<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
--------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------------- ------------------
Commission File No. 1-873-2
--------------------------------------------------
ARMCO INC.
----------
(Exact name of registrant as specified in its charter)
Ohio 31-0200500
- ------------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Oxford Centre, 301 Grant St., Pittsburgh, PA 15219-1415
-----------------------------------------------------------
(Address of principal executive offices, Zip Code)
(412) 255-9800
----------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
Yes X No
------- ------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
------- ------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares of common stock outstanding at June 30, 1997: 107,049,587
<PAGE>
ARMCO INC.
INDEX
Pages
Part I. Financial Information
Condensed Statement of Consolidated Financial Position -
June 30, 1997 and December 31, 1996 2
Condensed Statement of Consolidated Income and Accumulated
Deficit - Three and Six Months Ended June 30, 1997 and 1996 3
Condensed Statement of Consolidated Cash Flows -
Six Months Ended June 30, 1997 and 1996 4
Notes to Condensed Consolidated Financial Statements 5-6
Management's Discussion and Analysis of the Condensed
Consolidated Financial Statements 7-10
Segment Report 11
Part II. Other Information
Item 1. Legal Proceedings 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
Exhibit 11 Computation of Earnings (Loss) Per Common Share
-1-
<PAGE>
<TABLE>
ARMCO INC.
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(Unaudited)
<CAPTION>
(Dollars in millions) June 30, December 31,
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 175.2 $ 168.9
Receivables, less allowance for doubtful accounts 191.6 149.6
Inventories (Note 2) 265.0 246.9
Other 5.9 6.4
- -----------------------------------------------------------------------------
Total current assets 637.7 571.8
Investments
Investment in Armco Financial Services Group (Note 6) 85.6 85.6
Other, less allowance for impairment 47.7 52.4
Property, plant and equipment 1,284.1 1,267.7
Accumulated depreciation (627.4) (597.6)
- -----------------------------------------------------------------------------
Property, plant and equipment - net 656.7 670.1
Deferred tax asset 325.8 325.8
Goodwill and other intangible assets 141.5 144.8
Other assets 12.7 17.3
- -----------------------------------------------------------------------------
Total assets $1,907.7 $1,867.8
- -----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Trade accounts and notes payable $ 163.0 $ 136.3
Employment-related obligations 112.6 115.1
Other liabilities 68.4 79.6
Current portion of long-term debt 27.3 27.2
- -----------------------------------------------------------------------------
Total current liabilities 371.3 358.2
Long-term debt, less current portion 337.0 344.3
Long-term employee benefit obligations 1,203.7 1,200.2
Other liabilities 186.0 177.1
Commitments and contingencies (Note 6)
Shareholders' deficit (Note 7)
Preferred stock - Class A 137.6 137.6
Preferred stock - Class B 48.3 48.3
Common stock 1.1 1.1
Additional paid-in capital 967.4 965.0
Accumulated deficit (1,341.9) (1,363.9)
Other (2.8) (0.1)
- -----------------------------------------------------------------------------
Total shareholders' deficit (190.3) (212.0)
- -----------------------------------------------------------------------------
Total liabilities and shareholders' deficit $1,907.7 $1,867.8
- -----------------------------------------------------------------------------
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
-2-
<PAGE>
<TABLE>
ARMCO INC.
