.8 326.1
Goodwill and other intangible assets 142.3 145.9
Other assets 21.6 19.5
- ------------------------------------------------------------------------------
Total assets $1,895.3 $1,896.6
- ------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Trade accounts and notes payable $ 152.5 $ 148.2
Employee-related obligations 118.9 172.4
Other liabilities 79.5 72.6
Current portion of long-term debt 33.4 25.8
- ------------------------------------------------------------------------------
Total current liabilities 384.3 419.0
Long-term debt, less current portion 344.4 361.6
Long-term employee benefit obligations, less
current portion 1,198.7 1,165.9
Other liabilities 188.1 180.5
Commitments and contingencies (Note 7)
Shareholders' deficit (Note 8)
Preferred stock - Class A 137.6 137.6
Preferred stock - Class B 48.3 48.3
Common stock 1.1 1.1
Additional paid-in capital 965.9 963.0
Retained deficit (1,372.6) (1,378.5)
Other (0.5) (1.9)
- ------------------------------------------------------------------------------
Total shareholders' deficit (220.2) (230.4)
- ------------------------------------------------------------------------------
Total liabilities and shareholders' deficit $1,895.3 $1,896.6
- ------------------------------------------------------------------------------
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
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<PAGE>4
<TABLE>
ARMCO INC.
CONDENSED STATEMENT OF CONSOLIDATED OPERATIONS
AND RETAINED DEFICIT
(Unaudited)
(Dollars and shares in millions,
except per share amounts)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 429.2 $ 404.1 $ 1,310.4 $ 1,163.1
Cost of products sold (Note 3) (381.2) (364.1) (1,189.7) (1,033.8)
Selling and administrative expenses (23.8) (23.2) (69.2) (70.2)
- ------------------------------------------------------------------------------
Operating profit 24.2 16.8 51.5 59.1
Interest income 2.2 3.0 8.0 9.9
Interest expense (9.0) (8.7) (27.5) (24.7)
Gain on sale of investment in
AK Steel stock (Note 6) - - - 27.2
Sundry other - net (Note 4) (7.2) (12.3) (18.3) (37.9)
- ------------------------------------------------------------------------------
Income (loss) before income taxes 10.2 (1.2) 13.7 33.6
Provision for income taxes (0.3) (0.9) (0.9) (1.7)
- ------------------------------------------------------------------------------
Income (loss) from continuing
operations 9.9 (2.1) 12.8 31.9
Discontinued operations (Note 5)
Gain on sale of Aerospace and
Strategic Materials 6.5 - 6.5 -
Equity in income of National-Oilwell - 2.0 - 6.3
- ------------------------------------------------------------------------------
Net income (loss) 16.4 (0.1) 19.3 38.2
Retained deficit, beginning
of period (1,384.5) (1,361.0) (1,378.5) (1,390.4)
Preferred stock dividends (4.5) (4.5) (13.4) (13.4)
- ------------------------------------------------------------------------------
Retained deficit, end of period $(1,372.6) $(1,365.6) $(1,372.6) $(1,365.6)
- ------------------------------------------------------------------------------
Weighted average number of common
and common equivalent shares
outstanding - primary 106.6 106.1 106.5 106.0
Net income (loss) applicable to
common stock $ 11.9 $ (4.6) $ 5.9 $ 24.8
Earnings (loss) per common share
- primary
Income (loss) from continuing
operations $ 0.05 $ (0.06) $ 0.00 $ 0.17
Income from discontinued
operations 0.06 0.02 0.06 0.06
- ------------------------------------------------------------------------------
Net income (loss) $ 0.11 $ (0.04) $ 0.06 $ 0.23
Earnings per common share
- fully diluted * * * *
Cash dividends per share
$2.10 Class A $ 0.525 $ 0.525 $ 1.575 $ 1.575
$3.625 Class A 0.906 0.906 2.719 2.719
$4.50 Class B 1.125 1.125 3.375 3.375
<FN>
* Antidilutive or dilution less than 3%
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
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<PAGE>5
<TABLE>
ARMCO INC.
