<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 March 31, 1999
--------------------------------------
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
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
Yes X No
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares of common stock outstanding at March 31, 1999: 108,692,326
<PAGE>
ARMCO INC.
INDEX
Pages
-----
Part I. Financial Information
Condensed Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998 2
Condensed Consolidated Statements of Income and Accumulated Deficit -
Three Months Ended March 31, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1999 and 1998 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 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
-1-
<PAGE>
<TABLE>
ARMCO INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
(Dollars in millions) March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 145.5 $ 263.8
Short-term liquid investments 10.7 7.0
Receivables, less allowance for doubtful accounts 190.9 157.9
Inventories (Note 2) 264.3 250.7
Other 12.2 13.4
- ----------------------------------------------------------------------------
Total current assets 623.6 692.8
Investments
Investment in Armco Financial Services Group
(Note 6) 85.6 85.6
Other, less allowance for impairment 26.3 28.4
Property, plant and equipment 1,341.7 1,336.1
Accumulated depreciation (730.9) (714.3)
Property, plant and equipment - net 610.8 621.8
Deferred tax asset 312.8 315.8
Goodwill and other intangible assets 127.1 128.6
Other assets 21.6 20.8
- ----------------------------------------------------------------------------
Total assets $1,807.8 $1,893.8
============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts and notes payable $ 130.5 $ 115.7
Employment-related obligations 119.9 128.0
Other current liabilities 53.2 56.5
Current portion of long-term debt 5.9 116.9
- ----------------------------------------------------------------------------
Total current liabilities 309.5 417.1
Long-term debt, less current portion 250.5 250.7
Long-term employee benefit obligations 889.7 898.0
Other long-term liabilities 158.9 149.3
Commitments and contingencies (Note 6)
Shareholders' equity
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 975.9 972.0
Accumulated deficit (957.9) (975.8)
Other (5.8) (4.5)
- ----------------------------------------------------------------------------
Total shareholders' equity 199.2 178.7
- ----------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,807.8 $1,893.8
============================================================================
<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
except per share amounts) March 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Net sales $ 407.9 $ 447.7
Cost of products sold (353.7) (404.4)
Selling and administrative expenses (25.9) (22.0)
- ------------------------------------------------------------------------------
Operating profit 28.3 21.3
Interest income 2.4 2.5
Interest expense (5.8) (7.6)
Sundry other - net (Note 3) 4.7 5.9
- ------------------------------------------------------------------------------
Income before income taxes 29.6 22.1
Provision for income taxes (4.4) (1.8)
- ------------------------------------------------------------------------------
Income from continuing operations before extraordinary loss
and cumulative effect of an accounting change 25.2 20.3
Extraordinary loss on retirement of debt (Note 4) (2.8) -
Cumulative effect of a change in accounting
for postretirement benefits (Note 1) - 237.5
- ------------------------------------------------------------------------------
Net income 22.4 257.8
Accumulated deficit, beginning of period (975.8) (1,305.0)
Preferred stock dividends (4.5) (4.5)
- ------------------------------------------------------------------------------
Accumulated deficit, end of period $(957.9) $(1,051.7)
==============================================================================
Basic earnings per share (Note 5)
Weighted average shares 108.4 107.4
Income from continuing operations $0.19 $0.15
Extraordinary loss on retirement of debt (0.02) -
Cumulative effect of a change in accounting - 2.21
- ------------------------------------------------------------------------------
Net income $0.17 $2.36
- ------------------------------------------------------------------------------
Diluted earnings per share (Note 5)
Weighted average shares 126.8 125.7
Income from continuing operations $0.18 $0.15
Extraordinary loss on retirement of debt (0.02) -
Cumulative effect of a change in accounting - 1.89
- ------------------------------------------------------------------------------
Net income $0.16 $2.04
- ------------------------------------------------------------------------------
Cash dividends per share
$2.10 Class A $0.525 $0.525
$3.625 Class A 0.906 0.906
$4.50 Class B 1.125 1.125