CONDENSED STATEMENT OF CONSOLIDATED INCOME
AND ACCUMULATED DEFICIT
(Unaudited)
(Dollars and shares in millions,
except per share amounts)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 490.3 $ 450.8 $ 931.6 $ 881.2
Cost of products sold (436.1) (414.3) (833.6) (805.6)
Selling and administrative expenses (26.2) (24.3) (50.8) (48.3)
- ------------------------------------------------------------------------------
Operating profit 28.0 12.2 47.2 27.3
Interest income 2.4 2.8 4.9 5.8
Interest expense (8.5) (9.3) (17.2) (18.5)
Sundry other - net (Note 3) (0.6) (9.5) (4.0) (11.1)
- ------------------------------------------------------------------------------
Income (loss) before income taxes 21.3 (3.8) 30.9 3.5
Provision for income taxes (1.1) (0.2) (1.3) (0.6)
- ------------------------------------------------------------------------------
Income (loss) from continuing
operations 20.2 (4.0) 29.6 2.9
Discontinued operations -
Gain on sale of Aerospace and
Strategic Materials (Note 5) 1.3 - 1.3 -
- ------------------------------------------------------------------------------
Net income (loss) 21.5 (4.0) 30.9 2.9
Accumulated deficit, beginning of
period (1,359.0) (1,376.1) (1,363.9) (1,378.5)
Preferred stock dividends (4.4) (4.4) (8.9) (8.9)
- ------------------------------------------------------------------------------
Accumulated deficit, end of
period $(1,341.9) $(1,384.5) $(1,341.9) $(1,384.5)
- ------------------------------------------------------------------------------
Weighted average number of common
and common equivalent shares
outstanding - primary 107.1 106.7 106.9 106.5
Net income applicable to
common stock $ 17.1 $ (8.4) $ 22.0 $ (6.0)
Income (loss) per common share
from continuing operations 0.15 (0.08) 0.20 (0.06)
Income per share from
discontinued operations 0.01 - 0.01 -
- ------------------------------------------------------------------------------
Net income (loss) per common
share - primary $ 0.16 $ (0.08) $ 0.21 $ (0.06)
Net income (loss) per common
share - fully diluted * * * *
Cash dividends per share
$2.10 Class A $ 0.525 $ 0.525 $ 1.050 $ 1.050
$3.625 Class A 0.906 0.906 1.813 1.813
$4.50 Class B 1.125 1.125 2.250 2.250
<FN>
* Antidilutive or dilution less than 3%
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
-3-
<PAGE>
<TABLE>
ARMCO INC.
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
(Unaudited)
<CAPTION>
(Dollars in millions) Six Months Ended
June 30,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 30.9 $ 2.9
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 30.8 29.3
Net gain on disposal of investments and facilities (1.0) (1.4)
Other 4.9 (1.1)
Change in assets and liabilities:
Trade accounts and notes receivable (44.7) (30.4)
Inventory (18.1) (10.2)
Payables and accrued operating expenses 30.2 11.7
Employee benefit obligations (1.0) 11.3
Other assets and liabilities - net 2.6 (2.4)
- -----------------------------------------------------------------------------
Net cash provided by operating activities 34.6 9.7
- -----------------------------------------------------------------------------
Cash flows from investing activities:
Net proceeds from the sale of businesses and assets 2.5 4.9
Proceeds from the sale of investments 0.3 79.2
Contributions to investees - (3.6)
Capital expenditures (15.1) (27.0)
Other (0.2) (6.4)
- -----------------------------------------------------------------------------
Net cash (used in) provided by investing activities (12.5) 47.1
- -----------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from drawdown of debt 2.0 0.6
Payments on debt (7.4) (3.2)
Dividends paid (8.9) (8.9)
Other (1.5) (1.1)
- -----------------------------------------------------------------------------
Net cash used in financing activities (15.8) (12.6)
- -----------------------------------------------------------------------------
Net change in cash and cash equivalents 6.3 44.2
Cash and cash equivalents:
Beginning of period 168.9 136.8
- -----------------------------------------------------------------------------
End of period $175.2 $181.0
- -----------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of capitalized interest) $ 16.6 $17.4
Income taxes 1.6 0.6
Supplemental schedule of noncash investing and
financing activities:
Issuance of restricted stock 2.4 3.0
Note received in partial payment for asset sale 0.3 10.6
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
-4-
<PAGE>
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. should be
read in conjunction with the financial statements in Armco's Annual Report to
Shareholders for the year ended December 31, 1996. 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, Armco's financial position as of
June 30, 1997, its results of operations for the three and six months ended
June 30, 1997 and 1996, and its cash flows for the six months ended June 30,
1997 and 1996. The results of operations for the three and six months ended
June 30, 1997 are not necessarily indicative of the results to be expected for
the year 1997.
