<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, 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
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(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 July 31, 1999: 108,641,297
<PAGE>
ARMCO INC.
INDEX
Pages
-----
Part I. Financial Information
Condensed Consolidated Balance Sheets -
June 30, 1999 and December 31, 1998 2
Condensed Consolidated Statements of Income and Accumulated Deficit -
Three and Six Months Ended June 30, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements 5-7
Management's Discussion and Analysis of the Condensed
Consolidated Financial Statements 7-13
Segment Report 14
Part II. Other Information
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
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<PAGE>
<TABLE>
ARMCO INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
(Dollars in millions) June 30, December 31,
1999 1998
ASSETS ---------- ----------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 151.2 $ 263.8
Short-term liquid investments 25.1 7.0
Receivables, less allowance for
doubtful accounts 223.0 157.9
Inventories (Note 2) 242.6 250.7
Other 10.6 13.4
- -----------------------------------------------------------------------
Total current assets 652.5 692.8
Investments
Investment in Armco Financial
Services Group (Note 7) 85.6 85.6
Other, less allowance for impairment 26.0 28.4
Property, plant and equipment 1,357.7 1,336.1
Accumulated depreciation (746.0) (714.3)
- -----------------------------------------------------------------------
Property, plant and equipment - net 611.7 621.8
Deferred tax asset 309.1 315.8
Goodwill and other intangible assets 125.6 128.6
Other assets 19.2 20.8
- -----------------------------------------------------------------------
Total assets $1,829.7 $1,893.8
=======================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts and notes payable $ 120.8 $ 115.7
Employment-related obligations 125.3 128.0
Other current liabilities 53.5 56.5
Current portion of long-term debt 5.9 116.9
- -----------------------------------------------------------------------
Total current liabilities 305.5 417.1
Long-term debt, less current portion 247.8 250.7
Long-term employee benefit obligations 882.2 898.0
Other long-term liabilities 158.7 149.3
Commitments and contingencies (Note 7)
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 975.6 972.0
Accumulated deficit (921.0) (975.8)
Other (6.1) (4.5)
- -----------------------------------------------------------------------
Total shareholders' equity 235.5 178.7
- -----------------------------------------------------------------------
Total liabilities and shareholders' equity $1,829.7 $1,893.8
=======================================================================
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
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<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,
------------------ ------------------
1999 1998 1999 1998
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Net sales $ 468.2 $ 450.1 $ 876.1 $ 897.8
Cost of products sold (403.3) (396.1) (757.0) (800.5)
Selling and administrative expenses (28.0) (22.2) (53.9) (44.2)
- ------------------------------------------------------------------------------
Operating profit 36.9 31.8 65.2 53.1
Interest income 1.9 1.6 4.3 4.1
Interest expense (5.5) (7.1) (11.3) (14.7)
Sundry other - net (Note 3) 6.1 6.9 10.8 12.8
- ------------------------------------------------------------------------------
Income before income taxes 39.4 33.2 69.0 55.3
Provision for income taxes (5.6) (2.1) (10.0) (3.9)
- ------------------------------------------------------------------------------
Income from continuing operations 33.8 31.1 59.0 51.4
Discontinued operations -
Resolution of foreign
tax issues (Note 4) 7.5 - 7.5 -
- ------------------------------------------------------------------------------
Income before extraordinary loss and
cumulative effect of an
accounting change 41.3 31.1 66.5 51.4
Extraordinary loss on retirement
of debt (Note 5) - - (2.8) -
Cumulative effect of a change
in accounting for postretirement
benefits (Note 1) - - - 237.5
- ------------------------------------------------------------------------------
Net income 41.3 31.1 63.7 288.9
Accumulated deficit,
beginning of period (957.9) (1,051.7) (975.8) (1,305.0)
Preferred stock dividends (4.4) (4.4) (8.9) (8.9)
- ------------------------------------------------------------------------------
Accumulated deficit, end of period $(921.0) $(1,025.0) $(921.0) $(1,025.0)