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
(Unaudited)
(Dollars in millions)
<CAPTION>
Nine Months Ended
September 30,
-----------------
1996 1995
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 19.3 $ 38.2
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and lease-right amortization 44.1 39.8
Undistributed earnings from discontinued operations - (6.4)
Net gain on sales of investments and facilities (1.4) (28.4)
Other 2.0 8.8
Change in assets and liabilities:
Trade accounts and notes receivable (32.5) (50.4)
Inventory (30.7) (41.4)
Payables and accrued operating expenses 2.4 35.3
Employee benefit obligations (9.3) (25.7)
Other assets and liabilities - net 3.3 5.2
- ---------------------------------------------------------------------------
Net cash used in operating activities (2.8) (25.0)
- ---------------------------------------------------------------------------
Cash flows from investing activities:
Net proceeds from the sale of businesses and assets 5.6 23.5
Proceeds from the sale and maturity of liquid
investments - 24.7
Proceeds from the sale of investments 79.3 29.9
Purchase of liquid investments (0.3) (5.0)
Contributions to investees (3.6) -
Capital expenditures (41.9) (110.2)
Other (2.2) (1.4)
- ---------------------------------------------------------------------------
Net cash provided by (used in) investing activities 36.9 (38.5)
- ---------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from drawdown of debt 2.2 -
Principal payments on debt (18.1) (6.1)
Dividends paid (13.4) (16.4)
Other (0.7) 2.9
- ---------------------------------------------------------------------------
Net cash used in financing activities (30.0) (19.6)
- ---------------------------------------------------------------------------
Net change in cash and cash equivalents 4.1 (83.1)
Cash and cash equivalents:
Beginning of period 136.8 202.8
- ---------------------------------------------------------------------------
End of period $ 140.9 $ 119.7
- ---------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of capitalized interest) $ 23.0 $ 20.3
Income taxes 0.1 0.7
Supplemental schedule of noncash investing and
financing activities:
Issuance of restricted stock 3.0 4.6
Debt incurred directly for property - 16.2
Note received in partial payment for asset sale 10.6 1.0
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
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<PAGE>6
ARMCO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in millions,
except per share amounts)
1. The condensed consolidated financial statements of Armco Inc. (Armco)
should be read in conjunction with the financial statements in Armco's Annual
Report to Shareholders for the year ended December 31, 1995. In the opinion
of Armco's management, the accompanying condensed consolidated financial
statements contain all adjustments, which are of a normal recurring nature,
necessary to present fairly, in all material respects, the financial position
as of September 30, 1996, and the results of operations for the three and nine
months ended September 30, 1996 and 1995 and cash flows for the nine months
ended September 30, 1996 and 1995. The results of operations for the nine
months ended September 30, 1996 are not necessarily indicative of the results
to be expected for the year 1996.
2. Armco's inventories are valued at the lower of cost or market. Most of
Armco's domestic inventories are valued using the LIFO - Last In, First Out -
method. Other inventories are valued principally at average cost.
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Inventories on LIFO:
Finished and semi-finished $ 260.1 $ 226.8
Raw materials and supplies 23.8 24.8
Adjustment to state inventories at
LIFO value (62.8) (57.3)
------- -------
Total 221.1 194.3
------- -------
Inventories on average cost:
Finished and semi-finished 17.7 15.5
Raw materials and supplies 8.0 6.4
------- -------
Total 25.7 21.9
------- -------
Total inventories $ 246.8 $ 216.2
======= =======
</TABLE>
3. Cost of products sold for the nine months ended September 30, 1996
includes income of $4.2 related to the partial settlement of a business
interruption insurance claim for a third quarter 1995 unplanned outage. The
outage resulted from the failure of a generator on one stand of the hot mill
at the Butler Operations, which reduced efficiency during a six-week period,
resulting in the use of alternative and more costly product routings and lost
sales.
4. Sundry other - net in Armco's Condensed Statement of Consolidated
Operations and Retained Deficit includes expenses of $5.5 and $21.3 for the
three and nine months ended September 30, 1996, and $9.4 and $29.0 for the
three and nine months ended September 30, 1995, respectively, for interest on
employee benefit obligations related to facilities that have been divested.
The reduction in expense in 1996 is primarily due to lower interest rates and
reductions in unfunded liabilities due to favorable returns on pension assets
and Armco's recent contributions to the pension plans.
In the nine months ended September 30, 1996, Sundry other - net includes a
gain of $6.3, which resulted from the recognition of gains previously deferred
in connection with asset sales at a 500-acre industrial park owned by Armco.
Armco had elected to defer gains resulting from individual asset sales at this
site because of uncertainty concerning realization of the carrying value of
the remaining property. The gains were recognized following receipt, in March
1996, of an independent appraiser's report indicating that the land, buildings
and dock facilities in the park had a market value significantly in excess of
Armco's historical cost carrying value. Armco is currently discussing the
sale of this property.
