<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, 1998
--------------------------------------
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
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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
------- ------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
------- ------
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, 1998: 107,879,090
<PAGE>
ARMCO INC.
INDEX
Pages
Part I. Financial Information
Condensed Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 2
Condensed Consolidated Statements of Income and Accumulated
Deficit - Three and Six Months Ended June 30, 1998 and 1997 3
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1998 and 1997 4
Notes to Condensed Consolidated Financial Statements 5-7
Management's Discussion and Analysis of the Condensed
Consolidated Financial Statements 8-11
Segment Report 12
Part II. Other Information
Item 1. Legal Proceedings 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
-1-
<PAGE>
<TABLE>
ARMCO INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
(Dollars in millions) June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 125.6 $ 189.9
Short-term liquid investments 12.3 5.0
Receivables, less allowance for doubtful accounts 187.8 156.6
Inventories (Note 2) 275.1 268.0
Other 13.0 17.9
- -----------------------------------------------------------------------------
Total current assets 613.8 637.4
Investments
Investment in Armco Financial
Services Group (Note 5) 85.6 85.6
Other, less allowance for impairment 30.3 30.3
Property, plant and equipment 1,316.8 1,305.5
Accumulated depreciation (685.1) (653.0)
- -----------------------------------------------------------------------------
Property, plant and equipment - net 631.7 652.5
Deferred tax asset 317.6 319.3
Goodwill and other intangible assets 132.3 137.4
Other assets 16.5 18.8
- -----------------------------------------------------------------------------
Total assets $ 1,827.8 $ 1,881.3
=============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Trade accounts and notes payable $ 125.0 $ 148.9
Employment-related obligations 118.1 126.4
Other liabilities 64.2 72.8
Current portion of long-term debt 7.0 38.2
- -----------------------------------------------------------------------------
Total current liabilities 314.3 386.3
Long-term debt, less current portion 303.0 306.9
Long-term employee benefit obligations 914.4 1,178.1
Other liabilities 165.8 162.5
Commitments and contingencies (Note 5)
Shareholders' equity (deficit)
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 971.9 967.7
Accumulated deficit (1,025.0) (1,305.0)
Other (3.6) (2.2)
- -----------------------------------------------------------------------------
Total shareholders' equity (deficit) 130.3 (152.5)
- -----------------------------------------------------------------------------
Total liabilities and shareholders'
equity (deficit) $ 1,827.8 $ 1,881.3
=============================================================================
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
-2-
<PAGE>
<TABLE>
ARMCO INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND ACCUMULATED DEFICIT
(Unaudited)
<CAPTION>
(Dollars and shares in millions, Three Months Ended Six Months Ended
except per share amounts) June 30, June 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 450.1 $ 490.3 $ 897.8 $ 931.6
Cost of products sold (396.1) (436.1) (800.5) (833.6)
Selling and administrative expenses (22.2) (26.2) (44.2) (50.8)
- ------------------------------------------------------------------------------
Operating profit 31.8 28.0 53.1 47.2
Interest income 1.6 2.4 4.1 4.9
Interest expense (7.1) (8.5) (14.7) (17.2)
Sundry other - net (Note 3) 6.9 (0.6) 12.8 (4.0)
- ------------------------------------------------------------------------------
Income before income taxes 33.2 21.3 55.3 30.9
Provision for income taxes (2.1) (1.1) (3.9) (1.3)
- ------------------------------------------------------------------------------
Income from continuing operations 31.1 20.2 51.4 29.6
Discontinued operations -
Gain on Sale of Aerospace and
Strategic Materials - 1.3 - 1.3
- ------------------------------------------------------------------------------
Income before cumulative effect of
an accounting change 31.1 21.5 51.4 30.9
Cumulative effect of a change in
accounting for postretirement
benefits (Note 1) - - 237.5 -
- ------------------------------------------------------------------------------
Net income 31.1 21.5 288.9 30.9
Accumulated deficit, beginning
of period (1,051.7) (1,359.0) (1,305.0) (1,363.9)
Preferred stock dividends (4.4) (4.4) (8.9) (8.9)
- ------------------------------------------------------------------------------
Accumulated deficit, end
of period $(1,025.0) $(1,341.9) $(1,025.0) $(1,341.9)
==============================================================================
Basic earnings per share (Note 4)
Weighted average shares 107.9 107.1 107.6 106.9