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
-3-
<PAGE>
<TABLE>
ARMCO INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in millions)
<CAPTION>
Three Months Ended
March 31,
--------------------
1999 1998
-------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income $ 22.4 $ 257.8
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation expense 16.9 16.1
Loss on retirement of debt 2.8 -
Cumulative effect of accounting change - (237.5)
Deferred income tax expense 3.4 0.8
Other 2.0 0.4
Change in assets and liabilities:
Trade accounts receivable (30.6) (24.4)
Inventories (13.6) (15.6)
Payables and accrued operating expenses 10.1 (14.5)
Employee benefit obligations (8.8) (12.4)
Other assets and liabilities - net 1.2 4.9
- ------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 5.8 (24.4)
- ------------------------------------------------------------------------------
Cash flows from investing activities
Net proceeds from the sale of assets 0.6 0.4
Proceeds from the sale and maturity of liquid investments 7.0 -
Proceeds from the sale of investments 2.2 6.1
Purchase of liquid investments (10.7) (5.0)
Capital expenditures (6.1) (4.2)
Other 1.0 0.3
- ------------------------------------------------------------------------------
Net cash used in investing activities (6.0) (2.4)
- ------------------------------------------------------------------------------
Cash flows from financing activities
Payments on debt (113.2) (31.4)
Dividends paid on preferred stock (4.5) (4.5)
Other (0.4) (0.6)
- ------------------------------------------------------------------------------
Net cash used in financing activities (118.1) (36.5)
- ------------------------------------------------------------------------------
Net change in cash and cash equivalents (118.3) (63.3)
Cash and cash equivalents:
Beginning of period 263.8 189.9
- ------------------------------------------------------------------------------
End of period $ 145.5 $ 126.6
- ------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of capitalized interest) $ 9.0 $ 8.8
Income taxes 0.3 0.3
Supplemental schedule of non-cash investing and
financing activities:
Issuance of restricted stock 3.9 4.0
<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, 1998. 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 March 31, 1999, and results of operations and cash
flows for the three months ended March 31, 1999 and 1998. The results of
operations for the three months ended March 31, 1999 are not necessarily
indicative of the results to be expected for the full year 1999.
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 three months ended March 31, 1998, Armco
recognized income of $237.5 for the cumulative effect of this accounting
change.
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>
March 31, December 31,
1999 1998
-------- --------
<S> <C> <C>
Finished and semi-finished $284.9 $267.0
Raw materials 18.1 20.9
----- -----
Total cost 303.0 287.9
Adjustment to state inventories at LIFO value (38.7) (37.2)
----- -----
Net inventories $264.3 $250.7
===== =====
</TABLE>
3. Sundry other - net in the Condensed Consolidated Statements of Income and
Accumulated Deficit includes income of $5.3 and $6.1 for the three months
ended March 31, 1999 and 1998, respectively, for employee benefit obligations
related to facilities that have been shut down or divested.
4. In the three months ended March 31, 1999, Armco recognized a $2.8
extraordinary loss on the early retirement of its 9-3/8% Senior Notes due
2000.
5. 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.
-5-
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Income from continuing operations
Income as reported $25.2 $20.3
Preferred stock dividends (4.5) (4.5)
----- -----
Income available to common
shareholders - Basic 20.7 15.8
Assumed conversion of $3.625
Class A Preferred Stock 2.4 2.4
----- -----
Income available to common
shareholders - Diluted $23.1 $18.2
===== =====
Common shares (in millions)
Weighted average shares
outstanding - Basic 108.4 107.4
Assumed exercise of stock options 0.1 -
Assumed conversion of $3.625
Class A Preferred Stock 18.3 18.3
----- -----
Weighted average shares
outstanding - Diluted 126.8 125.7
===== =====
</TABLE>
6. There are various claims pending involving Armco and its subsidiaries
regarding product liability, antitrust, patent, employee benefits, taxes,
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 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, North Atlantic Insurance Company, a group of international
insurance companies previously affiliated with AFSG but sold in 1991, filed an
application for voluntary liquidation in the United Kingdom. As a result of
this voluntary liquidation filing, certain claims have been asserted against
NNIC by insureds of North Atlantic. NNIC is defending these claims as well as
pursuing related claims against third parties and North Atlantic.