-5-
<PAGE>7
5. Oregon Metallurgical Corporation (OREMET), formerly 80% owned by Armco,
was part of the Aerospace and Strategic Materials business segment that Armco
sold in 1985. Prior to the sale, Armco filed a suit on behalf of OREMET in
the U.S. Claims Court, claiming refunds and interest on federal and state
taxes. Pursuant to the sales agreement, Armco retained the benefit of its
share of any proceeds of this action, net of taxes imposed on OREMET and the
buyer. In 1988, as a result of a favorable settlement of this refund action
with the Internal Revenue Service (IRS), Armco recorded a $15.2 net of tax
adjustment to the gain on the sale of this business segment. Armco and OREMET
recently reached an agreement with the IRS that the 1988 refund of taxes and
interest should not, itself, have been subject to tax, further increasing the
cash proceeds to Armco. In the third quarter of 1996, Armco recorded an
additional $6.5 gain on the sale.
Included in Net assets held for sale as of December 31, 1995 was $85.5
representing Armco's 50% ownership interest in National-Oilwell, an oil field
equipment and supply joint venture. The sale of National-Oilwell was
completed on January 16, 1996, with Armco receiving $77.0 in cash and
receivables with a face value of $13.0. The receivables were recorded in
other investments at a discounted value of $10.6. After recording $2.1 for
recognition of deferred foreign translation losses and miscellaneous expenses,
no gain or loss was recorded on the sale. The equity income of National-
Oilwell, recognized prior to the fourth quarter of 1995, is reported in
Discontinued operations on the Condensed Statement of Consolidated Operations
and Retained Deficit.
6. During the nine months ended September 30, 1995, Armco sold all of the
shares it had received in the initial public offering and recapitalization of
AK Steel Holding Corporation, recognizing a gain of $27.2.
7. There are various claims pending involving Armco and its subsidiaries
regarding product liability, antitrust, patent, employee benefits,
environmental, reinsurance and insurance arrangements, and other matters
arising out of the conduct of Armco's business.
Like other manufacturers, Armco is subject to various environmental laws.
These laws necessitate expenditures to assure compliance at Armco's facilities
and to remediate sites where contamination has occurred. Compliance costs are
either expensed as they are incurred or, when appropriate, are recorded as
capital expenditures. Armco has accrued its estimate of remediation costs for
sites where it is probable that a liability has been incurred and the amount
can be reasonably estimated. The recorded amounts are currently believed by
management to be sufficient. However, such estimates could significantly
change in future periods to reflect new laws or regulations, advances in
technologies, additional sites requiring remediation, new remediation
requirements at existing sites, and Armco's share of liability at multi-party
sites.
There are various pending matters relating to litigation, arbitration and
regulatory affairs arising out of the operations of Armco's runoff insurance
companies, including matters related to Northwestern National Insurance
Company, a runoff company currently involved in, among other matters,
litigation with respect to certain reinsurance programs. At September 30,
1996 and December 31, 1995, Armco had recorded an $85.6 investment in these
companies.
Armco believes, based on current facts and circumstances, that its ultimate
liability for pending claims, contingent liabilities, environmental matters
and matters related to its runoff insurance companies identified to date will
not materially affect its consolidated financial condition or liquidity.
However, it is possible that due to fluctuations in Armco's results, future
developments with respect to such pending claims, contingent liabilities and
other matters could have a material effect on the results of its operations in
future interim or annual periods.
At September 30, 1996, Armco had recorded in its Condensed Statement of
Consolidated Financial Position, legal and environmental reserves of $85.5, of
which $18.1 was classified as current.
-6-
<PAGE>8
8. Under the terms of one of Armco's revolving credit facilities, which
expires on December 31, 1998, Armco is not permitted to pay cash dividends on
its common stock. The payment of dividends on preferred stock is prohibited
if Armco is in default under the credit agreement.
Under the terms of the indentures for Armco's 11.375% Senior Notes Due 1999
and 9.375% Senior Notes Due 2000, Armco cannot pay a dividend on its common
stock or repurchase its capital stock, unless it meets certain financial tests
described in the indentures. Armco does not expect to be able to meet all of
these tests in the near term.
On February 23, 1996, the Board of Directors adopted a Stockholder Rights Plan
and declared a dividend distribution of one preferred stock purchase right for
each outstanding share of common stock of Armco to stockholders of record at
the close of business on June 26, 1996. The new rights replace similar rights
initially distributed in 1986.
At its October 25, 1996 meeting, the Board of Directors declared the regular
quarterly dividends payable on Armco's $2.10 Cumulative Convertible Preferred
Stock, Class A, $3.625 Cumulative Convertible Preferred Stock, Class A, and
$4.50 Cumulative Convertible Preferred Stock, Class B.