Income from continuing operations $0.25 $0.15 $0.39 $0.20
Discontinued operations - 0.01 - 0.01
Cumulative effect of a change
in accounting - - 2.21 -
- ------------------------------------------------------------------------------
Net income $0.25 $0.16 $2.60 $0.21
- ------------------------------------------------------------------------------
Diluted earnings per share (Note 4)
Weighted average shares 126.4 125.4 126.1 106.9
Income from continuing operations $0.23 $0.15 $0.38 $0.20
Discontinued operations - 0.01 - 0.01
Cumulative effect of a change
in accounting - - 1.88 -
- ------------------------------------------------------------------------------
Net income $0.23 $0.16 $2.26 $0.21
- ------------------------------------------------------------------------------
Cash dividends per share
$2.10 Class A $0.525 $0.525 $1.050 $1.050
$3.625 Class A 0.906 0.906 $1.812 1.812
$4.50 Class B 1.125 1.125 $2.250 2.250
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
-3-
<PAGE>
<TABLE>
ARMCO INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in millions)
<CAPTION>
Six Months Ended
June 30,
----------------
1998 1997
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 288.9 $ 30.9
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation expense 32.2 30.8
Net gain on sales of investments and facilities (0.8) (1.0)
Cumulative effect of accounting change (237.5) -
Other 2.2 4.9
Change in assets and liabilities:
Trade accounts and notes receivable (29.3) (44.7)
Inventories (7.1) (18.1)
Payables and accrued operating expenses (27.5) 30.2
Employee benefit liabilities (24.4) (1.0)
Other assets and liabilities - net (6.6) 2.6
- ---------------------------------------------------------------------------
Net cash (used in) provided by operating activities (9.9) 34.6
- ---------------------------------------------------------------------------
Cash flows from investing activities:
Net proceeds from the sale of businesses and assets 1.3 2.5
Proceeds from the sale of investments 6.0 0.3
Purchase of liquid investments (7.3) -
Capital expenditures (11.2) (15.1)
Other 0.2 (0.2)
- ---------------------------------------------------------------------------
Net cash used in investing activities (11.0) (12.5)
- ---------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from drawdown of debt - 2.0
Payments on debt (34.2) (7.4)
Dividends paid on preferred stock (8.9) (8.9)
Other (0.3) (1.5)
- ---------------------------------------------------------------------------
Net cash used in financing activities (43.4) (15.8)
- ---------------------------------------------------------------------------
Net change in cash and cash equivalents (64.3) 6.3
Cash and cash equivalents:
Beginning of period 189.9 168.9
- ---------------------------------------------------------------------------
End of period $ 125.6 $ 175.2
- ---------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of capitalized interest) $ 15.1 $ 16.6
Income taxes 1.2 1.6
Supplemental schedule of non-cash investing and
financing activities:
Issuance of restricted stock 4.0 2.4
<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 accompanying 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, 1997. 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, 1998, results of operations for the three
and six months ended June 30, 1998 and 1997, and cash flows for the six months
ended June 30, 1998 and 1997. The results of operations for the six months
ended June 30, 1998 are not necessarily indicative of the results to be
expected for the full year 1998.
Effective January 1, 1998, Armco changed its method of amortizing unrecognized
net gains and losses related to its obligations for pensions and other
postretirement benefits. In the six months ended June 30, 1998, Armco
recognized income of $237.5 or $2.21 per share ($1.88 per diluted share) for
the cumulative effect of this accounting change.
At the time it originally adopted the standards governing accounting for
pensions and other postretirement benefits, Armco chose to use a minimum
amortization method whereby unrecognized net gains and losses, to the extent
they exceeded 10% of the larger of the benefit obligations or plan assets,
were amortized over the average remaining service life of active participants.
At Armco, the average remaining service life is approximately 15 years. Use
of this method, however, resulted in the accumulation of $419.3 of
unrecognized net gains for pensions and other postretirement benefits through
1997. Under the new method, Armco recognizes immediately into income
unrecognized net gains and losses which exceed the 10% corridor, as described
above, and amortizes amounts inside the corridor over the average remaining
service life of active participants. For the three and six months ended June
30, 1998, adoption of the new method increased income from continuing
operations by $0.7 and $1.5 or approximately $0.01 per share, respectively.