Certain amounts in the prior year financial statements have been reclassified
to conform to the 1997 presentation.
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>
June 30, December 31,
1997 1996
-------- --------
<S> <C> <C>
Inventories on LIFO:
Finished and semi-finished $ 268.9 $ 259.0
Raw materials and supplies 25.3 21.4
Adjustment to state inventories at LIFO value (55.3) (52.8)
-------- --------
Total 238.9 227.6
-------- --------
Inventories on average cost:
Finished and semi-finished 19.8 11.9
Raw materials and supplies 6.3 7.4
-------- --------
Total 26.1 19.3
-------- --------
Total inventories $ 265.0 $ 246.9
======== ========
</TABLE>
3. Sundry other - net in Armco's Condensed Statement of Consolidated Income
and Accumulated Deficit includes $0.5 and $2.1 for the three and six months
ended June 30, 1997 and $7.9 and $15.8 for the three and six months ended June
30, 1996, respectively, of expense for employee benefit obligations related to
facilities that have been divested. The reduction in expense in 1997 is
primarily due to favorable investment returns on pension plan assets and
favorable experience in pension and retiree medical benefit costs.
In the six months ended June 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 the Greens Port Industrial Park, which operates
a loading dock on the Houston Ship Channel, and leases buildings and land
located on its property to third parties.
4. Effective January 1, 1997, having reevaluated its plan to sell the
remaining assets of Greens Port as a single entity, Armco began to report the
consolidated results of the operations of the industrial park in its
Fabricated Products business segment. In the first six months of 1997, Greens
Port had revenues of $3.5 and operating profit of $2.2.
-5-
<PAGE>
5. In the three and six months ended June 30, 1997, Armco recorded $1.3 of
income in discontinued operations for a state tax refund related to a company
in the previously divested Aerospace and Strategic Materials business segment.
6. 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 runoff operations of the Armco Financial
Services Group (AFSG) companies, including matters related to Northwestern
National Insurance Company (NNIC), a runoff company currently involved in,
among other matters, litigation with respect to certain reinsurance programs.
In March 1997, a group of international insurance 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 reinsurance 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 AFSG.
Armco believes that its ultimate liability for pending claims, contingent
liabilities, environmental matters and matters related to AFSG identified to
date will not materially affect its consolidated financial condition or
liquidity. However, it is possible that 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 periods.
At June 30, 1997, Armco had recorded in its Condensed Statement of
Consolidated Financial Position, legal and environmental reserves of $78.1, of
which $15.3 was classified as current.
7. 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 future.
At its July 25, 1997 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.
8. Information relating to Armco's industry segments can be found on page 11.
-6-
<PAGE>
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 six months ended June 30, 1997
and 1996 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $490.3 $450.8 $931.6 $881.2
Operating profit 28.0 12.2 47.2 27.3
Net income (loss) 21.5 (4.0) 30.9 2.9
Earnings (loss) per common share 0.16 (0.08) 0.21 (0.06)
</TABLE>
Net sales in the three and six months ended June 30, 1997 were higher by $39.5
and $50.4, respectively, than in the same periods last year, primarily due to
increased volume of specialty semi-finished products and higher sales of
galvanized steel products in the Specialty Flat-Rolled Steels segment, as well
as sales growth in snowplows and tubular products in the Fabricated Products
segment.
Operating profit in the three months ended June 30, 1997 was more than double
the amount reported in the same period last year, reflecting a substantial
improvement in the Specialty Flat-Rolled Steels business segment, higher sales
of snowplows and favorable experience in pension and retiree medical benefit
expenses. Operating profit in the three- and six-month periods of 1997
included $1.1 and $2.2, respectively, for income generated by Greens Port
Industrial Park, which Armco began consolidating in the Fabricated Products
business segment on January 1, 1997. Prior to 1997, Greens Port was held for
sale and its results were reported in Sundry other - net.