9. Information relating to Armco's industry segments can be found on page 12.
ARMCO INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
GENERAL
- -------
Armco's consolidated results for the three and nine months ended September 30,
1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 429.2 $ 404.1 $1,310.4 $1,163.1
Operating profit 24.2 16.8 51.5 59.1
Gain on the sale of AK Steel stock -- -- -- 27.2
Income (loss) from
continuing operations 9.9 (2.1) 12.8 31.9
Discontinued operations
Gain on sale of Aerospace and
Strategic Materials 6.5 -- 6.5 --
Equity in income of National-Oilwell -- 2.0 -- 6.3
Net income (loss) 16.4 (0.1) 19.3 38.2
Net income (loss) per common share
- primary 0.11 (0.04) 0.06 0.23
</TABLE>
Net sales in the three and nine months ended September 30, 1996 were 6% and
13% higher, respectively, than in the same periods last year, primarily due to
higher sales of automotive chrome, electrical and carbon steels in the
Specialty Flat-Rolled Steels segment.
In the nine months ended September 30, 1996, operating profit included income
of $4.2 related to the partial settlement of a business interruption insurance
claim. Excluding this credit, the decrease in operating profit from last year
was primarily due to the effects of planned equipment outages and higher
outside processing costs.
-7-
<PAGE>9
Income from continuing operations for the nine months ended September 30, 1996
and 1995 was $12.8 and $31.9, respectively. Included in the 1996 amount was
the above-mentioned insurance settlement and a $6.3 gain, which resulted from
the recognition of gains previously deferred in connection with asset sales at
a 500-acre industrial park owned by Armco. Armco had elected to defer gains
resulting from individual asset sales at this site because of the uncertainty
concerning realization of the carrying value of the remaining property. The
gains were recognized following receipt, in March 1996, of an independent
appraiser's report indicating that the land, buildings and dock facilities in
the park had a market value significantly in excess of Armco's historical cost
carrying value. Armco is currently discussing the sale of this property.
During the first nine months of 1995, Armco sold all of the shares it had
received in the initial public offering and recapitalization of AK Steel
Holding Corporation, recognizing a gain of $27.2.
Oregon Metallurgical Corporation (OREMET), formerly 80% owned by Armco, was
part of the Aerospace and Strategic Materials business segment that Armco sold
in 1985. Prior to the sale, Armco filed a suit on behalf of OREMET in the
U.S. Claims Court, claiming refunds and interest on federal and state taxes.
Pursuant to the sales agreement, Armco retained the benefit of its share of
any proceeds of this action, net of taxes imposed on OREMET and the buyer. In
1988, as a result of a favorable settlement of this refund action with the
Internal Revenue Service (IRS), Armco recorded a $15.2 net of tax adjustment
to the gain on the sale of this business segment. Armco and OREMET recently
reached an agreement with the IRS that the 1988 refund of taxes and interest
should not, itself, have been subject to tax, further increasing the cash
proceeds to Armco. In the third quarter of 1996, Armco recorded an additional
$6.5 gain on the sale.
At December 31, 1995, Armco had recorded $85.5 in Net assets held for sale for
its 50% ownership interest in National-Oilwell, an oil field equipment and
supply joint venture. The sale of National-Oilwell was completed on January
16, 1996, with Armco receiving $77.0 in cash and receivables with a face value
of $13.0. The receivables were recorded at a discounted value of $10.6.
After recording $2.1 for recognition of deferred foreign translation losses
and miscellaneous expenses, no gain or loss was recorded on the sale. The
equity income of National-Oilwell, recognized prior to the fourth quarter of
1995, is reported in Discontinued operations.
Net income (loss) per common share reflects a deduction of $4.5 for the third
quarter and $13.4 for the first nine months of each year for preferred stock
dividends declared.
BUSINESS SEGMENT RESULTS
- ------------------------
Specialty Flat-Rolled Steels
- ----------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Customer sales $ 350.5 $ 326.1 $1,098.7 $ 950.7
Operating profit 19.3 13.3 51.5 63.9
</TABLE>
Customer sales for the segment were $24.4 and $148.0 higher in the third
quarter and first nine months of 1996, respectively, than in the same periods
of 1995, primarily as a result of higher sales of automotive chrome,
electrical and carbon steels. Part of the increase was attributable to a third
quarter 1995 equipment failure which resulted in lost sales last year. The
nine-month period increase also reflects the idling of the Mansfield
Operations during the entire first quarter of 1995 pending completion of its
new thin-slab caster. The caster was completed, and the plant resumed
operations, in April 1995.