Assuming Armco had applied the accounting change retroactively, income from
continuing operations and net income for the three and six months ended June
30, 1998 and 1997 would have been as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Income from continuing operations $31.1 $21.1 $51.4 $31.4
Net income 31.1 22.4 51.4 32.7
Basic earnings per share
Income from continuing operations 0.25 0.16 0.39 0.21
Net income 0.25 0.17 0.39 0.22
Diluted earnings per share
Income from continuing operations 0.23 0.15 0.38 0.21
Net income 0.23 0.16 0.38 0.22
</TABLE>
-5-
<PAGE>
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. Certain
amounts from year end 1997 have be reclassified to agree to the 1998
presentation.
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- --------
<S> <C> <C>
Inventories on LIFO:
Finished and semi-finished $287.2 $280.5
Raw materials 20.9 25.8
Adjustment to state inventories at LIFO value (51.3) (54.0)
------ ------
Total 256.8 252.3
------ ------
Inventories on average cost:
Finished and semi-finished 15.5 10.6
Raw materials and supplies 2.8 5.1
------ ------
Total 18.3 15.7
------ ------
Total inventories $275.1 $268.0
====== ======
</TABLE>
3. Sundry other - net in the Condensed Consolidated Statements of Income and
Accumulated Deficit includes income of $5.9 and $12.0 for the three and six
months ended June 30, 1998 and expense of $0.5 and $2.1 for the three and six
months ended June 30, 1997, respectively, for employee benefit obligations
related to facilities that have been shut down or divested. The improvement
in results for 1998 was primarily due to continued favorable investment
returns on pension plan assets and lower than expected increases in medical
benefit costs.
4. The following information was used in the calculation of basic and diluted
earnings per share in accordance with Statement of Financial Accounting
Standards No. 128, Earnings Per Share.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Income from continuing operations
- ---------------------------------
Income as reported $31.1 $20.2 $51.4 $29.6
Less: Preferred stock dividends (4.4) (4.4) (8.9) (8.9)
----- ----- ----- -----
Income available to common
shareholders - Basic 26.7 15.8 42.5 20.7
Assumed conversion of $3.625
Preferred Stock, Class A 2.4 2.4 4.9 -
----- ----- ----- -----
Income available to common
shareholders - Diluted $29.1 $18.2 $47.4 $20.7
===== ===== ===== =====
Shares (in millions)
- ------
Weighted average shares
outstanding - Basic 107.9 107.1 107.6 106.9
Assumed exercise of stock options 0.2 - 0.2 -
Assumed conversion of $3.625
Preferred Stock, Class A 18.3 18.3 18.3 -
----- ----- ----- -----
Weighted average shares
outstanding - Diluted 126.4 125.4 126.1 106.9
===== ===== ===== =====
</TABLE>
5. 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.
-6-
<PAGE>
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 an 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 transactions entered into with these companies.
However, Armco believes that its investment in AFSG will not be materially
affected as a result of pending claims or contingent liabilities related to
this matter.
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, 1998, Armco had recorded in its Condensed Consolidated Balance
Sheets, legal and environmental reserves of $64.7, of which $12.1 was
classified as a current liability.
6. Effective January 1, 1998, Armco adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income. This standard requires
Armco to report "other comprehensive income," as defined in the standard, that
is not otherwise presented in its Condensed Consolidated Statements of Income.
Currently Armco's other comprehensive income consists solely of foreign
currency translation adjustments related to its European subsidiaries. For
the three and six months ended June 30, 1998 and 1997, comprehensive income
was as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income $31.1 $21.5 $288.9 $30.9
Foreign currency translation adjustment 0.2 (0.8) (0.5) (1.5)
----- ----- ----- -----
Comprehensive income $31.3 $20.7 $288.4 $29.4
===== ===== ===== =====
</TABLE>
7. At its July 17, 1998 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. 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.
8. Information relating to Armco's industry segments can be found on page 12.
-7-
<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, 1998
and 1997 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales $450.1 $490.3 $897.8 $931.6
Operating profit 31.8 28.0 53.1 47.2
Sundry other-net 6.9 (0.6) 12.8 (4.0)
Income from continuing operations 31.1 20.2 51.4 29.6
Discontinued operations - 1.3 - 1.3
Cumulative effect of a change in
accounting for postretirement benefits - - 237.5 -
Net income 31.1 21.5 288.9 30.9
Basic earnings per share -
Income from continuing operations 0.25 0.15 0.39 0.20
Net income 0.25 0.16 2.60 0.21
Diluted earnings per share -
Income from continuing operations 0.23 0.15 0.38 0.20
Net income 0.23 0.16 2.26 0.21
</TABLE>
Net sales in the three and six months ended June 30, 1998 were $40.2 and $33.8
lower than in the respective periods of last year, primarily due to reduced
pricing across all steel product lines, lower volume in the specialty semi-
finished and galvanized steel product lines, and lower snowplow shipments.