Operating profit, in the six months ended June 30, 1997 and 1996, included
income of $2.0 and $4.2, respectively, related to partial settlement of
business interruption insurance claims. Excluding the results of Greens Port
and the insurance credits, operating profit increased by $19.9 in the first
six months of 1997 over the same period in 1996, primarily due to the reasons
given for the quarterly improvement.
Included in net income for the first six months of 1996 was the above-
mentioned insurance settlement and $6.3 of gains previously deferred in
connection with asset sales at Greens Port. In addition, net income for the
three and six months ended June 30, 1997 included $1.3 for a tax refund
related to a company in the divested Aerospace and Strategic Materials
business segment.
Armco's net income also improved as a result of lower expenses related to
long-term benefit obligations for employees of Armco facilities that have been
divested. The reductions of $7.4 and $13.7 for the three- and six-month
period comparisons were primarily due to favorable investment returns on
pension plan assets and lower pension and retiree medical benefit costs.
Earnings (loss) per common share reflects the deduction from net income of
preferred stock dividends declared.
-7-
<PAGE>
BUSINESS SEGMENT RESULTS
- ------------------------
Specialty Flat-Rolled Steels
- ----------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Customer sales $402.9 $376.1 $777.9 $748.2
Operating profit 22.3 12.2 44.7 32.2
</TABLE>
Customer sales for the segment were 7% and 4% higher in the three and six
months ended June 30, 1997 than in the respective periods in 1996, primarily
as a result of increased volume of specialty semi-finished products and higher
sales of galvanized steel products. The segment's average sales per ton in
1997 decreased from 1996 due to the effects of high levels of imports of
stainless and electrical steels, partially offset by a shift in carbon steel
product mix to higher priced galvanized products from lower priced hot bands.
Specialty strip and sheet and semi-finished products were affected most by
weakening prices.
Customer sales and shipments by major product line and total cast production
were as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
(tons in thousands) Sales Tons Sales Tons Sales Tons Sales Tons
------ ---- ------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Specialty flat-rolled $287.3 196 $297.2 199 $568.4 389 $584.2 386
Specialty semi-
finished 65.1 53 39.3 29 105.2 87 70.9 50
Galvanized/carbon 40.6 76 31.4 67 86.6 162 75.6 175
Other 9.9 - 8.2 - 17.7 - 17.5 -
------ --- ------ --- ------ --- ------ ---
Total $402.9 325 $376.1 295 $777.9 638 $748.2 611
Cast production 389 353 752 743
</TABLE>
Shipments of specialty flat-rolled products, which include automotive exhaust
stainless, electrical steel and specialty strip and sheet, were approximately
the same in the respective three- and six-month periods of 1997 and 1996.
However, 1997 average sales per ton declined 3% from the first six months of
1996, reflecting elimination of raw material surcharges on stainless steel and
increased import competition on certain grades of chrome nickel stainless and
cold rolled non-oriented electrical steels.
Specialty semi-finished shipments increased substantially in 1997 over 1996,
primarily as a result of increased sales of chrome nickel hot bands. However,
a 15% reduction in average sales per ton for the first six months of 1997
compared to 1996 reflected worldwide market softness and import competition.
Carbon steel shipments in the second quarter of 1997 increased as a result of
strong demand for galvanized steel, partially offset by the elimination of
carbon hot band shipments and the increased use of Armco's melt capacity for
specialty products. In the first half of 1996, Armco began exiting the lower
priced hot band market, shifting to higher priced galvanized steel products
and thus increasing average sales per ton by 24% in the six-month period
comparison.
Second quarter operating profit increased in 1997 as a result of higher sales
and lower costs. The lower costs were primarily due to more stable operating
conditions and favorable experience in pension and retiree medical benefit
costs. Costs in 1996 were adversely affected by several planned outages
necessary
-8-
<PAGE>
to complete equipment upgrades. These outages disrupted operations and
resulted in the increased use of outside processors. Specialty Flat-Rolled
Steels' operating profit included gains of $2.0 and $4.2 in the first half of
1997 and 1996, respectively, from the partial settlements of a business
interruption insurance claim.