==============================================================================
Basic earnings per share (Note 6)
Weighted average shares 108.6 107.9 108.5 107.6
Income from continuing operations $ 0.27 $ 0.25 $ 0.46 $ 0.39
Discontinued operations 0.07 - 0.07 -
Extraordinary loss on retirement
of debt - - (0.03) -
Cumulative effect of a change
in accounting principle - - - 2.21
- ------------------------------------------------------------------------------
Net income $ 0.34 $ 0.25 $ 0.50 $ 2.60
- ------------------------------------------------------------------------------
Diluted earnings per share (Note 6)
Weighted average shares 127.2 126.4 127.0 126.1
Income from continuing operations $ 0.25 $ 0.23 $ 0.43 $ 0.38
Discontinued operations 0.06 - 0.06 -
Extraordinary loss on retirement
of debt - - (0.02) -
Cumulative effect of a change
in accounting principle - - - 1.88
- ------------------------------------------------------------------------------
Net income $ 0.31 $ 0.23 $ 0.47 $ 2.26
- ------------------------------------------------------------------------------
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>
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<PAGE>
<TABLE>
ARMCO INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in millions)
<CAPTION>
Six Months Ended
June 30,
------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $ 63.7 $ 288.9
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation expense 33.3 32.2
Loss on retirement of debt 2.8 -
Cumulative effect of accounting change - (237.5)
Deferred income tax expense 8.1 2.2
Resolution of foreign tax issues (7.5) -
Other 3.1 (0.8)
Change in assets and liabilities:
Trade accounts receivable (60.1) (29.3)
Inventories 8.1 (7.1)
Payables and accrued operating expenses 6.3 (27.5)
Employee benefit obligations (15.9) (24.4)
Other assets and liabilities - net 8.9 (6.6)
- -------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 50.8 (9.9)
- -------------------------------------------------------------------------------
Cash flows from investing activities
Net proceeds from the sale of investments and assets 3.7 7.3
Proceeds from the maturity of liquid investments 7.0 -
Purchase of liquid investments (25.1) (7.3)
Capital expenditures (24.1) (11.2)
Other 1.0 0.2
- -------------------------------------------------------------------------------
Net cash used in investing activities (37.5) (11.0)
- -------------------------------------------------------------------------------
Cash flows from financing activities
Payments on debt (115.9) (34.2)
Dividends paid on preferred stock (8.8) (8.9)
Other (1.2) (0.3)
- -------------------------------------------------------------------------------
Net cash used in financing activities (125.9) (43.4)
- -------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (112.6) (64.3)
Cash and cash equivalents:
Beginning of period 263.8 189.9
- -------------------------------------------------------------------------------
End of period $ 151.2 $ 125.6
- -------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of capitalized interest) $ 12.5 $ 15.1
Income taxes 3.1 1.2
Supplemental schedule of non-cash investing and
financing activities:
Issuance of restricted stock 3.4 4.0
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
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<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 June 30, 1999, results of operations for the three
and six months ended June 30, 1999 and 1998 and cash flows for the six months
ended June 30, 1999 and 1998. The results of operations for the six months
ended June 30, 1999 are not necessarily indicative of the results to be
expected for the full year 1999.
On May 21, 1999, Armco announced that it had entered into a definitive
agreement to be merged into AK Steel Corporation, the principal operating
subsidiary of AK Steel Holding Corporation. Under the terms of the merger
agreement, Armco shareholders would receive shares of AK Steel Holding stock
with a value of between $7.50 and $8.00 per share of Armco common stock,
depending on the price of AK Steel Holding stock prior to the merger. The
proposed tax-free merger, which is to be accounted for as a pooling of
interests, is scheduled for completion by September 30, 1999, or shortly
thereafter. However, the completion of this transaction is subject to
customary closing conditions, including review by the Department of Justice
and approval by the shareholders of Armco and AK Steel Holding Corporation.