Operating profit in the three and six months ended June 30, 1998 was
approximately 13% higher than the amounts reported in the same periods last
year, reflecting higher specialty flat-rolled steel shipments, improved
product mix and lower pension and retiree medical benefit expenses.
Postretirement employee benefit expenses in the current year were again lower
as a result of favorable investment returns on pension plan assets and lower
than expected increases in medical benefit costs. Improved results in the
Specialty Flat-Rolled Steels segment were partially offset by lower profits in
the Fabricated Products segment.
The change in sundry other - net between 1997 and 1998 is the result of lower
expenses related to long-term benefit obligations for former employees of
Armco facilities that have been shut down or divested. This was primarily due
to continued favorable investment returns on pension plan assets and lower
than expected increases in medical benefit costs.
Effective January 1, 1998, Armco changed its method of amortizing unrecognized
net gains and losses related to its obligations for pensions and other
postretirement benefits. In the six months ended June 30, 1998, Armco
recognized income of $237.5, or $2.21 per share of common stock ($1.88 per
diluted share), for the cumulative effect of this accounting change. Under
the newly adopted accounting method,
-8-
<PAGE>
Armco recognizes immediately into income unrecognized net gains and losses
that exceed 10% of the larger of the benefit obligations or plan assets, and
amortizes amounts inside this 10% corridor over the average remaining service
life of active participants (approximately 15 years). For the three and six
months ended June 30, 1998, adoption of the new method increased income from
continuing operations by $0.7 and $1.5, or approximately $0.01 per share,
respectively.
BUSINESS SEGMENT RESULTS
- ------------------------
Specialty Flat-Rolled Steels
- ----------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales $376.2 $402.9 $767.6 $777.9
Operating profit 27.1 22.3 53.6 44.7
</TABLE>
In the three months ended June 30, 1998, net sales for the segment were 7%
lower than in the same period one year ago, primarily as a result of reduced
specialty steel pricing and lower volumes of specialty semi-finished and
galvanized steels. Overall segment average sales per ton decreased 5% as
record import levels continue to depress pricing across all stainless and
electrical product lines.
Customer sales and shipments by major product line were as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(tons in thousands) Sales Tons Sales Tons Sales Tons Sales Tons
----- ---- ----- ---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Specialty flat-rolled $293.0 213 $287.3 196 $599.1 436 $568.4 389
Specialty semi-finished 37.7 37 65.1 53 85.6 81 105.2 87
Galvanized/carbon 36.6 68 40.6 76 66.4 123 86.6 162
Other 8.9 - 9.9 - 16.5 - 17.7 -
----- ---- ----- ---- ----- ---- ----- ----
Total $376.2 318 $402.9 325 $767.6 640 $777.9 638
===== ==== ===== ==== ===== ==== ===== ====
</TABLE>
In the first six months of 1998, shipments of specialty flat-rolled products,
which include automotive exhaust stainless, electrical steel and specialty
sheet and strip, increased 12% over 1997. Record shipments of automotive
exhaust stainless and electrical steels led the increase. Automotive exhaust
stainless demand was driven by high production of light trucks and sport
utility vehicles, while electrical steel sales were stimulated by strong
housing starts and demand for electrical machinery and equipment. However,
lower prices, particularly for specialty sheet and strip products, reduced
average sales per ton by 6% in the year-to-year comparison.
Specialty semi-finished shipments and average sales per ton decreased in the
first half of 1998 versus the same period in 1997 reflecting worldwide market
softness and imports.
Galvanized carbon steel shipments declined earlier in the year as a result of
temporarily short supplies of carbon steel coils purchased by the Dover
Operations during the transition period following Armco's decision to
eliminate production of carbon steel at its Mansfield Operations.
In the first half of 1998, operating profit increased 20% over the same period
in 1997, primarily as a result of higher shipments of the more profitable
specialty flat-rolled products, lower operating costs and reduced pension and
other retiree benefit expenses.
-9-
<PAGE>
Outlook: The elimination of carbon steel production at the Mansfield
Operations should lower costs in this segment. In addition, Armco continues to
focus on cost containment efforts. However, Armco has reduced production
turns at the Butler and Mansfield melt shops, along with selected finishing
operations, in an effort to match production to order levels and balance
inventories. A reduction in production turns can be expected to unfavorably
impact costs, offsetting some of the benefits realized by the cost containment
efforts.
