<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1998
-----------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
------------------ --------------
Commission file number 1-873-2
-------
ARMCO INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-0200500
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Oxford Centre, 301 Grant Street, Pittsburgh, Pennsylvania 15219-1415
- ------------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 412/255-9800
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
Class A Preferred Stock, without par value New York Stock Exchange
Class B Preferred Stock, $1 par value each New York Stock Exchange
Common Stock, $.01 par value each/ New York Stock Exchange
Rights to Purchase Participating Preferred
Stock of Class A Preferred Stock New York Stock Exchange
9% Senior Notes, due 2007 New York Stock Exchange
8 7/8% Senior Notes, due 2008 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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
such filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of Armco
Inc. (assuming solely for purposes of this Form, that all members of
registrant's Board of Directors are "affiliates") was approximately
$698,241,346 as of February 26, 1999.
As of the close of business on February 26, 1999, there were 107,912,948
shares of Common Stock outstanding.
Documents incorporated by reference herein include:
Annual Report to Shareholders for the year ended December 31, 1998 --
Parts I, II, and IV of this report.
Proxy Statement for the 1999 Annual Meeting of Shareholders filed with
the Commission under Rule 14a-6 of the Securities Exchange Act of 1934 in
connection with the Company's 1999 Annual Meeting of Shareholders -- Part III
of this report.
<PAGE>
PART I
ITEM 1. BUSINESS
General
Armco Inc. ("Armco" or the "Company") was incorporated as an Ohio
corporation in 1917 as a successor to a New Jersey corporation incorporated in
1899. Armco believes it is the largest domestic producer of stainless sheet
and strip and electrical steels, based on tons shipped. Armco's Sawhill
Tubular Division manufactures a wide range of steel pipe and tubing products
for use in the construction, industrial and plumbing fields. The Company also
owns Douglas Dynamics, L.L.C. ("Douglas Dynamics"), the largest North American
manufacturer of snowplows for four-wheel drive light trucks. Armco also
operates an industrial park on the Houston, Texas ship channel.
Armco's strategic objectives include enhancing and expanding its leading
domestic position as a producer of specialty flat-rolled steels via
incremental facility additions that add value through cost reductions or
productivity gains, or through joint venture/partnership arrangements where
value can be added without major capital outlay. In addition, Armco is
exploring possible acquisitions of "downstream," fabricating or parts-
producing businesses -- such as first and second operations like blanking,
stamping, tool and die manufacturing, welding, fabrication and forming
operations -- that will allow it to fully utilize its specialty steel
technical, manufacturing and customer service expertise. Armco also intends
to expand its snowplow business by adding new snowplow and ice control
products to reach new market segments as well as modestly expanding its
industrial park facility.
Business Segments
In 1998, Armco adopted Statement of Financial Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information. As a
result, Armco changed its segment presentation to reflect the operating
segments and performance measurements evaluated regularly by its chief
executive officer.
The Company operates in three business segments: Specialty Flat-Rolled
Steels, Tubular Products, and Other Businesses. Information on the amounts of
revenue, operating results and identifiable assets attributable to each of
Armco's business segments, set forth in Note 8 of the Notes to Consolidated
Financial Statements in Armco's Annual Report to Shareholders for the year
ended December 31, 1998, is incorporated by reference herein.
Additional information about Armco's business segments is set forth in
Management's Discussion and Analysis in Armco's Annual Report to Shareholders
for the year ended December 31, 1998, which is incorporated by reference
herein.
Specialty Flat-Rolled Steels Segment
Armco's Specialty Flat-Rolled Steels businesses produce and finish flat-
rolled stainless, electrical and galvanized carbon steels at manufacturing
operations located in Butler, Pennsylvania, and Coshocton, Dover, Mansfield
and Zanesville, Ohio. The Butler and Mansfield facilities produce both semi-
finished and finished specialty stainless and electrical steels in slab, hot
band and sheet and strip form. The Coshocton plant finishes stainless steel
in sheet and strip form and the Zanesville plant finishes stainless and
electrical sheet and strip. The Dover facility coats carbon steel products at
its
1
<PAGE>
galvanizing facility. The segment also includes the results of European
trading companies that buy and sell steel and manufactured steel products.
The stainless and electrical steel industry is a relatively small but
distinct segment of the overall steel industry that represented approximately
2% of domestic steel tonnage but accounted for approximately 14% of domestic
steel revenues in 1998. These steels differ from basic carbon steel by their
metallurgical composition. Electrical steels have properties that make them
desirable in the generation and distribution of electricity. Stainless steels
are made with a high alloy content, which permits their use in environments
that demand exceptional hardness, toughness, strength and resistance to heat,
corrosion or abrasion, or combinations thereof. Unlike high-volume carbon
steel, stainless and electrical steels are generally produced in relatively
small quantities utilizing special processing techniques designed to meet more
exacting specifications and tolerances. Stainless and electrical steel
products sell at higher prices and generate higher average profit margins than
carbon steel products.
Stainless steel contains elements such as chromium, nickel and molybdenum
that give it the unique qualities of resistance to rust, corrosion and heat;
high strength; good wear characteristics; natural attractiveness; and ease of
maintenance. Stainless steel is used in the automotive and aerospace
industries, and in the manufacture of food handling, chemical processing,
pollution control, medical and health equipment and other products where its
combination of strength, durability and attractiveness is desirable.
Electrical steels are iron-silicon alloys which, through special production
techniques, possess unique magnetic properties that make them desirable for
use as energy efficient material in such applications as power transmission
and distribution transformers, electrical motors and generators.