Year-to-date average sales per ton in 1996 was down from 1995 levels due to
the elimination of raw material price surcharges on certain stainless steels;
market softness, particularly for specialty strip and sheet and specialty
semi-finished products, and increased sales of lower-priced carbon products.
-8-
<PAGE>10
Customer sales and shipments by major product line and total raw steel
production were as follows:
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ---------------------------
1996 1995 1996 1995
------------ ------------ ------------ -----------
(tons in thousands) Sales Tons Sales Tons Sales Tons Sales Tons
------ ---- ------ ---- ------ ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Automotive chrome $122.2 93 $101.9 73 $ 390.5 293 $313.4 232
Electrical 91.9 67 80.0 58 275.2 203 251.4 182
Specialty strip
and sheet 59.3 23 68.4 24 191.9 73 207.1 77
Specialty semi-finished 38.4 27 42.9 24 109.3 77 93.7 58
Carbon 30.0 58 23.3 60 105.6 233 53.8 120
Other 8.7 -- 9.6 -- 26.2 -- 31.3 --
------- ---- ------- ---- ------- ---- ------ ----
Total $350.5 268 $326.1 239 $1,098.7 879 $950.7 669
Raw steel production 369 311 1,112 816
</TABLE>
Automotive chrome shipments were 27% higher in the third quarter of 1996 than
in the same period in 1995, as the Mansfield Operations shipped significant
quantities of this product line in the current year. During the first nine
months of 1995, Mansfield did not produce stainless steel products. Strong
production of North American light vehicles and increased use of stainless in
exhaust systems stimulated current year demand.
Shipments of electrical steel products increased 16% in the third quarter as a
result of generally good market conditions and some easing of capacity
constraints. Driven by strong housing starts, demand remained strong for
grain oriented electrical steel used in utility distribution transformers.
However, shipments of non-oriented electrical steel used in motors and
generators suffered under pressure from imports.
Specialty strip and sheet shipments declined slightly in the year-to-year
comparisons due to softer market conditions and increased import penetration.
Average sales realization per ton was 10% lower in the third quarter of 1996
compared to 1995 as a result of the elimination of raw material surcharges and
base price erosion.
Specialty semi-finished shipments increased slightly in the third quarter of
1996, primarily due to export sales, which generated lower margins. A 20%
reduction in average sales realization per ton reflected worldwide market
softness and the elimination of raw material surcharges. Specialty semi-
finished products have also been adversely affected by import competition.
Carbon steel shipments in the third quarter of 1996 totaled 58,000 tons
compared to 60,000 tons shipped in the same period of 1995. In the first half
of 1996, Armco began exiting the lower-priced hot band market, shifting the
product mix to more galvanized steel and increasing average sales realization
per ton by 33%. All of Armco's carbon steel products are produced at the
Mansfield and Dover Operations.
Specialty Flat-Rolled Steels' operating profit for the first nine months of
1996 included income of $4.2 related to the partial settlement of a business
interruption insurance claim for a third quarter 1995 unplanned outage. The
outage resulted from the failure of a generator on one stand of the hot mill
at the Butler Operations, which reduced efficiency during a six-week period,
resulting in the use of alternative and more costly product routings and lost
sales.
Third quarter 1996 operating profit also included an $8.8 loss from the
Mansfield and Dover Operations, compared to a loss of $32.7 in the same period
last year while Mansfield was ramping up. During the nine months ended
September 30, 1996 and 1995, the combined Mansfield and Dover losses were
$41.0 and $82.8, respectively. Mansfield, in addition to producing carbon
steels, shipped a significant percentage of Armco's automotive chrome
stainless in 1996. Mansfield continues to show improvement in operating cost,
throughput and productivity.
-9-
<PAGE>11
During the first nine months of 1996, operating profit for this segment was
lower than last year due to several planned equipment outages, including
outages necessary to upgrade Armco's finishing facilities as part of the
strategic facilities plan. The outages and the subsequent process of
restarting and returning these facilities to full capability contributed to
lower yields. In order to meet demand during this time, Armco used outside
processors to finish some of its stainless steels, resulting in increased
costs.
Outlook: With all of its equipment now fully operational, Armco expects
increased production and continued reduction in losses at Mansfield in the
fourth quarter of 1996. The completion of the Specialty Flat-Rolled Steels
finishing facilities upgrades earlier this year resulted in increased
finishing capacity, further improvement in quality and lower costs, including
a reduction in the use of high cost outside processors. However, fourth
quarter 1996 volume will be adversely affected by customer holiday shutdowns,
while Armco's costs will be higher in the quarter due to its own annual
maintenance outages.