Shipment levels in the second half of the year are expected to be lower than
in the first half. While the labor strike at General Motors had little effect
on Armco's results during the first half of 1998, automotive exhaust stainless
and sheet and strip shipments could be substantially reduced by a prolonged
dispute, compounding the effects of a seasonally slower third quarter.
During the remainder of the year, high levels of specialty steel imports are
expected to continue to depress pricing. However, in June 1998, Armco and
other domestic producers of flat-rolled stainless sheet and strip products
filed petitions with the U.S. Department of Commerce and the International
Trade Commission charging eight foreign countries with violations of U.S.
trade laws. A finding that unfairly traded imports have caused injury to
domestic producers could result in tariffs that may help slow the flood of
imports, but probably not until late in 1998. On July 24, 1998, the
International Trade Commission issued its preliminary finding that there has
been injury to domestic producers. However, there can be no assurance of a
successful final outcome and the imposition of such tariffs on imports.
Fabricated Products
- -------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales $73.9 $87.4 $130.2 $153.7
Operating profit 9.6 11.9 8.2 14.5
</TABLE>
Net sales in the three and six months ended June 30, 1998 decreased $13.5 and
$23.5, respectively, compared to 1997. Lower customer sales at Douglas
Dynamics reflected the mild winter experienced in its major markets and
relatively high dealer inventory levels, which affected both snowplow and ice
control product shipments. Operating profit also reflected the lower shipment
levels.
Net sales at Sawhill Tubular decreased on lower volume and selling prices,
which reflected softness in the market. However, improved product mix, lower
costs and improved quality more than offset the lower sales, resulting in a
slight increase in operating profit at Sawhill.
Greens Port's revenues and operating profit for 1998 increased over last year
in both the quarter and first six months.
Outlook: High dealer inventories, resulting from last winter's mild weather,
and the ongoing General Motors strike are expected to depress snowplow
shipments during the remainder of 1998. Sawhill shipments are expected to
remain flat, however, increasing pressure from imported pipe is likely to
result in a decrease in pricing. However, tubular profitability is expected to
increase on the strength of continued cost control. Greens Port is expected
to maintain its current performance level.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At June 30, 1998, Armco had $137.9 of cash, cash equivalents and liquid
investments compared to $194.9 at December 31, 1997. Cash, cash equivalents
and liquid investments decreased $57.0 during the first six months of 1998,
primarily due to principal payments on debt of $34.2, capital expenditures of
-10-
<PAGE>
$11.2, preferred stock dividend payments of $8.9 and $9.9 of cash used by
operations, principally as a result of increases in working capital.
Partially offsetting these cash outflows were $7.3 of proceeds from the sale
of assets and investments.
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. At June
30, 1998, no borrowings were outstanding under either facility. However,
Armco had outstanding $53.9 of letters of credit and a total of $95.7 was
available for borrowing under both facilities.
Armco anticipates cash outlays of $40.0 to $45.0 during the remainder of 1998
for capital expenditures, which it expects to be paid out of existing cash
balances and cash generated from operations.
On July 17, 1998, 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, 1998 to shareholders of
record on August 21, 1998. 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, 1998 to shareholders of record on
August 21, 1998. 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.
NEW ACCOUNTING STANDARD
- -----------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133). Armco intends to adopt the new
standard when required in 2000. Armco does not expect that SFAS No. 133 will
have a material effect on its financial statements; however, its effect, if
any, will depend on what derivative instruments Armco has on and after
adoption.
FORWARD-LOOKING STATEMENTS
- --------------------------
Certain statements made in this Management's Discussion and 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", the section entitled NEW ACCOUNTING
--------------
STANDARD and in Note 5 relating to contingencies.
- --------
As discussed in its Form 10-K for the year ended December 31, 1997, 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. In addition to those risk factors specifically noted
in the above referenced Management's Discussion and Analysis and Notes, such
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.
-11-
<PAGE>
<TABLE>
ARMCO INC.