Armco believes that its ultimate liability for pending claims, contingent
liabilities, environmental matters and matters related to AFSG, including the
liquidation of North Atlantic, 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.
-6-
<PAGE>
At March 31, 1999, Armco had recorded in its Condensed Consolidated Balance
Sheets legal and environmental reserves totaling $61.4, of which $11.3 was
classified as a current liability.
7. Effective January 1, 1998, Armco adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income (SFAS No. 130). SFAS No. 130
requires Armco to report "other comprehensive income," as defined in the
standard. For the three months ended March 31, 1999 and 1998, comprehensive
income was as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Net income $22.4 $257.8
Foreign currency translation adjustment (0.4) (0.7)
----- ------
Comprehensive income $22.0 $257.1
===== ======
</TABLE>
8. 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 amounts)
GENERAL
- -------
Armco's consolidated results for the three months ended March 31, 1999 and
1998 were as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Net sales $407.9 $447.7
Operating profit 28.3 21.3
Provision for income taxes (4.4) (1.8)
Income from continuing operations before
extraordinary loss and cumulative effect
of an accounting change 25.2 20.3
Extraordinary loss on retirement of debt (2.8) -
Cumulative effect of a change in
accounting for postretirement benefits - 237.5
Net income 22.4 257.8
Basic earnings per share -
Income from continuing operations 0.19 0.15
Net income 0.17 2.36
Diluted earnings per share -
Income from continuing operations 0.18 0.15
Net income 0.16 2.04
</TABLE>
-7-
<PAGE>
Net sales in the three months ended March 31, 1999 were $39.8 lower than in
the same period last year, primarily due to lower pricing across all steel
product lines and lower volume in specialty flat-rolled and specialty semi-
finished steels, partially offset by higher snow and ice control product
sales.
Excluding a $2.5 business interruption insurance recovery recorded in 1999,
operating profit in the three months ended March 31, 1999 was 21% higher than
the amount reported in the same period last year, reflecting improved
operating results at the Specialty Flat-Rolled Steels segment and the higher
snow and ice control product sales.
The 1999 provision for income taxes increased $2.6 on higher first quarter
earnings and an increase in the effective tax rate.
In the three months ended March 31, 1999, Armco recognized a $2.8
extraordinary loss for the early retirement of its 9-3/8% Senior Notes due
2000.
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 three months ended March 31, 1998, Armco
recognized income of $237.5 for the cumulative effect of this accounting
change.
BUSINESS SEGMENT RESULTS
- ------------------------
Specialty Flat-Rolled Steels
- ----------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Net sales $347.9 $391.4
Income from continuing operations 33.1 27.5
</TABLE>
In the three months ended March 31, 1999, net sales for the segment were 11%
lower than in the same period one year ago, primarily as a result of reduced
specialty steel pricing and lower volumes of specialty flat-rolled and
specialty semi-finished steels. Overall, 1999 first quarter average sales per
ton decreased 4% compared to 1998, as imports continue to depress pricing
across most stainless and electrical steel product lines.
Net sales and shipments by major product line were as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
------------ ------------
(tons in thousands) Sales Tons Sales Tons
----- ---- ----- ----
<S> <C> <C> <C> <C>
Specialty flat-rolled $287.2 211 $306.1 223
Specialty semi-finished 25.3 31 47.9 44
Galvanized carbon 27.1 56 29.8 55
Other 8.3 - 7.6 -
----- --- ----- ---
Total $347.9 298 $391.4 322
===== === ===== ===
</TABLE>
In the first three months of 1999, shipments of specialty flat-rolled steel
products, which include automotive exhaust stainless, electrical steel and
stainless sheet and strip, decreased 5% from the levels shipped in the first
three months of 1998. The decline in stainless steel shipments reflected
competitive pressures from an increased supply of imported steel delivered in
advance of the trade cases.