Outlook: Third quarter 1997 shipments of automotive chrome stainless are
expected to decline from second quarter levels due to normal vehicle model
changeovers. While vehicle production remained strong in the first half of
the year, recent automotive sales figures trailed those of a year ago, raising
concerns about weakening demand.
Armco expects electrical products, in general, to be under pressure due to
softening demand and continued high imports. Demand for specialty strip and
sheet and semi-finished products has increased, but pricing remains low due to
pressure from imports.
Fabricated Products
- -------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Customer sales $87.4 $74.7 $153.7 $133.0
Operating profit 11.9 6.4 14.5 7.9
</TABLE>
Customer sales increased $12.7 and $20.7 for the second quarter and first six
months, respectively, of 1997, primarily due to higher sales at Douglas
Dynamics and Sawhill Tubular, and the consolidation of the Greens Port
Industrial Park. Higher customer sales at Douglas Dynamics reflected a
significant improvement in snowplow shipments primarily due to an expanded
sales network and the introduction of new products. Higher sales at Sawhill
were a result of volume increases along most major product lines. Greens Port
recorded sales of $3.5 in the first six months of 1997 from loading dock fees
and rental of land and buildings. During 1996, Greens Port revenues were not
included in the segment.
Douglas Dynamics' and Sawhill's operating profit were substantially higher in
1997. Douglas Dynamics' results improved due to manufacturing efficiencies
achieved during the year and reduced operating expenses following the decision
in 1996 to exit certain unprofitable product lines. The increase in Sawhill's
profits was also driven by lower costs. This segment's operating profit in
the first six months of 1997 included $2.2 from Greens Port.
Outlook: Douglas Dynamics' sales are expected to be somewhat lower in the
second half of 1997 compared to last year. However, savings from
manufacturing efficiencies and cost reduction programs are expected to result
in improved operating profit in the same comparative periods. Sawhill
Tubular's 1997 sales and profitability are expected to exceed last year due to
higher volume in certain product lines and lower costs.
ARMCO FINANCIAL SERVICES GROUP (AFSG)
- -------------------------------------
In March 1997, a group of international insurance 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 reinsurance 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 AFSG.
-9-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At June 30, 1997, Armco had $175.2 of cash and cash equivalents compared to
$168.9 at December 31, 1996. Cash and cash equivalents increased $6.3 during
the first six months of 1997, primarily due to $34.6 of cash generated by
operations, partially offset by capital expenditures of $15.1, preferred stock
dividends of $8.9 and principal payments on debt of $7.4.
In addition to cash on hand, Armco has a receivables credit facility with a
commitment of up to $120.0 for borrowings and letters of credit. Under this
facility, Armco Funding Corporation, a wholly owned subsidiary to which Armco
sells substantially all of its receivables, may borrow, depending on its
available borrowing base and the amount of letters of credit outstanding, 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. While no
borrowings were outstanding under either facility, at June 30, 1997, Armco had
outstanding $64.3 of letters of credit. A total of $91.4 was available for
borrowing.
Armco anticipates that expenditures for capital projects during the remainder
of the year will total approximately $40.0. In addition, Armco has $19.8 of
debt maturing through December 1997. Armco expects that these expenditures
will be paid out of existing cash balances and cash generated from operations.
On July 25, 1997, 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 September 30, 1997 to shareholders of
record on August 29, 1997. The Board of Directors also declared the regular
quarterly dividend of $1.125 per share on the $4.50 Cumulative Convertible
Preferred Stock, Class B, payable October 1, 1997 to shareholders of record on
August 29, 1997. Payment of dividends on Armco's common stock is currently
prohibited under the terms of certain of Armco's debt instruments and
inventory credit facility.