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 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>
June 30, December 31,
1999 1998
-------- --------
<S> <C> <C>
Finished and semi-finished $262.3 $267.0
Raw materials 19.1 20.9
------ ------
Total cost 281.4 287.9
Adjustment to state inventories at LIFO value (38.8) (37.2)
------ ------
Net inventories $242.6 $250.7
====== ======
</TABLE>
3. Sundry other - net in the Condensed Consolidated Statements of Income and
Accumulated Deficit includes income of $5.4 and $10.7 for the three and six
months ended June 30, 1999, and $5.9 and $12.0 for the three and six months
ended June 30, 1998, respectively, primarily for returns on invested pension
plan assets and the amortization of gains on employee benefit obligations
related to facilities that have been shut down or divested.
4. Certain of Armco's former businesses included operations in foreign
countries, which had outstanding tax issues. Following consultation with local
country advisors, Armco determined that it had resolved most of these issues
and, in the three and six months ended June 30, 1999, reversed a majority of
the related reserves, recognizing $7.5 of income in discontinued operations.
-5-
<PAGE>
5. In the six months ended June 30, 1999, Armco recognized a $2.8
extraordinary loss on the early retirement of its 9-3/8% Senior Notes due
2000.
6. 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,
----------------- ----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Income from continuing operations
Income as reported $33.8 $31.1 $59.0 $51.4
Preferred stock dividends (4.4) (4.4) (8.9) (8.9)
------ ------ ------ ------
Income available to common
shareholders - Basic 29.4 26.7 50.1 42.5
Assumed conversion of $3.625
Class A Preferred Stock 2.4 2.4 4.9 4.9
------ ------ ------ ------
Income available to common
shareholders - Diluted $31.8 $29.1 $55.0 $47.4
====== ====== ====== ======
Common shares (in millions)
Weighted average shares
outstanding - Basic 108.6 107.9 108.5 107.6
Assumed exercise of stock options 0.3 0.2 0.2 0.2
Assumed conversion of $3.625
Class A Preferred Stock 18.3 18.3 18.3 18.3
------ ------ ------ ------
Weighted average shares
outstanding - Diluted 127.2 126.4 127.0 126.1
====== ====== ====== ======
</TABLE>
7. 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
-6-
<PAGE>
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.
At June 30, 1999, Armco had recorded in its Condensed Consolidated Balance
Sheets legal and environmental reserves totaling $59.6, of which $10.9 was
classified as a current liability.
8. For the three and six months ended June 30, 1999 and 1998, comprehensive
income under Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, was as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------- ----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income $41.3 $31.1 $63.7 $288.9
Foreign currency translation adjustment (0.9) 0.2 (1.3) (0.5)
------ ------ ------ ------
Comprehensive income $40.4 $31.3 $62.4 $288.4
====== ====== ====== ======
</TABLE>
9. Information relating to Armco's industry segments can be found on page 14.
ARMCO INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
PROPOSED MERGER AGREEMENT
- -------------------------
On May 21, 1999, Armco announced that it had entered into a definitive
agreement to be merged into AK Steel Corporation, the principal operating
subsidiary of AK Steel Holding Corporation. Under the terms of the merger
agreement, Armco shareholders would receive shares of AK Steel Holding stock
with a value of between $7.50 and $8.00 per share of Armco common stock,
depending on the price of AK Steel Holding stock prior to the merger. The
proposed tax-free merger, which would be accounted for as a pooling of
interests, is scheduled for completion by September 30, 1999, or shortly
thereafter. However, completion of the transaction is subject to customary
closing conditions, including review by the Department of Justice and approval
by the shareholders of Armco and AK Steel Holding Corporation.