Demand for Armco's automotive chrome stainless, electrical and carbon steel
products remains relatively strong. However, the market conditions for
specialty strip and sheet and specialty semi-finished products have weakened
and are having an adverse effect on both volume and pricing. Weak market
conditions, together with higher imports, are expected to continue to exert
downward pressure on shipments and pricing of specialty strip and sheet and
specialty semi-finished products.
In October 1996, the membership of the independent union representing
approximately 1,900 employees at the Butler Operations ratified a new five-
year contract. The new contract is expected to result in Armco maintaining
its competitive position.
Fabricated Products
- -------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Customer sales $ 78.7 $ 78.0 $211.7 $212.4
Operating profit 10.5 10.7 18.4 16.9
</TABLE>
Third quarter customer sales in this segment equaled last year's level, with
higher sales at Douglas Dynamics, L.L.C., offset by a decrease in sales at
Sawhill Tubular. The higher customer sales at Douglas Dynamics were a result
of price increases, which offset a slight decline in the number of snowplows
shipped. Although Sawhill's shipment volumes increased in the third quarter
comparison, a decrease in customer sales resulted from lower prices caused by
increased domestic competitive pressures and a high level of imports.
Douglas Dynamics' operating profit during the three- and nine-month periods
ended September 30, 1996 were slightly higher than in the same periods last
year. Increased sales and cost reductions related to the elimination of
production outsourcing were offset by higher fixed manufacturing,
administrative and selling costs, primarily related to the introduction of new
products.
Sawhill Tubular recorded a slight decrease in profits in the third quarter
comparison as a result of experiencing relatively higher costs for steel
compared to product selling price. Compared to the first nine months of 1995,
Sawhill's operating profit was higher due to cost reductions and quality
improvements.
Outlook: Douglas Dynamics anticipates somewhat lower snowplow sales over the
next twelve months compared to the last twelve months as a result of reduced
shipments partially offset by price increases. Operating results for the next
twelve months are expected to decline somewhat from the previous twelve-month
period.
-10-
<PAGE>12
Sawhill Tubular's sales and profitability are expected to remain level for the
next twelve months, although some of its markets remain soft.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At September 30, 1996, Armco had $140.9 of cash and cash equivalents compared
to $136.8 at December 31, 1995. Cash and cash equivalents increased $4.1
during the first nine months of 1996, primarily due to cash inflows of $77.0
from the sale of Armco's investment in National-Oilwell and cash generated by
operations; partially offset by capital expenditures of $41.9, pension
contributions totaling $28.2, principal payments on debt of $18.1 and
preferred stock dividends of $13.4.
In addition to the cash on hand, Armco has a receivables credit facility,
under which Armco Funding Corporation, a wholly owned subsidiary to which
Armco sells substantially all of its receivables, may borrow up to $120.0
secured by those receivables. In addition, Armco can borrow up to $50.0 under
a credit facility secured by certain of its inventories. At September 30,
1996, $77.3 of the receivables facility was used as support for letters of
credit, while no borrowings were outstanding under either facility.
Armco anticipates that cash expenditures for capital projects during the
remainder of the year will total approximately $22.0. In addition, Armco has
$6.2 of debt commitments maturing through December 1996 and expects to make
discretionary pension payments of about $13.0 during the remainder of the
year. During 1997, Armco expects to spend approximately $60.0 to $70.0 for
capital expenditures, $27.2 in debt payments and $30.0 to $40.0 for pension
funding. These expenditures will be paid out of existing cash balances and
cash generated from operations and asset disposals.
On October 25, 1996, Armco's Board of Directors declared the regular quarterly
dividends of $.525 per share on the $2.10 Cumulative Convertible Preferred
Stock, Class A, and $.90625 per share on the $3.625 Cumulative Convertible
Preferred Stock, Class A, each payable December 31, 1996 to shareholders of
record on November 29, 1996. The Board of Directors also declared the regular
quarterly dividend of $1.125 per share on the $4.50 Cumulative Convertible
Preferred Stock, Class B, payable January 2, 1997 to shareholders of record on
November 29, 1996. Payment of dividends on Armco's common stock is currently
prohibited under the terms of certain of Armco's debt instruments and under
the terms of its inventory credit facility.
-11-
<PAGE>13
<TABLE>
ARMCO INC.