Armco expects that long-term demand for stainless steel will continue to
grow due to increasing use in the manufacture of consumer durable goods and
industrial applications. Per capita stainless steel usage in many developed
countries significantly exceeds per capita usage in the United States and
Armco believes that this is an indication of the growth potential of demand
for stainless steel in the United States. In addition, the 1990 amendments to
the Clean Air Act have resulted in the increasing use of corrosion-resistant
materials in a number of applications for which stainless steel is well
suited, including industrial pollution control devices and motor vehicle
exhaust systems for use in the United States, where Armco now has the leading
market share. Another factor that Armco believes will affect demand
positively is the increasing issuance of new car bumper-to-bumper warranties
and the use of stainless steel in passenger restraint systems and other
functional components.
Armco produces flat-rolled stainless and electrical sheet and strip
products that are used in a diverse range of consumer durables and industrial
applications. During the last three years, approximately 77% of Armco's sales
of specialty flat-rolled steel has been finished stainless and electrical
steels, 10% has been specialty semi-finished and 10% has been galvanized
carbon steel. The remaining sales in this segment of Armco's business are
primarily related to the foreign subsidiaries that buy, warehouse, and sell
specialty steel products. Major markets served are industrial machinery and
electrical equipment, automotive, construction and service centers.
Armco is the leading producer of chrome stainless grades used primarily
in the domestic market for automotive exhaust components. Stainless steel,
which formerly was not used in parts of the exhaust system other than the
catalytic converter, is now used in the entire exhaust system, from manifold
to tailpipe, by many auto manufacturers. Armco has developed a number of
specialty grades for this application. Armco is also known for its "bright
anneal" finish utilized for automotive and appliance trim and chrome grades
used for cutlery, kitchen utensils, scissors and surgical instruments.
Specialty chrome nickel grades produced by Armco are used in household
cookware, restaurant, food processing and
2
<PAGE>
medical equipment. Other Armco stainless products have various automotive,
agricultural, heating, air conditioning and various industrial uses.
Armco is the only United States manufacturer of a complete line of flat-
rolled electrical steel products. It is also the only domestic manufacturer
utilizing laser scribing technology. In this process, the surface of
electrical steel is etched with high-technology lasers that refine the
magnetic domains of the steels, resulting in superior electrical efficiency.
Major electrical product categories are: Regular Grain Oriented ("RGO"), used
in the cores of power and distribution transformers; Cold Rolled Non-Oriented
("CRNO"), used for electrical motors, generators and lighting ballasts; and
TRAN-COR[registered trademark]H, which is used in power transformers and is
the only high permeability electrical steel made domestically.
Additionally, Armco produces a full range of hot-dipped galvanized
products primarily for use in the heating, ventilation and air conditioning
("HVAC") market.
Armco's order backlog for its Specialty Flat-Rolled Steels segment was
$193.7 million at December 31, 1998, and $188.5 million at December 31, 1997.
While substantially all of the orders on hand at year-end 1998 are expected to
be shipped in 1999, such orders, as is customary in the industry, are subject
to modification, extension or cancellation.
Armco's specialty steelmaking operations are located in Pennsylvania and
Ohio. Armco's Butler, Pennsylvania facility, which is situated on 1,300 acres
with 3.2 million square feet of buildings, continuously casts 100% of its
steel. Melting takes place in three 175-ton electric arc furnaces that feed
the world's largest (175-ton) argon-oxygen decarburization unit and a 175-ton
vacuum degassing unit for refining molten metal that, in turn, feed two double
strand continuous casters. The melt capacity at Butler is approximately
950,000 cast tons. Butler operates a hot-strip mill, anneal and pickle units
and two fully-automated tandem cold-rolling mills. It also has various
intermediate and finishing operations for both stainless and electrical
steels.
The finishing plant in Coshocton, Ohio, located on 650 acres, is housed
in a 600,000 square-foot plant and has three Sendzimer mills and two Z-high
mills for cold reduction, four anneal and pickle lines, bell annealing
furnaces, three bright anneal lines and other processing equipment, including
temper rolling, slitting and packaging facilities.
The Mansfield, Ohio plant consists of a 1.4 million square-foot facility,
including a melt shop with two electric arc furnaces (170-ton and 128-ton), a
135-ton argon-oxygen decarburization unit, a thin-slab continuous caster, a
six-stand hot strip mill, a five-stand tandem cold rolling mill and a pickle
line.
Armco's Zanesville, Ohio plant, with 508,000 square feet of buildings on
88 acres, is a finishing plant for some of the steel produced at Butler and
Mansfield and has a Sendzimer cold-rolling mill, anneal and pickle lines, high
temperature box anneal and other decarburization and coating units.
The Dover, Ohio plant consists of a 600,000 square foot facility
including a 48 inch galvanizing line, bell annealing furnaces and a temper
mill. The Dover plant has been the subject of sale negotiations over the past
year. However, no assurances can be given that a sale will be completed.
Tubular Products Segment
This business segment consists of Armco's Sawhill Tubular Division.
Sawhill Tubular manufactures a wide range of steel pipe and tubular products
for use in the non-residential construction,
3
<PAGE>
industrial, plumbing and heating markets at plants in Sharon and Wheatland,
Pennsylvania and Warren, Ohio.
Armco's order backlog for its Tubular Products segment was $17.3 million
at December 31, 1998 and $23.0 million at December 31, 1997. The decrease in
1998 was due to lower volume and selling prices as a result of oversupply in
the market, including a high level of imported pipe. While substantially all
of the orders on hand at year-end 1998 are expected to be shipped in 1999,
such orders, as is customary in this industry, are subject to modification,
extension or cancellation. Armco has been, and continues to be, in
negotiations for the sale of Sawhill Tubular. However, no assurances can be
given that a sale will be completed.
Other Businesses
The businesses currently included in this segment are described below.