Under the terms of the merger agreement, for each share of Armco common stock,
shareholders would receive between .2836 and .3409 shares of AK Steel Holding
stock, if the average closing price of that stock, prior to the merger, is
between $22.00 and $26.44. The average closing price is to be determined
during the ten-day trading period ending six days before the meeting at which
Armco shareholders vote
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<PAGE>
on the transaction. In this case, the final exchange ratio would result in
Armco shareholders receiving stock worth $7.50 per Armco share. If the average
closing price of AK Steel Holding stock is higher than $26.44, Armco
shareholders would receive shares having a value greater than $7.50 per Armco
share, but in no event more than $8.00 per share. If the average closing price
of AK Steel Holding stock is less than $22.00, the exchange ratio will
nonetheless be fixed at .3409 per Armco share, resulting in a value of less
than $7.50. However, in that event, AK Steel would have the option of
delivering more shares of its stock to assure the $7.50 per share value and,
if that value wasn't met, Armco would have the right to terminate the merger
agreement prior to the shareholder vote. If the merger did not meet the
conditions necessary to be accounted for as a pooling of interests, AK Steel
would have the right to pay cash for up to 25% of the amount due Armco common
shareholders.
Holders of Armco's $3.625 Class A preferred stock would receive an equal
amount of a newly issued series of $3.625 preferred stock of AK Steel Holding
having substantially the same terms. Holders of Armco's $2.10 Class A and
$4.50 Class B preferred stock issues would receive cash in an amount equal to
the redemption price of their shares.
GENERAL
- -------
Armco's consolidated results for the three and six months ended June 30, 1999
and 1998 were as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------- ----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales $468.2 $450.1 $876.1 $897.8
Operating profit 36.9 31.8 65.2 53.1
Provision for income taxes (5.6) (2.1) (10.0) (3.9)
Income from continuing operations before
extraordinary loss and cumulative
effect of an accounting change 33.8 31.1 59.0 51.4
Discontinued operations 7.5 - 7.5 -
Extraordinary loss on retirement of debt - - (2.8) -
Cumulative effect of a change in
accounting for postretirement benefits - - - 237.5
Net income 41.3 31.1 63.7 288.9
Basic earnings per share -
Income from continuing operations 0.27 0.25 0.46 0.39
Net income 0.34 0.25 0.50 2.60
Diluted earnings per share -
Income from continuing operations 0.25 0.23 0.43 0.38
Net income 0.31 0.23 0.47 2.26
</TABLE>
Net sales in the six months ended June 30, 1999 were $21.7 lower than in the
same period last year, primarily due to lower pricing across most steel
product lines, partially offset by increased volume in specialty semi-finished
steels and higher snow and ice control product sales.
Excluding a $2.5 business interruption insurance recovery recorded in 1999,
operating profit in the six months ended June 30, 1999 was 18% 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. Partially offsetting the improved operating results
were higher corporate expenses, which included higher costs for Year 2000
projects and merger-related activities.
-8-
<PAGE>
Provision for income taxes increased $6.1 in the first half of 1999 versus the
same period of 1998 on higher earnings and an increase in the effective tax
rate.
Certain of Armco's former businesses included operations in foreign countries,
which had outstanding tax issues. Following consultation with local country
advisors, Armco determined that it had resolved most of these issues and, in
the three and six months ended June 30, 1999, reversed a majority of the
related reserves, recognizing $7.5 of income in discontinued operations.