SEGMENT REPORT
(Unaudited)
(Dollars in millions)
<CAPTION>
1998 1997
-------------- ------------------------------
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 $376.2 $391.4 $353.7 $365.4 $402.9 $375.0
Operating profit 27.1 26.5 23.2 20.7 22.3 22.4
Fabricated Products:
Customer sales 73.9 56.3 82.7 95.9 87.4 66.3
Operating profit (loss) 9.6 (1.4) 7.9 19.5 11.9 2.6
Corporate general (4.9) (3.8) (6.9) (6.2) (6.2) (5.8)
- ------------------------------------------------------------------------------
Total operating profit 31.8 21.3 24.2 34.0 28.0 19.2
Interest income 1.6 2.5 3.2 2.5 2.4 2.5
Interest expense (7.1) (7.6) (8.8) (9.5) (8.5) (8.7)
Sundry other - net 6.9 5.9 (0.3) 3.2 (0.6) (3.4)
- ------------------------------------------------------------------------------
Income before income taxes 33.2 22.1 18.3 30.2 21.3 9.6
Provision for income taxes (2.1) (1.8) (0.5) (0.5) (1.1) (0.2)
- ------------------------------------------------------------------------------
Income from continuing
operations 31.1 20.3 17.8 29.7 20.2 9.4
Discontinued operations -
Gain on sale of Aerospace and
Strategic Materials - - 1.4 - 1.3 -
Extraordinary loss on
retirement of debt - - - (3.0) - -
Cumulative effect of a change
in accounting for post-
retirement benefits - 237.5 - - - -
- ------------------------------------------------------------------------------
Net income $31.1 $257.8 $19.2 $26.7 $21.5 $9.4
==============================================================================
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
-12-
<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, 1997 (the Form 10-K) and Armco's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998 (the Form 10-Q). The
following summarizes significant developments in previously reported
matters and any material claims asserted since March 31, 1998:
In the Kingsbridge action, the 45 day appeal period has expired and the
-----------
plaintiffs have not filed a notice of appeal to the Texas Supreme Court,
thus rendering Armco's dismissal final and nonappealable and bringing an
end to the Cornerstones line of cases with no finding of liability
------------
against Armco.
The total liability of those 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 1999 annual
meeting of shareholders must be received by Armco by November 16, 1998,
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 1999 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 24, 1999.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
A. The following is an index of the exhibits included in the Form
10-Q:
None
B. The following Reports on Form 8-K were filed by Armco during
the quarter ended March 31, 1998.
Report Date Description
----------- -----------
April 8, 1998 On April 8, 1998, Armco announced that it
would record a gain of $237.5 million, or
$2.21 per share of common stock, for the
cumulative effect of an accounting
change. Armco stated that effective
January 1, 1998, it changed the method
used to amortize unrecognized net gains
and losses associated with accounting for
pension and other postretirement benefit
plans.
April 27, 1998 Armco filed restated Financial Data
Schedules for the three years ended
December 31, 1997 and for the three
year-to-date interim periods in the years
1997 and 1996. All periods report basic
and diluted earnings per share as
restated to conform with Statement of
Financial Accounting Standards No. 128,
Earnings Per Share, which Armco adopted
on December 31, 1997.
-13-
<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 July 24, 1998 /s/ Jerry W. Albright
------------------ -------------------------------------------
Jerry W. Albright
Vice President and Chief Financial Officer
Date July 24, 1998 /s/ John N. Davis
------------------ -------------------------------------------
John N. Davis
Vice President and Controller
-14-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE ARMCO INC. CONDENSED CONSOLIDATED BALANCE
SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
ACCUMULATED DEFICIT AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
<CIK> 0000007383
<NAME> ARMCO INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-START> JAN-01-1998
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 125,600
<SECURITIES> 12,300
<RECEIVABLES> 187,800
<ALLOWANCES> 0
<INVENTORY> 275,100
<CURRENT-ASSETS> 613,800
<PP&E> 1,316,800
<DEPRECIATION> 685,100
<TOTAL-ASSETS> 1,827,800
<CURRENT-LIABILITIES> 314,300
<BONDS> 303,000
0
185,900
<COMMON> 1,100
<OTHER-SE> (56,700)
<TOTAL-LIABILITY-AND-EQUITY> 1,827,800
<SALES> 897,800
<TOTAL-REVENUES> 897,800
<CGS> 800,500
<TOTAL-COSTS> 800,500
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,700
<INCOME-PRETAX> 55,300
<INCOME-TAX> 3,900
<INCOME-CONTINUING> 51,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 237,500
<NET-INCOME> 288,900
<EPS-PRIMARY> 2.60
<EPS-DILUTED> 2.26
</TABLE>