-- Douglas Dynamics, L.L.C. is the largest North American manufacturer
of snowplows for four-wheel drive light trucks. Douglas Dynamics, which has
manufacturing plants in Rockland, Maine, Milwaukee, Wisconsin and Johnson
City, Tennessee, sells its snowplows and ice control products under the brand
names Western and Fisher through independent distributors in the United States
and Canada. Douglas Dynamics' sales depend on the level of four-wheel drive
light truck sales and total snowfalls in major markets.
-- Greens Port Industrial Park consists of approximately 500 acres on
the Houston Ship Channel and leases land, buildings and rail car storage
facilities to third parties and operates a deep water loading dock on the
channel.
Employees
At December 31, 1998, Armco had approximately 5,700 employees. Most of
Armco's domestic production and maintenance employees are represented by
international, national or independent local unions, although some operations
are not unionized.
Armco has agreements with the United Steelworkers of America at its
Mansfield and Dover plants, which terminate September 1, 1999, and at its
Sharon plant, which terminates September 30, 1999.
Competition
The Company faces intense competition from domestic and foreign steel
producers, and also from producers of components and other products and
manufacturers of competing products other than steel, including aluminum,
plastics, composites and ceramics. Competition is based primarily on price,
with factors such as reliability of supply, service and quality also being
important in certain segments.
In addition to existing competition, AK Steel Corporation, an integrated
steel company has announced plans to enter the specialty steel market. AK
Steel is building a steel finishing facility in Rockport, Indiana that is
expected to be completed in mid-1999. When completed, this facility will
provide AK Steel with substantial stainless steel processing and finishing
capacity. Increases in the production capacity and efficiency of other
domestic producers, together with possible new entrants into the specialty
steel market, are expected to result in intensified competition that could
exert downward pressure on price and market share.
4
<PAGE>
Armco's competitors in the domestic galvanized carbon steel market
include many of the large integrated and mini-mill flat rolled producers.
Since 1989, significant flat-rolled mini-mill capacity has been constructed
and these mini-mills now compete with integrated domestic steel producers in
most flat-rolled steel markets. Mini-mills generally rely on less capital-
intensive hot metal sources, have smaller, non-unionized workforces resulting
in lower employment costs per ton shipped and are relatively free of many of
the employee, environmental and other obligations that have traditionally
burdened non-mini-mill steel producers. There is significant flat-rolled and
galvanized capacity under construction or announced with various planned
commissioning dates in the next several years.
Competition is also presented by foreign producers. Some of these
foreign producers have lower labor costs and are subsidized by their
governments. Their decisions with regard to production and sales may be
influenced more by political and social considerations than prevailing market
forces. Many foreign steel producers continue to ship into the United States
market despite decreasing profit margins. Depending on a number of market
factors, including the strength of the dollar, import levels, and the
effectiveness of U.S. trade laws, pricing of the Company's products could be
adversely affected.
In recent years, record levels of imports have depressed pricing on
specialty steel products in the U.S. 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 July
24, 1998, the U.S. International Trade Commission issued its preliminary
finding that there has been injury to domestic producers. On November 10,
1998, the U.S. Department of Commerce announced preliminary results in the
subsidy investigations, establishing countervailing duty rates for companies
in France, Italy and South Korea. On December 17, 1998, the U.S. Department
of Commerce announced a preliminary determination on antidumping margins for
companies in those countries, as well as in Germany, Japan, Mexico, Taiwan and
the United Kingdom. Final antidumping determinations are expected to be
announced in the second quarter of 1999. A finding that unfairly traded
imports have caused injury to domestic producers could result in tariffs that
may help slow the flood of imports.
In addition, with respect to electrical steels, in mid-1999 the U.S.
Department of Commerce and the U.S. International Trade Commission are
expected to review existing antidumping and countervailing duties involving
Italian and Japanese producers to determine whether these protections should
be extended for another five years. The failure to obtain or extend
meaningful tariff protections for any of the products Armco sells could
adversely affect prices and reduce profitability.
Raw Materials and Energy Sources
Raw materials represent a major component of production costs in the
steel industry. The principal raw materials used by Armco in the production
of steels are iron and carbon steel scrap, chrome and nickel and their
ferroalloys, stainless steel scrap, silicon, molybdenum and zinc. These
materials are purchased in the open market from various outside sources.
Since much of this purchased raw material is not covered by long-term
contracts, availability and price are subject to world market conditions.
Chrome, nickel and certain other materials in mined alloy form can be acquired
only from foreign sources, many of them located in developing countries that
may be subject to unstable political and economic conditions that might
disrupt supplies or affect the price of these materials. A significant
portion of Armco's chrome and nickel requirements, however, is obtained from
stainless steel scrap rather than mined alloys. While certain raw materials
have been in short supply from time to time, Armco currently is not
experiencing and does not anticipate any problems obtaining appropriate
materials in amounts sufficient to meet its production needs. Armco also uses
large amounts of
5
<PAGE>
electricity and natural gas in the manufacture of its products. It is
expected that such energy sources will continue to be available in the
foreseeable future.
The Year 2000 Issue
A discussion of Year 2000 issues is incorporated herein by reference from
Management's Discussion and Analysis under the caption "The Year 2000 Issue"
of the Annual Report to Shareholders for the year ended December 31, 1998.
Environmental Matters
A discussion of environmental matters is incorporated herein by reference
from Management's Discussion and Analysis and Notes to Consolidated Financial
Statements under the captions "Environmental Matters," "Environmental
Liabilities" and "Litigation and Environmental Matters", respectively, of the
Annual Report to Shareholders for the year ended December 31, 1998.
Research and Development
Armco carries on a broad range of research and development activities
aimed at improving its existing products and manufacturing processes and
developing new products and processes. Armco's research and development
activities are carried out primarily at a central technology center located in
Middletown, Ohio. This center is engaged in applied materials research
related to iron and steel, non-ferrous materials and new materials. In
addition, the materials and metallurgy departments at each operating unit
develop and implement improvements to products and processes that are directly
connected with the activities of such operating unit. Armco spent $14.2
million, $15.3 million and $13.1 million, respectively, on research and
development in the years 1998, 1997 and 1996.