In the six months ended June 30, 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 six months ended June 30, 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 Six months ended
June 30, June 30,
----------------- ----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales $393.8 $376.2 $741.7 $767.6
Income from continuing operations 38.1 25.6 71.2 53.1
</TABLE>
Net sales and income for the three months ended June 30, 1999 exceeded 1998's
second quarter by 5% and 49%, respectively. The net sales increase was due to
higher sales of specialty semi-finished products, while the income improvement
was a result of higher margins for most product lines, as lower costs more
than offset a 6% decline in average sales per ton. In the six months ended
June 30, 1999, net sales for the segment were 3% lower than in the same period
one year ago, primarily as a result of reduced specialty steel pricing,
partially offset by higher specialty semi-finished steel volume. Overall,
average sales per ton in the first six months of 1999 declined 5% compared to
1998, as imports continued 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 Six months
ended June 30, ended June 30,
----------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(tons in thousands) Sales Tons Sales Tons Sales Tons Sales Tons
----- ---- ----- ---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Specialty flat-rolled $287.2 211 $293.0 213 $574.4 422 $599.1 436
Specialty semi-finished 71.2 86 37.7 37 96.5 117 85.6 81
Galvanized carbon 27.0 57 36.6 68 54.1 113 66.4 123
Other 8.4 - 8.9 - 16.7 - 16.5 -
----- --- ----- --- ----- --- ----- ---
Total $393.8 354 $376.2 318 $741.7 652 $767.6 640
===== === ===== === ===== === ===== ===
</TABLE>
In the first six months of 1999, shipments of specialty flat-rolled steel
products, which include automotive exhaust stainless, electrical steel and
stainless sheet and strip, decreased 3% from the levels shipped in the first
six months of 1998. This decline was primarily the result of weakness in the
non-oriented electrical steel market and a shift in sales of some automotive-
grade product to semi-finished form.
Specialty semi-finished shipments increased substantially in the first six
months of 1999 versus the same period in 1998 as a result of Armco selling
slabs and hot bands to domestic steel companies for their new
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<PAGE>
and expanded processing facilities. However, a 22% decrease in average sales
per ton reflected worldwide market softness, the effect of imports and a
change in product mix to lower-priced chrome hot bands.
Galvanized carbon steel shipments and sales per ton declined 8% and 11%,
respectively, from 1998 levels as a result of domestic competition and low-
priced imports. Armco continues to negotiate toward the sale of its carbon
steel galvanizing facility in Dover, Ohio. However, no assurance can be given
that a sale will be completed.
In the first six months of 1999, income from continuing operations increased
34% over the same period in 1998, primarily as a result of lower costs and a
$2.5 insurance recovery, partially offset by lower pricing.
Outlook: Shipments and net sales for the remainder of 1999 will depend on
consumer demand for durable goods and the effect the settlement of the trade
cases, discussed below, has on imports. Overall shipment levels in the second
half of 1999 are expected to be somewhat higher than last year.
High levels of specialty steel imports depressed pricing in 1998 and the first
half of 1999. 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. On May 20, 1999, the Department
of Commerce announced antidumping and countervailing duties, ranging up to
59%; and on July 7, 1999, the International Trade Commission voted
affirmatively that imports have injured the domestic industry. These rulings
triggered the imposition of tariffs, which should result in higher foreign
flat-rolled stainless steel prices. Tariffs permit a return to a normal supply
and demand mechanism, easing pricing distortions. The tariffs may also help
reduce the level of imports, probably as early as the third quarter of 1999.
The labor agreement for production employees at the Mansfield Operations
expires on September 1, 1999. Armco is committed to reaching a fair and
reasonable agreement prior to the contract expiration. However, Armco has
prepared contingency plans for the continued operation of the plant in the
event of a strike and expects to provide an uninterrupted flow of product to
its primary customers.
Tubular Products
- ----------------
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------- ----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales $44.5 $48.0 $87.9 $99.2
Income (loss) from continuing
operations 0.5 1.8 (0.7) 2.8
</TABLE>
Net sales in the six months ended June 30, 1999 decreased 11% on lower selling
prices and volume. In the second quarter of 1999, the Tubular Products segment
returned to profitability and expects to remain profitable through the
remainder of the year. However, this segment's results continue to be
adversely affected by a general oversupply in the market brought on by high
levels of imported pipe.
Negotiations for the sale of Sawhill Tubular were terminated in the second
quarter of 1999.
Other Businesses
- ----------------
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------- ----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales $29.9 $25.9 $46.5 $31.0
Income from continuing operations 9.7 7.9 13.5 5.6
</TABLE>
-10-
<PAGE>
Net sales in the six months ended June 30, 1999 for this segment, which
includes Douglas Dynamics L.L.C., a snow and ice control products
manufacturer, and Greens Port Industrial Park, increased $15.5 compared to
1998. A substantial increase in shipments at Douglas Dynamics reflected higher
snowfall this past winter in a number of its major markets and continued
strong sales of light trucks. Income increased on the strength of the higher
sales. Greens Port's revenues and income were comparable to last year's
levels.