-8-
<PAGE>
Specialty semi-finished shipments and average sales per ton decreased
substantially in the first three months of 1999 versus the same period in 1998
reflecting worldwide market softness and the effect of imports.
Galvanized carbon steel shipments, produced by the Dover Operations from
purchased steel coils, were equal to 1998 levels; however, as a result of
increases in domestic competition and low-priced imports, sales per ton were
down 11%. Armco continues in negotiations for the sale of Dover. However, no
assurance can be given that a sale will be completed.
In the first three months of 1999, income from continuing operations increased
$5.6 over the same period in 1998, primarily as a result of lower costs and a
$2.5 insurance recovery.
Outlook: Shipments and net sales for 1999 will depend on consumer demand for
durable goods and the outcome of the trade cases discussed below. Shipment
levels for the remainder of 1999 are expected to be somewhat higher than last
year.
High levels of specialty steel imports 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
reduce the level of imports, but probably not until mid to late 1999. Final
antidumping determinations are expected to be announced in May, 1999. However,
there can be no assurance of a successful final outcome and the imposition of
tariffs on imports.
Tubular Products
- ----------------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Net sales $ 43.4 $51.2
Income (loss) from continuing operations (1.2) 1.0
</TABLE>
Net sales in the three months ended March 31, 1999 decreased 15% on lower
selling prices and volume, and higher operating costs. This segment's results
continue to be adversely affected by a general oversupply in the market
brought on by high levels of imported pipe.
Armco has been, and continues to be, in negotiations for the sale of Sawhill
Tubular, the sole business in this segment. However, no assurances can be
given that a sale will be completed.
Other Businesses
- ----------------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Net sales $16.6 $ 5.1
Income (loss) from continuing operations 3.8 (2.3)
</TABLE>
Net sales in the three months ended March 31, 1999 for this segment, which
includes Douglas Dynamics LLC, a snow and ice control products manufacturer,
and Greens Port Industrial Park, increased $11.5 compared to 1998. A
substantial increase in shipments at Douglas Dynamics reflected higher average
snowfall this past winter in many of its major markets and lower customer
inventories compared to the previous year's mild winter and unusually high
customer inventories. Income increased on the strength of the higher sales.
Greens Port's revenues for 1999 were approximately equal to last year's first
quarter, while income was slightly unfavorable.
-9-
<PAGE>
Outlook: Douglas Dynamics' shipments and net sales for 1999, which are
dependent on the amount of snowfall in its market areas and the strength of
four wheel drive light truck sales, are expected to exceed those of last year.
Greens Port is also expecting improved operating results.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At March 31, 1999, Armco had $156.2 of cash, cash equivalents and liquid
investments compared to $270.8 at December 31, 1998. Cash, cash equivalents
and liquid investments decreased $114.6 during the first three months of 1999,
primarily due to debt payments of $113.2, including $111.0 for the early
retirement of the outstanding principal amount of Armco's 9-3/8% Senior Notes.
In addition to cash on hand, Armco has two credit facilities with commitments
totaling up to $170.0 for borrowings and letters of credit. Under a
receivables 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 $100.0 secured by those receivables. In addition, Armco can
borrow, depending on its available borrowing base and the amount of letters of
credit outstanding, up to $70.0 under a credit facility secured by certain of
its inventories. At March 31, 1999, no borrowings were outstanding under
either facility. However, Armco had outstanding $59.1 of letters of credit
under the receivables facility and a combined total of $110.9 was available
for borrowing under both facilities.