Discontinued Operations
Armco Financial Services Group ("AFSG")
Armco's investment in AFSG represents the net assets of its discontinued
insurance and finance leasing businesses, which have been largely liquidated.
The insurance companies, including Northwestern National Insurance Company
(NNIC), have stopped writing new business and are being "run off." These
insurance companies have not written any new business for retention since 1986
except for an immaterial amount of guaranteed renewable accident and health
business. AFSG is accounted for as a discontinued operation under the
liquidation basis of accounting, whereby future cash inflows and outflows are
considered.
The discontinued insurance companies estimate that 60% of future claims
will be paid in the next five years and that substantially all of the claims
will be paid by the year 2017. The ultimate amount of the claims as well as
the timing of the claims payments are estimated based on the annual review of
loss reserves performed by independent and consulting actuaries. There have
been no charges recorded to income with respect to these companies since 1990.
There are various pending matters relating to litigation, arbitration and
regulatory affairs arising out of the runoff operations of the AFSG companies.
In March 1997, North Atlantic Insurance Company, a group of international
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
6
<PAGE>
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 management continues to believe, based on current facts and
circumstances and the opinions of outside counsel and advisors, that future
charges, if any, resulting from the liquidation of AFSG, including matters
related to the voluntary liquidation of North Atlantic, will not be material
to Armco's financial condition or liquidity. However, it is possible that,
due to fluctuations in Armco's operating results, future developments could
have a material effect on the results of one or more future interim or annual
periods.
ITEM 2. PROPERTIES
Armco owns and leases property primarily in the United States. This
property includes manufacturing facilities, offices and undeveloped property.
The locations of Armco's principal plants and materially important physical
properties are described in "ITEM 1. BUSINESS". Armco believes that all its
operating facilities are being adequately maintained and are in good operating
condition.
ITEM 3. LEGAL PROCEEDINGS
There are various claims pending against Armco and its subsidiaries
involving product liability, reinsurance and insurance arrangements,
environmental, antitrust, employee benefits and other matters arising out of
the conduct of the business of Armco.
Environmental Proceedings. Most environmental actions involving Armco
--------------------------
relate to alleged contamination at off-site treatment and disposal sites.
Other claims sometimes arise from contractual obligations for properties Armco
previously owned or leased and from regulatory actions. In most of these
cases, Armco is one of many companies who have been identified as potentially
responsible parties ("PRPs"). In a few instances, Armco is one of only a few
parties or is alleged to be solely liable. It is routinely asserted that
joint and several liability will be applied in such cases; thus, a single
party could be held liable for all costs related to a site. However, Armco's
experience has been that liability is apportioned on the basis of volume
and/or toxicity of materials sent to a site and Armco expects that any
ultimate liability would be apportioned among Armco and other financially
viable parties. Armco intends to assert all meritorious legal and equitable
defenses that are available to it with respect to environmental matters.
Based on Armco's analysis of the claims against it for contamination,
including the presence of other PRPs, Armco's experience in resolving similar
claims, and in some instances the type of contamination and expected
remediation costs, Armco does not believe that its liability, if any, for
these claims would materially impact its consolidated financial position or
liquidity. However, it is possible that due to fluctuations in Armco's
operating results, future developments with respect to such matters could have
a material effect on the results of operations in future interim or annual
periods.
On February 27, 1995, the Ohio Environmental Protection Agency ("OEPA")
issued a Notice of Violation ("NOV") to Armco's Zanesville Operations
alleging noncompliance with both a 1993 Order and various state regulations
regarding hazardous waste management. Armco continues to work with OEPA to
achieve final resolution of this matter. No proposed penalties were included
in the NOV and Armco cannot reasonably estimate potential penalties, if any,
based on current information.
On September 30, 1998, the United States Environmental Protection Agency
("USEPA") issued an order under Section 3013 of the Resource Conservation and
Recovery Act requiring environmental investigation at Armco's Mansfield
Operations. The cost of the investigation is not expected to have a material
effect on future, interim or annual results of operations. Armco has filed a
complaint against the
7
<PAGE>
USEPA in the U.S. District Court for the Northern District of Ohio, Eastern
Division, which seeks injunctive relief and to set aside penalties during the
pendency of the legal proceeding. Armco's complaint challenges 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. The complaint was filed on October 30,
1998. On December 30, 1998, USEPA filed a motion to dismiss Armco's complaint
primarily on the basis that the Order was not final agency action and
therefore, that the court lacked subject matter jurisdiction. Armco is
preparing a response to this motion.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders of
Armco during the fourth quarter of the year ended December 31, 1998.
Executive Officers of Armco
The executive officers of Armco as of March 12, 1999, were as follows:
<TABLE>
<CAPTION>
Years
Age as of Tenure in of
Service
Name March 12, 1999 Office Office(1) with Armco
- ---- --------------- ------ ----------- ---------
- -
<S> <C> <C> <C> <C>
James F. Will 60 Chairman, President and
Chief Executive Officer 1994(2) 7
Jerry W. Albright 62 Vice President and
Chief Financial Officer 1997 2
James L. Bertsch 55 Vice President and
Treasurer 1989 33
John B. Corey 55 Vice President - Diversified
Businesses and Business
Development. President,
Douglas Dynamics, L.L.C. 1994 20
John N. Davis 40 Vice President and
Controller 1996 7
Gary R. Hildreth 60 Vice President, General
Counsel and Secretary 1993 28
Gary L. McDaniel 52 Vice President -
Operations 1996 6
M. Dennis McGlone 49 Vice President -
Commercial 1996 7
Pat J. Meneely 47 Vice President - Information
and Organizational
Effectiveness 1995 4
DeWayne W. Tuthill 62 Vice President - Purchasing
and Materials Management 1998 1
9
<PAGE>
<FN>
(1) All officers are elected annually by the Board of Directors and
hold office until their successors are elected and qualified. Each of the
officers named above has held responsible positions with Armco or its
subsidiaries during all of the past five years, with the exceptions of
Messrs. Albright, Meneely and Tuthill. Prior to joining Armco, Mr. Albright
was a consultant and small business owner. Prior to that he was Assistant to
the President of Armco Inc. and prior to that he was Vice President and Chief
Financial Officer of Cyclops Industries, Inc. Immediately prior to joining
Armco, Mr. Meneely worked as an executive consultant and held executive
positions with Sara Lee Hosiery and Wheeling-Pittsburgh Steel Corporation.