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 June 30, 1999, Armco had $176.3 of cash, cash equivalents and liquid
investments compared to $270.8 at December 31, 1998. Cash, cash equivalents
and liquid investments decreased $94.5 during the first six months of 1999,
primarily due to debt payments of $115.9, including $111.0 for the early
retirement of the outstanding principal amount of Armco's 9-3/8% Senior Notes,
and capital expenditures of $24.1. These cash outflows were partially offset
by $50.8 generated by operations.
In addition to cash on hand, Armco has two credit facilities with commitments
totaling up to $170.0 for borrowings and letters of credit. Borrowing capacity
under each of these facilities depends on its available borrowing base and the
amount of letters of credit outstanding. Under a receivables facility, Armco
Funding Corporation, a wholly owned subsidiary to which Armco sells
substantially all of its receivables, may borrow up to $100.0 secured by those
receivables. In addition, Armco can borrow up to $70.0 under a credit facility
secured by certain of its inventories. At June 30, 1999, no borrowings were
outstanding under either facility. However, Armco had outstanding $54.4 of
letters of credit under the receivables facility and a combined total of
$115.6 was available for borrowing under both facilities.
Armco anticipates cash outlays for capital expenditures of between $25.0 to
$35.0 during the remainder of 1999, bringing total estimated capital
expenditures for the year to $50.0 to $60.0. It expects to fund capital
expenditures from existing cash balances and cash generated by 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). The effective date of SFAS No. 133 has
since been delayed and Armco intends to adopt the new standard when required
in 2001. 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
- -------------
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 in 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
-11-
<PAGE>
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. 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. Where
considered necessary, some suppliers will be audited to ensure that their
compliance efforts are sufficient. An executive steering committee reviews and
evaluates Armco's readiness plan at least monthly.
To prepare for the reasonably likely worst case scenario, Armco has
substantially completed a contingency plan designed to mitigate the effect on
its operations in case certain of its systems or suppliers fail to perform as
planned. The contingency plan consists of curtailing certain operations during
the weekend following December 31, 1999 and providing all required technical
support to repair internal systems should they fail at critical times. The
plan also calls for establishing additional inventories where practical and
preparing manual back-up procedures in the event Armco's plants are idled or
suppliers are unable to deliver materials and services in a timely manner.
Armco has completed work on substantially all mission-critical Year 2000
compliance activities, including system testing. During the third quarter,
certain non-production and end-user administrative systems will be addressed,
with a target date for compliance of September 30, 1999. In the first six
months of 1999, Armco spent approximately $7.5 on Year 2000 compliance
activities and currently anticipates that it will spend an additional $1.5
during the remainder of 1999. These expenditures, which consist primarily of
capital expenditures, outside consultants and internal personnel costs, have
been and will be funded out of operating cash flows.
Armco's ability to become fully compliant in a timely manner is dependent on a
number of factors, many of which are beyond its control. Some of these factors
include its ability to locate and correct all potential computer problems; the
accuracy of representations by computer hardware and software manufacturers;
the ability of suppliers, customers and other third parties to resolve their
own Year 2000 compliance issues; and Armco's ability to successfully respond
should a failure occur.
FORWARD-LOOKING STATEMENTS
- --------------------------
Certain statements made in this Management's Discussion and Analysis of the
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 the sections entitled PROPOSED
MERGER AGREEMENT, NEW ACCOUNTING STANDARD and THE YEAR 2000.
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 paragraphs, 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; diversion of management's
attention from operating issues and disruptions to the organization caused by
the
-12-
<PAGE>
impending merger with AK Steel; 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.
-13-
<PAGE>
<TABLE>
Armco Inc.