Armco anticipates cash outlays of approximately $45.0 to $55.0 during the
remainder of 1999 for capital expenditures, which it expects to be paid out of
existing cash balances and cash generated from operations.
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 Armco's exposure to derivative instruments at the time of adoption
and thereafter.
THE YEAR 2000 ISSUE
- -------------------
Many existing computer systems may not be able to appropriately interpret
dates after December 31, 1999 because such systems allow only two digits to
indicate a year in the date field. If not corrected, many computers and
computer applications could fail or create erroneous results, causing safety,
operational and financial problems. If such a failure were to occur to certain
of its computer systems, Armco's manufacturing and financial systems could be
temporarily shut down, resulting in a material adverse effect on its financial
condition, liquidity and results of operations. In addition, the failure of
vendor computer systems could cause interruption of deliveries of key supplies
or utilities, which might result in similar material adverse impacts. Because
of the complexity of the issues and the number of parties involved, Armco
cannot reasonably predict with certainty the nature or likelihood of such
impacts.
However, Armco, using its internal staff and outside consultants, is actively
addressing this situation and anticipates that it will not experience a
material adverse impact to its operations, liquidity or financial condition
related to systems under its control. Armco has completed an assessment of
substantially all business information, manufacturing and facility control
systems to identify areas of concern. Armco is in the process of modifying or
replacing noncompliant computer hardware and software used internally.
-10-
<PAGE>
In addition, Armco has surveyed its suppliers with regard to their Year 2000
preparations, focusing on those suppliers most critical to its operations.
Armco intends to continue to monitor the Year 2000 compliance efforts of its
suppliers and to obtain, to the extent possible, assurances that they will be
able to deliver their products and services without interruption.
To prepare for the reasonably likely worst case scenario, Armco is developing
a contingency plan designed to mitigate the effects on its operations in case
certain of its systems or suppliers fail to perform as planned. Completion of
this plan is expected by the end of the second quarter of 1999. Contingency
planning will consist of providing all required resources to repair internal
systems should they fail at critical times, as well as establishing additional
inventories and back-up procedures in the event suppliers are unable to
deliver raw materials and services in a timely manner.
Armco has prioritized its efforts, planning to complete work on noncompliant
systems in the most critical areas first, with the expectation that virtually
all Year 2000 compliance activities, including system testing, will be
completed by September 30, 1999. In this process, Armco has redirected its
systems resources from noncritical projects to Year 2000 compliance
activities, resulting in an immaterial increase in expense. In the first three
months of 1999, Armco spent approximately $4.0 on Year 2000 compliance
activities and currently anticipates that it will spend an additional $7.0
during the remainder of 1999. These expenditures, which are expected to
consist primarily of capital expenditures, outside consultants and internal
personnel costs, have been and will be funded out of operating cash flows.
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 sections entitled NEW ACCOUNTING
--------------
STANDARD and THE YEAR 2000 ISSUE, and Note 6 relating to contingencies.