Mr. Tuthill previously served as Group Executive Vice President at Wheeling-
Pittsburgh Steel Corporation since October of 1995. Having been with
Wheeling-Pittsburgh since 1989, Mr. Tuthill also held the positions of
Executive Vice President of Operations and Vice President - Purchasing,
Traffic and Raw Materials.
(2) Effective February 1, 1996, Mr. Will was elected Chairman of the
Board in addition to the positions of President and Chief Executive Officer.
</TABLE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Armco's common stock is sold principally on the New York Stock Exchange.
At February 26, 1999, there were 19,782 common stock shareholders of record.
Other information required by this item is incorporated herein by reference
from pages 32 and 36 of the Annual Report to Shareholders for the year ended
December 31, 1998.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
(In millions, except per share amounts)(1)
<CAPTION>
1998 1997 1996 1995
1994
---- ---- ---- ---- --
- --
<S> <C> <C> <C> <C>
<C>
Net sales $1,706.5 $1,829.3 $1,724.0 $1,559.9
$1,437.6
Special charges - net (2) -- -- (8.8) --
(35.0)
Income from continuing operations 109.6 77.1 26.0 23.5
65.8
Income per common share
from continuing operations:
- Basic 0.85 0.55 0.08 0.05
0.46
- Diluted 0.81 0.55 0.08 0.05
0.46
Total assets 1,893.8 1,881.3 1,867.8 1,896.6
1,934.9
Long-term debt and lease obligations 250.7 306.9 344.3 361.6
363.8
Long-term employee benefit obligations 898.0 1,178.1 1,200.2 1,165.9
1,221.9
- -------------------------------
9
<PAGE>
<FN>
(1) The information in this Item should be read in conjunction with
Armco's financial statements and the notes thereto, which are incorporated by
reference in Item 8.
(2) Special charges primarily relate to the sale and/or
rationalization of operating facilities.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain information required by this Item is incorporated herein by
reference from pages 16-21 under the caption Management's Discussion and
Analysis in the Annual Report to Shareholders for the year ended December 31,
1998.
Other
Certain statements made or incorporated by reference in this Form 10-K,
or made in press releases or in oral presentations made by Company employees,
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 paragraphs entitled Outlook for 1999, Armco
Financial Services Group (AFSG), Liquidity And Capital Resources,
Environmental Matters, The Year 2000 Issue and New Accounting Standard in the
section entitled Management's Discussion and Analysis and in the Letter to
Shareholders contained in the Annual Report to Shareholders and in Note 1.
Summary of Significant Accounting Policies, relating to Concentration of
Credit Risk and New Accounting Standard; Note 9. Litigation and Environmental
Matters; and Note 10. Discontinued Operations, relating to AFSG in the Notes
to Consolidated Financial Statement in the Annual Report to Shareholders
incorporated herein by reference.
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 noted in the
statements themselves, these factors include, but are not limited to, the
following: risks of a downturn in the general economy or in the highly
cyclical steel industry; 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated herein by reference
from pages 22-35 of the Annual Report to Shareholders for the year ended
December 31, 1998.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
10
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item as to executive officers of Armco
is contained in Part I of this report under "Executive Officers of Armco" and
is incorporated herein by reference. The information required as to directors
is incorporated herein by reference from the information set forth under the
caption "ELECTION OF DIRECTORS" in the registrant's Proxy Statement for the
1999 Annual Meeting of Shareholders filed with the Securities and Exchange
Commission pursuant to Rule 14a-6 of the Securities Exchange Act of 1934, as
amended (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
from the information set forth in the Proxy Statement under the caption
"EXECUTIVE COMPENSATION".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The security ownership in Armco stock of directors, certain executive
officers and directors and executive officers as a group and of persons known
by Armco to be the beneficial owners of more than five percent of any class of
Armco's voting securities is incorporated herein by reference from the
information set forth in the Proxy Statement under the caption "MISCELLANEOUS
- -- Stock Ownership".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
I. Documents Filed as a Part of this Report
A. Financial Statements and Financial Statement Schedules Page
----
1. Consolidated Statements of Income and Comprehensive Income
for the Years Ended December 31, 1998, 1997 and 1996 *
2. Consolidated Balance Sheets as of December 31, 1998 and 1997 *
3. Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 *
4. Notes to Consolidated Financial Statements *
11
<PAGE>
5. Independent Auditors' Report *
6. Responsibility for Financial Reporting *
- ----------------
* Incorporated in this Annual Report on Form 10-K by reference to pages 22-35
of the Annual Report to Shareholders for the year ended December 31, 1998.
Financial Statements and Financial Statement Schedules Omitted
The financial statements and financial statement schedules for Armco Inc.
and subsidiaries, other than those listed above, are omitted because of the
absence of conditions under which they are required, or because the
information is set forth in the Notes to Consolidated Financial Statements.
B. Exhibits
The following is an index of the exhibits included in the Annual Report
on Form 10-K.