SEGMENT REPORT
(Unaudited)
(Dollars in millions)
<CAPTION>
1996 1995
-------------------- --------------------------
3rd 2nd 1st 4th 3rd 2nd 1st
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Specialty Flat-Rolled Steels:
Customer sales $350.5 $376.1 $372.1 $326.3 $326.1 $320.9 $303.7
Operating profit 19.3 12.2 20.0 12.1 13.3 27.4 23.2
Fabricated Products:
Customer sales 78.7 74.7 58.3 70.5 78.0 69.7 64.7
Operating profit 10.5 6.4 1.5 5.1 10.7 5.4 0.8
Corporate general (5.6) (6.4) (6.4) (7.3) (7.2) (7.0) (7.5)
- -----------------------------------------------------------------------------
Total operating profit 24.2 12.2 15.1 9.9 16.8 25.8 16.5
Interest income 2.2 2.8 3.0 1.9 3.0 3.2 3.7
Interest expense (9.0) (9.3) (9.2) (8.2) (8.7) (8.5) (7.5)
Gain on sale of investment
in AK Steel stock - - - - - 25.9 1.3
Sundry other - net (7.2) (9.5) (1.6) (11.7) (12.3) (12.7) (12.9)
Provision for income taxes (0.3) (0.2) (0.4) (0.3) (0.9) (0.6) (0.2)
- -----------------------------------------------------------------------------
Income (loss) from
continuing operations 9.9 (4.0) 6.9 (8.4) (2.1) 33.1 0.9
Discontinued operations
Gain on sale of Aerospace
and Strategic Materials 6.5 - - - - - -
Equity in income of
National-Oilwell - - - - 2.0 2.8 1.5
- -----------------------------------------------------------------------------
Net income (loss) $ 16.4 $ (4.0) $ 6.9 $ (8.4) $(0.1) $35.9 $ 2.4
=============================================================================
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
-12-
<PAGE>14
Part II. Other Information
Item 1. Legal Proceedings
------------------
There are various claims pending against Armco and its subsidiaries involving
product liability, antitrust, patent, insurance arrangements, environmental
and hazardous waste matters, employee benefits and other matters arising out
of the conduct of the business of Armco as previously described in Armco's
Annual Report on Form 10-K for the year ended December 31, 1995 (the Form 10-
K) and Armco's Quarterly Reports on Form 10-Q for the quarters ended March 31,
1996 and June 30, 1996 (Form 10-Qs). The following summarizes significant
developments in previously reported matters and any claims asserted since June
30, 1996:
In the Larry B. Ricke, Trustee v. Armco action, on August 13, 1996, the U.S.
--------------------------------
Court of Appeals affirmed the District Court's decision denying Armco's Motion
for Summary Judgment. On September 26, 1996, Armco filed a Petition for
Rehearing which was denied on October 21, 1996. The district court will
schedule a status conference in the near future to establish procedures and
discovery schedules for the case to progress to trial.
In the Pension Benefit Guaranty Corporation v. Armco and Eastern Stainless
-------------------------------------------------------------------
Corporation action, the court has reset the summary jury trial for February 3,
- -----------
1997, and trial on the merits for March 24, 1997. Armco has renewed its
motion to dismiss the derivative claims and has filed a motion for summary
judgment with respect to the direct claims. The court has set a hearing for
these motions on December 5, 1996.
In the Granville Solvents matter, trial is expected in 1997.
In the matter involving the former E. G. Smith plant in Cambridge, Ohio, Armco
paid a penalty of $100,000 and agreed to initiate a $200,000 study to reduce
the environmental effects of nitric acid pickling. If Armco does not
implement the results of the study, an additional penalty up to $100,000 may
be assessed.
The total liability on the foregoing claims and those other claims described
under ITEM 3. LEGAL PROCEEDINGS in the Form 10-K or under Item 1 in the Form
10-Qs is not determinable; but in the opinion of management, the ultimate
liability resulting will not materially affect the consolidated financial
condition or liquidity of Armco and its subsidiaries; however, it is possible
that due to fluctuations in Armco's results, future developments with respect
to changes in the ultimate liability could have a material effect on future
interim or annual results of operations.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
A. The following is an index of the exhibits included in the Form 10-Q:
Exhibit 11 Computation of Income (Loss) Per Common Share
B. No report on Form 8-K was filed by Armco since June 30, 1996.
-13-
<PAGE>15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on behalf of the registrant by the following duly
authorized persons.
Armco Inc.
-----------------------------------
(Registrant)
Date November 4, 1996 /s/ David G. Harmer
--------------------- -----------------------------------
David G. Harmer
Vice President and Chief Financial Officer
Date November 4, 1996 /s/ John N. Davis
--------------------- -----------------------------------
John N. Davis
Vice President and Controller
-14-
<TABLE>
EXHIBIT 11
ARMCO INC.