FORWARD LOOKING STATEMENTS
- --------------------------
Certain statements made in this Management's Discussion & Analysis of the
Condensed Consolidated Financial Statements and in the Notes to Condensed
Consolidated Financial Statements 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
foregoing paragraphs entitled "Outlook" and ARMCO
--
- --- FINANCIAL SERVICES GROUP (AFSG) and in footnote No. 6 relating to
contingencies.
- ------------------------------
As discussed in its Form 10-K for the year ended December 31, 1996, 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 and changes in application or scope
of environmental regulations applicable to Armco.
-10-
<PAGE>
<TABLE>
ARMCO INC.
SEGMENT REPORT
(Unaudited)
(Dollars in millions)
<CAPTON>
1997 1996
-------------- ------------------------------
2nd 1st 4th 3rd 2nd 1st
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Specialty Flat-Rolled Steels:
Customer sales $402.9 $375.0 $322.5 $350.5 $376.1 $372.1
Operating profit 22.3 22.4 21.4 19.3 12.2 20.0
Fabricated Products:
Customer sales 87.4 66.3 91.1 78.7 74.7 58.3
Special charges - - (8.8) - - -
Operating profit 11.9 2.6 4.4 10.5 6.4 1.5
Corporate general (6.2) (5.8) (2.6) (5.6) (6.4) (6.4)
- ------------------------------------------------------------------------------
Total operating profit 28.0 19.2 23.2 24.2 12.2 15.1
Interest income 2.4 2.5 2.1 2.2 2.8 3.0
Interest expense (8.5) (8.7) (8.8) (9.0) (9.3) (9.2)
Sundry other - net (0.6) (3.4) (2.8) (7.2) (9.5) (1.6)
- ------------------------------------------------------------------------------
Income (loss) before
income taxes 21.3 9.6 13.7 10.2 (3.8) 7.3
Provision for income taxes (1.1) (0.2) (0.5) (0.3) (0.2) (0.4)
- ------------------------------------------------------------------------------
Income (loss) from continuing
operations 20.2 9.4 13.2 9.9 (4.0) 6.9
Discontinued operation -
Gain on sale of Aerospace
and Strategic Materials 1.3 - - 6.5 - -
- ------------------------------------------------------------------------------
Net income (loss) $ 21.5 $ 9.4 $ 13.2 $ 16.4 $ (4.0) $ 6.9
==============================================================================
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
-11-
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
-----------------
There are various claims pending against Armco and its subsidiaries involving
product liability, patent, reinsurance and insurance arrangements,
environmental, antitrust, 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, 1996 (the Form 10-K) and
Armco's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997
(the Form 10-Q). The following summarizes significant developments in
previously reported matters and any material claims asserted since March 31,
1997:
In the Pension Benefit Guaranty Corporation v. Armco and Eastern Stainless
-------------------------------------------------------------------
Corporation action, the parties agreed on a settlement of all claims in the
- -----------
amount of $4.5 million. On June 19, 1997, the Court approved the settlement
at a fairness hearing and no appeals were timely filed thereafter. The
settlement of this matter is now final.
In the Fultz Landfill Superfund action, Armco has added eight additional
companies as third-party defendants. Armco continues to seek an equitable
settlement of this case. In June, 1997, the Court approved a settlement
agreement under which three of the companies initially identified as PRPs by
the USEPA (Armco is not among them), plus their successors and certain other
companies, have agreed to undertake remediation of the site. USEPA continues
to seek approximately $6 million in oversight costs. No estimate of Armco's
proportionate liability can be made at this time.
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-Q is not determinable; but, in the opinion of management, the ultimate
liability resulting will not materially affect the consolidated financial
condition or liquidity of Armco and its subsidiaries; however, it is possible
that due to fluctuations in 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 5. Other Information
-----------------
Any shareholder proposals intended to be presented at the 1998 annual meeting
of shareholders must be received by Armco by November 17, 1997, in order to be
considered for inclusion in the proxy statement and form of proxy for that
meeting. Shareholders intending to nominate director candidates for election
at the 1998 annual meeting of shareholders must deliver written notice,
including specified information, to the Secretary of Armco, at its offices at
One Oxford Centre, 301 Grant Street, Pittsburgh, Pennsylvania 15219-1415, by
January 25, 1998.