3(a). Articles of Incorporation of Armco Inc., as amended as of April 4,
1996 (1)
3(b). Regulations of Armco Inc. (2)
4. Armco hereby agrees to furnish to the Securities and Exchange
Commission, upon its request, a copy of each instrument defining the rights of
holders of long-term debt of Armco and its subsidiaries, omitted pursuant to
Item 601(b)(4)(iii) of Regulation S-K.
10(a). Deferred Compensation Plan for Directors*
10(b). 1993 Long-Term Incentive Plan of Armco Inc. (3)*
10(c). Amended Severance Benefit Agreement (4)*
10(d). 1988 Restricted Stock Plan (5)*
10(e). Executive Supplemental Deferred Compensation Plan Trust (6)*
10(f). Executive Supplemental Deferred Compensation Plan (7)*
10(g). Pension Plan for Outside Directors (8)*
10(h). Key Management Severance Policy (9)*
10(i). Minimum Pension Plan (10)*
10(j). Stainless Steel Toll Rolling Services Agreement (11)
10(k). Rights Agreement dated as of February 23, 1996 between Armco Inc. and
Fifth Third Bank (12)
12
<PAGE>
13. Annual Report to Shareholders for the year ended December 31, 1997.
(Filed for information only, except for those portions that are specifically
incorporated in this Form 10-K Annual Report for the year ended December 31,
1997.)
21. List of subsidiaries of Armco Inc.
23. Independent Auditors' Consent
27. Financial Data Schedule
99. Description of Armco Capital Stock
The annual reports (Form 11-K) for the year ended December 31, 1998
for the Armco Inc. Retirement and Savings Plan and the Armco Inc. Thrift Plan
for Hourly Employees will be filed by amendment as exhibits hereto, as
permitted under Rule 15d-21.
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to the Annual Report on Form 10-K pursuant to Item 14(c)
of Form 10-K.
- ----------------------
(1) Incorporated by reference from Exhibit 3.1 to Armco's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1993.
(2) Incorporated by reference from Exhibit 3.2 to Armco's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1994.
(3) Incorporated by reference from Exhibit 10 to Armco's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1993.
(4) Incorporated by reference from Exhibit 10(i) to Armco's Annual Report
on Form 10-K for the year ended December 31, 1997.
(5) Incorporated by reference from Exhibit 10(i) to Armco's Annual Report
on Form 10-K for the year ended December 31, 1988 (SEC File No. 001-00873).
(6) Incorporated by reference from Exhibit 10(b) to Armco's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1988 (SEC File No. 001-
00873).
(7) Incorporated by reference from Exhibit 10(c) to Armco's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1988 (SEC File No. 001-
00873).
(8) Incorporated by reference from Exhibit 10(p) to Armco's Annual Report
on Form 10-K for the year ended December 31, 1989 (SEC File No. 001-00873).
(9) Incorporated by reference from Exhibit 10(p) to Armco's Annual Report
on Form 10-K for the year ended December 31, 1990.
13
<PAGE>
(10) Incorporated by reference from Exhibit 10(r) to Armco's Annual Report
on Form 10-K for the year ended December 31, 1991.
(11) Incorporated by reference from Exhibit 10(s) to Armco's Annual Report
on Form 10-K for the year ended December 31, 1993.
(12) Incorporated by reference from Exhibit 10(p) to Armco's Form 10-K for
the year ended December 31, 1995.
- ----------------------
II. Reports on Form 8-K
The following Report on Form 8-K as filed by Armco during the quarter
ended December 31, 1998.
Report Date Description
- ----------- -----------
December 7, 1998 On December 7, 1998, Armco Inc. (the "Company")
announced plans to issue $75 million of Senior Notes
maturing in 2008, in a private placement pursuant to
Rule 144A under the Securities Act of 1933, as amended.
The Company stated that it intends to use the net
proceeds of the offering to redeem or repurchase
certain outstanding debt securities.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized as of March 12,
1999.
ARMCO INC.
By JAMES F. WILL
----------------------------------
James F. Will
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of March 12, 1999.
By JAMES F. WILL By JOHN C. HALEY
- -------------------------------------- -------------------------------
James F. Will John C. Haley
Chairman of the Board, President, Director
Chief Executive Officer
and Director
By JERRY W. ALBRIGHT By CHARLES J. HORA, JR.
- -------------------------------------- ------------------------------
Jerry W. Albright Charles J. Hora, Jr.
Vice President and Director
Chief Financial Officer
By JOHN N. DAVIS By BRUCE E. ROBBINS
- ------------------------------------- ------------------------------
John N. Davis Bruce E. Robbins
Vice President and Controller Director
By DAN R. CARMICHAEL By JAN H. SUWINSKI
- ------------------------------------- ------------------------------
Dan R. Carmichael Jan H. Suwinski
Director Director
By PAULA H.J. CHOLMONDELEY By JOHN D. TURNER
- -------------------------------------- ------------------------------
Paula H.J. Cholmondeley John D. Turner
Director Director
By DOROTHEA C. GILLIAM
- --------------------------------------
Dorothea C. Gilliam
Director
15
<PAGE>
EXHIBIT INDEX
The following is an index of the exhibits included in the Annual Report
on Form 10-K.
13. Annual Report to Shareholders for the year ended December 31, 1998.
(Filed for information only, except for those portions that are specifically
incorporated in this Form 10-K Annual Report for the year ended December 31,
1998.)
21. List of subsidiaries of Armco Inc.
23. Independent Auditors' Consents
27. Financial Data Schedule
99. Description of Armco Capital Stock
- ------------------------
<PAGE>
Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
Three Years Ended December 31, 1998
(Dollars in millions, except per share amounts)
GENERAL
This discussion and analysis of Armco's financial results should be read
together with the Consolidated Financial Statements and Notes on pages 23
through 35.