COMPUTATION OF INCOME (LOSS) PER COMMON SHARE
<CAPTION>
(Dollars and shares in millions,
except per share amounts) Three Months Ended Nine Months Ended
PRIMARY September 30, September 30,
- ------------------------------------------------------------------------------
1996 1995 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income (loss) from continuing
operations $ 9.9 $ (2.1) $ 12.8 $ 31.9
Preferred stock dividends (4.5) (4.5) (13.4) (13.4)
- ------------------------------------------------------------------------------
Income (loss) from continuing
operations applicable to common stock 5.4 (6.6) (0.6) 18.5
Income from discontinued operation 6.5 2.0 6.5 6.3
- ------------------------------------------------------------------------------
Net income (loss) applicable to
common stock $ 11.9 $ (4.6) $ 19.3 $ 24.8
- ------------------------------------------------------------------------------
Weighted average number of common shares 106.6 106.1 106.5 105.9
Weighted average number of common
equivalent shares - - - 0.1
- ------------------------------------------------------------------------------
Average common shares outstanding
as adjusted 106.6 106.1 106.5 106.0
- ------------------------------------------------------------------------------
Income (loss) per share from
continuing operations $ 0.05 $(0.06) $ 0.00 $ 0.17
Income per share from discontinued
operation 0.06 0.02 0.06 0.06
- ------------------------------------------------------------------------------
Net income (loss) per share $ 0.11 $(0.04) $ 0.06 $ 0.23
- ------------------------------------------------------------------------------
FULLY DILUTED*
Income (loss) from continuing
operations $ 9.9 $ (2.1) $ 12.8 $ 31.9
Preferred stock dividends - (4.5) - -
- ------------------------------------------------------------------------------
Income (loss) from continuing
operations applicable to common stock 9.9 (6.6) 12.8 31.9
Income from discontinued operation 6.5 2.0 6.5 6.3
- ------------------------------------------------------------------------------
Net income (loss) applicable to
common stock $ 16.4 $ (4.6) $ 19.3 $ 38.2
- ------------------------------------------------------------------------------
Weighted average number of common shares 106.6 106.1 106.5 105.9
Weighted average number of common
equivalent shares - ** - 0.1
Weighted average number of preferred
shares on an "if converted" basis 22.7 ** 22.7 22.7
- ------------------------------------------------------------------------------
Average common shares outstanding
as adjusted 129.3 106.1 129.2 128.7
- ------------------------------------------------------------------------------
Income (loss) per share from
continuing operations $ 0.08 $(0.06) $ 0.10 $ 0.25
Income per share from discontinued
operation 0.05 0.02 0.05 0.05
- ------------------------------------------------------------------------------
Net income (loss) per share $ 0.13 $(0.04) $ 0.15 $ 0.30
- ------------------------------------------------------------------------------
Shares of stock outstanding at September 30
Common 106.6 106.1
Preferred - $2.10 Class A 1.7 1.7
Preferred - $3.625 Class A 2.7 2.7
Preferred - $4.50 Class B 1.0 1.0
<FN>
* Calculation of fully diluted income per share is submitted in accordance
with Securities Exchange Act of 1934 Release No. 9083, although it is
contrary to paragraph 40 of APB Opinion No. 15 because it produces an
antidilutive result, or is not required by footnote 2 to paragraph 14 of
APB Opinion No. 15 because it results in dilution of less than 3%.
** Antidilutive
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE ARMCO INC. CONDENSED STATEMENT OF
CONSOLIDATED FINANCIAL POSITION AND CONDENSED STATEMENT
OF CONSOLIDATED OPERATIONS AND RETAINED DEFICIT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 140,900
<SECURITIES> 0
<RECEIVABLES> 201,800
<ALLOWANCES> 0
<INVENTORY> 246,800
<CURRENT-ASSETS> 597,500
<PP&E> 1,251,900
<DEPRECIATION> 584,000
<TOTAL-ASSETS> 1,895,300
<CURRENT-LIABILITIES> 384,300
<BONDS> 344,400
<COMMON> 1,100
0
185,900
<OTHER-SE> (407,200)
<TOTAL-LIABILITY-AND-EQUITY> 1,895,300
<SALES> 1,310,400
<TOTAL-REVENUES> 1,310,400
<CGS> 1,189,700
<TOTAL-COSTS> 1,189,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,500
<INCOME-PRETAX> 13,700
<INCOME-TAX> 900
<INCOME-CONTINUING> 12,800
<DISCONTINUED> 6,500
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,300
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.15
</TABLE>