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 Earnings Per Common Share
B. No report on Form 8-K was filed by Armco since March 31, 1997.
-12-
<PAGE>
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 August 1, 1997 /s/ Jerry W. Albright
----------------------- --------------------------------
Jerry W. Albright
Vice President and Chief
Financial Officer
Date August 1, 1997 /s/ John N. Davis
----------------------- ---------------------------------
John N. Davis
Vice President and Controller
-13-
<TABLE>
ARMCO INC.
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
<CAPTION>
(Dollars and shares in millions, Three Months Ended Six Months Ended
except per share amounts) June 30, June 30,
- ------------------------------------------------------------------------------
1997 1996 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PRIMARY
Income (loss) from continuing operations $20.2 $ (4.0) $29.6 $ 2.9
Preferred stock dividends (4.4) (4.4) (8.9) (8.9)
- ------------------------------------------------------------------------------
Income (loss) from continuing operations
applicable to common stock 15.8 (8.4) 20.7 (6.0)
Income from discontinued operations 1.3 - 1.3 -
- ------------------------------------------------------------------------------
Net income (loss) applicable to
common stock $17.1 $ (8.4) $22.0 $ (6.0)
- ------------------------------------------------------------------------------
Weighted average number of common shares 107.1 106.7 106.9 106.5
- ------------------------------------------------------------------------------
Income (loss) per common share from
continuing operations $0.15 $(0.08) $0.20 $(0.06)
Income per common share from
discontinued operations 0.01 - 0.01 -
- ------------------------------------------------------------------------------
Net income (loss) per common share $0.16 $(0.08) $0.21 $(0.06)
- ------------------------------------------------------------------------------
FULLY DILUTED*
Income (loss) from continuing operations $20.2 $ (4.0) $29.6 $ 2.9
Preferred stock dividends - (4.4) - (8.9)
- ------------------------------------------------------------------------------
Income (loss) from continuing operations
applicable to common stock 20.2 (8.4) 29.6 (6.0)
Income from discontinued operations 1.3 - 1.3 -
- ------------------------------------------------------------------------------
Net income (loss) applicable to
common stock $21.5 $ (8.4) $30.9 $ (6.0)
- ------------------------------------------------------------------------------
Weighted average number of common shares 107.1 106.7 106.9 106.5
Weighted average number of preferred
shares on an "if converted" basis 22.7 ** 22.7 **
- ------------------------------------------------------------------------------
Average common shares outstanding
as adjusted 129.8 106.7 129.6 106.5
- ------------------------------------------------------------------------------
Income (loss) per common share from
continuing operations $0.16 $(0.08) $0.23 $(0.06)
Income per common share from
discontinued operations 0.01 - 0.01 -
- ------------------------------------------------------------------------------
Net income (loss) per common share $0.17 $(0.08) $0.24 $(0.06)
- ------------------------------------------------------------------------------
Shares of stock outstanding at June 30,
Common 107.1 106.6
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%.
</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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 175,200
<SECURITIES> 0
<RECEIVABLES> 191,600
<ALLOWANCES> 0
<INVENTORY> 265,000
<CURRENT-ASSETS> 637,700
<PP&E> 1,284,100
<DEPRECIATION> 627,400
<TOTAL-ASSETS> 1,907,700
<CURRENT-LIABILITIES> 371,300
<BONDS> 337,000
<COMMON> 1,100
0
185,900
<OTHER-SE> (377,300)
<TOTAL-LIABILITY-AND-EQUITY> 1,907,700
<SALES> 931,600
<TOTAL-REVENUES> 931,600
<CGS> 833,600
<TOTAL-COSTS> 833,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,200
<INCOME-PRETAX> 30,900
<INCOME-TAX> 1,300
<INCOME-CONTINUING> 29,600
<DISCONTINUED> 1,300
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,900
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.24
</TABLE>