Operating Results
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $1,706.5 $1,829.3 $1,724.0
Special charges - - (8.8)
Operating profit 107.6 105.4 74.7
Sundry other - net 27.7 (1.1) (21.1)
Income from continuing operations 109.6 77.1 26.0
Income from discontinued operations - 2.7 6.5
Extraordinary loss on retirement of debt - (3.0) -
Cumulative effect of a change in accounting
for postretirement benefits 237.5 - -
Net income 347.1 76.8 32.5
Basic earnings per share
Income from continuing operations 0.85 0.55 0.08
Net income 3.05 0.55 0.14
Diluted earnings per share
Income from continuing operations 0.81 0.55 0.08
Net income 2.69 0.55 0.14
- ------------------------------------------------------------------------------
</TABLE>
1998 vs. 1997: Net sales in 1998 declined 7% from 1997 levels primarily due to
reduced pricing across all steel and tubular product lines, lower volume in
the specialty semi-finished and galvanized steel lines and lower snowplow and
tubular product shipments. Sales volume for Armco's higher margin specialty
flat-rolled steels increased 9%, somewhat offsetting these declines.
Operating profit increased 2% despite lower sales, reflecting increased volume
of higher margin steel products, lower operating costs, lower pension and
retiree medical benefit expenses, and a one-time gain of $7.1 from a
settlement with a vendor. Postretirement employee benefit expenses in 1998
were again lower as a result of prior years' favorable investment returns on
pension plan assets and lower than expected increases in medical benefit
costs.
The change in sundry other - net between 1997 and 1998 is primarily the result
of pension income and lower medical expenses in 1998 related to retirement
benefits for former employees of Armco facilities that have been shut down or
divested. The pension income resulted from favorable investment returns on
pension plan assets related to the former facilities, and lower medical
expenses were due to lower than expected benefit cost increases. Income of
$24.2 in 1998 and expense of $2.0 in 1997 was included in sundry other - net
for these benefits. Sundry other - net in 1998 also included an additional
gain of $1.1 for the vendor settlement mentioned previously. In 1997, sundry
other - net included a $4.0 gain for the settlement of certain partially
impaired long-term receivables.
In 1998, income from continuing operations included $4.3 for the favorable
settlement of certain state tax issues.
In 1997, Armco recorded $2.7 of income from discontinued operations for a tax
refund related to a previously divested company.
Also in 1997, Armco recorded a $3.0 extraordinary loss upon the early
retirement of debt, which was refinanced by a senior note offering.
Effective January 1, 1998, Armco changed its method of accounting for
unrecognized net gains and losses related to its obligations for pensions and
other postretirement benefits. Armco recognized income of $237.5, or $2.20 per
share of common stock ($1.88 per diluted share), for the cumulative effect of
this accounting change. Under the newly adopted method, Armco recognizes into
income, as a fourth quarter adjustment, any 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). Adoption of the new
method increased 1998 income from continuing operations by $3.0 or $0.03 per
share of common stock.
[A BAR CHART APPEARS HERE]
EMPLOYEE BENEFIT EXPENSE/INCOME OF DIVESTED BUSINESS UNITS
$ MILLIONS
<TABLE>
<CAPTION>
95 96 97 98
<S> <C> <C> <C> <C>
Expense $39 $22 $2 -
Income - - - $24
<FN>
Favorable returns on pension plan assets and lower than expected medical cost
increases have contributed to continuing lower expense in sundry other - net.
</TABLE>
1997 vs. 1996: Armco's 1997 net sales increased 6% over 1996 primarily as a
result of higher shipments of specialty steels and tubular products. Partially
offsetting the higher shipments of specialty steel products was a decline in
prices across the stainless and electrical steel product lines, primarily due
to intense global competition.
Operating profit increased 41% in 1997 primarily as a result of lower costs in
the manufacturing operations, the consolidation of Greens Port Industrial
Park, which in the prior year was an investment held for sale, and lower
employee benefit expenses. Benefit expenses were lower as a result of
favorable investment returns on pension plan assets and lower than expected
increases in medical benefit costs.
Included in the 1996 operating profit were special charges totaling $8.8 for a
loss on the sale of Armco's nonresidential construction
16 Armco 1998 Annual Report
<PAGE>
business and a decision to exit a line of light truck equipment manufactured
by Douglas Dynamics, LLC, Armco's snowplow and ice control products
manufacturer. Operating profit in 1996 also included nonrecurring income of
$8.6 from claim settlements, including a business interruption insurance
claim.
Sundry other - net expense decreased in 1997 as a result of lower expenses
related to long-term benefit obligations for former employees of Armco
facilities that have been shut down or divested. Included in sundry other -
net for 1996 was the recognition of $6.3 of gains in connection with asset
sales at Greens Port.
Income from discontinued operations consisted of additional gains of $2.7 in
1997 and $6.5 in 1996 for tax refunds related to a previously divested
company.
Outlook for 1999: Armco expects modest volume increases in the Specialty Flat-
Rolled Steels segment. Assuming a favorable outcome in the stainless flat-
rolled steel trade cases filed with the U.S. Department of Commerce and the
International Trade Commission in 1998, Armco expects stainless sheet and
strip pricing to stabilize and possibly improve in the latter half of 1999.
Overall results for the Specialty Flat-Rolled Steels segment are expected to
be negatively affected by higher retiree benefit expenses, primarily due to
lower expected returns on pension plan assets.
Results for the other segments are expected to improve somewhat in 1999
compared to 1998.
BUSINESS SEGMENT RESULTS
Specialty Flat-Rolled Steels
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $1,418.9 $1,497.0 $1,421.2
Income from continuing operations 105.7 91.3 72.9
- ------------------------------------------------------------------------------
</TABLE>
Armco's Specialty Flat-Rolled Steels businesses produce and finish flat-rolled
stainless, electrical and galvanized carbon steels at plants in Butler,
Pennsylvania, and Coshocton, Dover, Mansfield and Zanesville, Ohio. The
segment also includes results of international trading companies that buy and
sell steel and manufactured steel products.