Segment Report
(Unaudited)
(Dollars in millions)
<CAPTION>
1999 1998
---------------------- -----------------------------------------
YTD 2Q 1Q Total 4Q 3Q 2Q 1Q
------- ------ ------ -------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales
Specialty Flat-Rolled Steels $741.7 $393.8 $347.9 $1,418.9 $318.5 $332.8 $376.2 $391.4
Tubular Products 87.9 44.5 43.4 192.7 45.6 47.9 48.0 51.2
Other Businesses 46.5 29.9 16.6 94.9 29.2 34.7 25.9 5.1
- ----------------------------------------------------------------------------------------------
Total $876.1 $468.2 $407.9 $1,706.5 $393.3 $415.4 $450.1 $447.7
- ----------------------------------------------------------------------------------------------
Income from Continuing
Operations
Specialty Flat-Rolled Steels $71.2 $38.1 $33.1 $105.7 $28.2 $24.4 $25.6 $27.5
Tubular Products (0.7) 0.5 (1.2) 2.4 (1.7) 1.3 1.8 1.0
Other Businesses 13.5 9.7 3.8 28.2 10.0 12.6 7.9 (2.3)
Corporate, interest, taxes
and other (25.0) (14.5) (10.5) (26.7) (9.0) (7.6) (4.2) (5.9)
- ----------------------------------------------------------------------------------------------
Total $59.0 $33.8 $25.2 $109.6 $27.5 $30.7 $31.1 $20.3
- ----------------------------------------------------------------------------------------------
Specialty Flat-Rolled Steels
Shipments (tons 000s)
Specialty flat-rolled 422 211 211 826 195 195 213 223
Specialty semi-finished 117 86 31 125 20 24 37 44
Galvanized carbon 113 57 56 245 56 66 68 55
- ----------------------------------------------------------------------------------------------
Total 652 354 298 1,196 271 285 318 322
- ----------------------------------------------------------------------------------------------
</TABLE>
-14-
<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 filed a motion for reconsideration with the Court.
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 6. Exhibits and Reports on Form 8-K
--------------------------------
The following is an index of the exhibits included in the Form 10-Q:
None
The following report on Form 8-K was filed by Armco during the quarter ended
June 30, 1999.
Report Date Description
- ----------- -----------
May 21, 1999 On May 21, 1999, Armco announced that it, AK Steel Holding
Corporation and AK Steel Corporation had entered into an
Agreement and Plan of Merger, dated as of May 20, 1999.
Under the Agreement, Armco will be merged with and into AK
Steel Corporation, the separate corporate existence of Armco
will cease and Armco common shareholders will receive stock
of AK Steel Holding Corporation in exchange for their Armco
shares.
-15-
<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 12, 1999 /s/ Jerry W. Albright
---------------- ------------------------------------------
Jerry W. Albright
Vice President and Chief Financial Officer
Date August 12, 1999 /s/ John N. Davis
---------------- ------------------------------------------
John N. Davis
Vice President and Controller
-16-
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 151,200
<SECURITIES> 25,100
<RECEIVABLES> 223,000
<ALLOWANCES> 0
<INVENTORY> 242,600
<CURRENT-ASSETS> 652,500
<PP&E> 1,357,700
<DEPRECIATION> 746,000
<TOTAL-ASSETS> 1,829,700
<CURRENT-LIABILITIES> 305,500
<BONDS> 247,800
0
185,900
<COMMON> 1,100
<OTHER-SE> 48,500
<TOTAL-LIABILITY-AND-EQUITY> 1,829,700
<SALES> 867,100
<TOTAL-REVENUES> 867,100
<CGS> 757,000
<TOTAL-COSTS> 757,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,300
<INCOME-PRETAX> 69,000
<INCOME-TAX> 10,000
<INCOME-CONTINUING> 59,000
<DISCONTINUED> 7,500
<EXTRAORDINARY> (2,800)
<CHANGES> 0
<NET-INCOME> 63,700
<EPS-BASIC> 0.50
<EPS-DILUTED> 0.47
</TABLE>