- -------- -------------------
As discussed in its Form 10-K for the year ended December 31, 1998, Armco
cautions readers that such forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially from those
currently 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; volatility in financial markets, which may affect
invested pension plan assets and the calculation of benefit plan liabilities
and expenses; 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>
1999 1998
-------- -------------------------------------
1Q Total 4Q 3Q 2Q 1Q
-------- -------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Net Sales
Specialty Flat-Rolled Steels $347.9 $1,418.9 $318.5 $332.8 $376.2 $391.4
Tubular Products 43.4 192.7 45.6 47.9 48.0 51.2
Other Businesses 16.6 94.9 29.2 34.7 25.9 5.1
- -----------------------------------------------------------------------------
Total $407.9 $1,706.5 $393.3 $415.4 $450.1 $447.7
- -----------------------------------------------------------------------------
Income from Continuing
Operations
Specialty Flat-Rolled Steels $33.1 $105.7 $28.2 $24.4 $25.6 $27.5
Tubular Products (1.2) 2.4 (1.7) 1.3 1.8 1.0
Other Businesses 3.8 28.2 10.0 12.6 7.9 (2.3)
Corporate, interest,
taxes, & other (10.5) (26.7) (9.0) (7.6) (4.2) (5.9)
- -----------------------------------------------------------------------------
Total $25.2 $109.6 $27.5 $30.7 $31.1 $20.3
- -----------------------------------------------------------------------------
Specialty Flat-Rolled
Steels Shipments
(tons 000s)
Specialty flat-rolled 211 826 195 195 213 223
Semi-finished 31 125 20 24 37 44
Galvanized carbon 56 245 56 66 68 55
- -----------------------------------------------------------------------------
Total 298 1,196 271 285 318 322
- -----------------------------------------------------------------------------
</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, 1998. The following
summarizes significant developments in previously reported matters and any
material claims asserted since December 31, 1998:
As previously reported, on September 30, 1998, Mansfield received an Order
under Section 3013 of the Resource Conservation & Recovery ("RCRA") Act
requiring Armco to develop a plan for investigation of eight areas of the
plant which allegedly could be sources of contamination. On October 30, 1998,
Armco filed a complaint in U.S. District Court in Cleveland seeking pre-
enforcement review. Armco's complaint challenged the legal basis for the
Order, the lack of support in the administrative record for such an Order, and
the lack of due process the Order provides to Armco in responding to
modifications and expansions USEPA could make to the scope of work to be
performed under the Order. On April 1, 1999 the court dismissed Armco's
action on the basis that the statute did not allow pre-enforcement review of
such agency orders. Armco is preparing a motion for reconsideration.
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 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Annual Meeting of Shareholders was held on April 23, 1999, and all nine
nominees to the Board of Directors named in Armco's Proxy Statement were
elected. Approximately 83% of the outstanding common, $2.10 Cumulative
Convertible Preferred and $3.625 Cumulative Convertible Preferred shares were
voted. The vote on the election was as follows:
Name For Withheld
---- --- --------
Dan R. Carmichael 92,337,395 792,872
Paula H.J. Cholmondeley 92,235,644 894,623
Dorothea C. Gilliam 92,297,857 832,410
John C. Haley 92,273,317 856,950
Charles J. Hora, Jr. 92,293,005 837,262
Bruce E. Robbins 92,358,925 771,342
Jan H. Suwinski 92,310,931 819,336
John D. Turner 92,386,139 744,128
James F. Will 92,291,289 838,978
-13-
<PAGE>
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. No Report on Form 8-K was filed by Armco during the quarter ended
March 31, 1999.
-14-
<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 May 3, 1999 /s/ Jerry W. Albright
--------------------- ---------------------------------------
Jerry W. Albright
Vice President and Chief Financial Officer
Date May 3, 1999 /s/ John N. Davis
--------------------- ---------------------------------------
John N. Davis
Vice President and Controller
-15-
<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-01-1999
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 145,500
<SECURITIES> 10,700
<RECEIVABLES> 190,900
<ALLOWANCES> 0
<INVENTORY> 264,300
<CURRENT-ASSETS> 623,600
<PP&E> 1,341,700
<DEPRECIATION> 730,900
<TOTAL-ASSETS> 1,807,800
<CURRENT-LIABILITIES> 309,500
<BONDS> 250,500
0
185,900
<COMMON> 1,100
<OTHER-SE> 12,200
<TOTAL-LIABILITY-AND-EQUITY> 1,807,800
<SALES> 407,900
<TOTAL-REVENUES> 407,900
<CGS> 353,700
<TOTAL-COSTS> 353,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,800
<INCOME-PRETAX> 29,600
<INCOME-TAX> 4,400
<INCOME-CONTINUING> 25,200
<DISCONTINUED> 0
<EXTRAORDINARY> (2,800)
<CHANGES> 0
<NET-INCOME> 22,400
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.16
</TABLE>