Net sales and shipments by major product line were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1998 1997 1996
Sales Tons Sales Tons Sales Tons
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(tons in thousands)
Specialty flat-rolled* $1,133.4 826 $1,103.0 757 $1,108.0 739
Specialty semi-finished 122.5 125 198.8 168 133.9 97
Galvanized and other carbon 129.9 245 165.1 306 144.2 304
Other 33.1 - 30.1 - 35.1 -
- ------------------------------------------------------------------------------
Total $1,418.9 1,196 $1,497.0 1,231 $1,421.2 1,140
- ------------------------------------------------------------------------------
<FN>
* The Specialty flat-rolled product line consists of automotive exhaust
stainless, stainless sheet and strip, and electrical steels.
</TABLE>
[A BAR CHART APPEARS HERE]
<TABLE>
SPECIALTY FLAT-ROLLED STEELS SALES BY MARKETS
<CAPTION>
96 97 98
<S> <C> <C> <C>
Automotive 44% 39% 42%
Industrial & Electrical Equipment 28% 27% 30%
Service Centers 12% 12% 10%
Other/Conversion 16% 22% 18%
<FN>
Armco is shipping more value-added specialty steels to the automotive and
industrial markets.
</TABLE>
1998 vs. 1997: Net sales for the Specialty Flat-Rolled Steels segment
decreased 5% in 1998 primarily as a result of lower pricing in all product
lines and reduced shipments in specialty semi-finished and galvanized steels.
Record import levels continued to depress pricing across most stainless and
electrical steel product lines.
Specialty flat-rolled steel volume increased 9% on the strength of record
shipments of automotive exhaust stainless and the highest electrical steel
shipments in almost 20 years. Automotive exhaust stainless demand was driven
by high levels of North American vehicle production, while electrical steel
sales were stimulated by strong housing starts and demand for electrical
machinery and equipment. However, lower prices, particularly for stainless
sheet and strip products, reduced average sales per ton in this product line
by 6%.
Specialty semi-finished shipments and average sales per ton decreased by 26%
and 17%, respectively, reflecting worldwide market softness, excess capacity
and increased imports.
Galvanized carbon steel shipments, produced by the Dover Operations from
purchased steel coils, decreased 20% due to increased competition and low-
priced imports.
Income from continuing operations in 1998 increased $14.4 over 1997, primarily
as a result of increased sales of higher margin automotive exhaust stainless
and electrical steels, lower operating and raw material costs, a $7.1 gain
from a settlement with a vendor, and reduced pension and other retiree benefit
expenses. In addition, increased efficiencies and higher yields were made
possible by a number of cost reduction and productivity improvement
initiatives. These improvements were partially offset by the continuing
deterioration in selling prices.
1997 vs. 1996: Net sales in 1997 were 5% higher than in 1996 on an 8% increase
in tons shipped. A decrease in the segment's overall average sales per ton
resulted from increased shipments of lower priced specialty semi-finished
steels, partially offset by a change in the mix of carbon steel shipments from
hot bands to higher priced galvanized steel products.
A 3% reduction in average sales per ton of specialty flat-rolled products
reflected increased import competition on certain grades of chrome nickel
stainless and cold rolled non-oriented electrical steels and elimination of
most of the remaining surcharges on stainless steel. Armco and other specialty
steel producers add raw material surcharges to the price of their product to
compensate for higher costs incurred when the price of key raw materials such
as nickel, chromium or molybdenum rises above certain levels. Such surcharges
were minimal in 1997 and the second half of 1996.
Specialty semi-finished shipments increased substantially in 1997 over 1996,
primarily as a result of increased sales of chrome nickel hot bands. However,
average sales per ton declined 14%, reflecting worldwide overcapacity.
Armco 1998 Annual Report 17
<PAGE>
Shipments of galvanized carbon steel increased in 1997, but the increased tons
were offset by the elimination of carbon hot band shipments. In the first half
of 1996, Armco exited the lower priced hot band market, shifting to higher
priced galvanized steel products and thus increasing average sales per ton by
14% in the year-to-year comparison.
Specialty Flat-Rolled Steels' 1996 income from continuing operations included
an $8.6 credit from various claim settlements, including a business
interruption insurance claim. Excluding the claim settlements, income
increased in 1997 primarily as a result of lower costs due to facilities
upgrades, more stable operating conditions and lower employee benefit
expenses. Costs in 1996 were adversely affected by several planned outages,
including outages necessary to upgrade Armco's finishing facilities as part of
the strategic facilities plan. The outages and the subsequent process of
restarting and returning these facilities to full capability contributed to
higher costs and lower yields. To meet demand during this period, Armco
substantially increased its use of outside processors to finish some of its
stainless steels, resulting in higher costs.
Outlook for 1999: Armco anticipates stable volume and further cost reductions
for most product lines during the next twelve months. Although automotive
exhaust stainless shipments are expected to remain strong, supported by North
American vehicle sales, tons shipped may decline slightly from 1998's record
level. Stable housing starts are expected to continue to stimulate demand for
oriented electrical steels, while high levels of lower priced imports continue
to adversely affect non-oriented electrical steel product sales.
In recent years, record levels of imports have depressed pricing on specialty
steel products in the U.S. 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. On July 24, 1998, the
International Trade Commission issued its preliminary finding that there has
been injury to domestic producers. On November 10, 1998, the U.S. Department
of Commerce announced preliminary results in the subsidy investigations,
establishing countervailing duty rates for companies in France, Italy and
South Korea. On December 17, 1998, a preliminary determination on antidumping
margins was announced by the U.S. Department of Commerce for companies in
those three countries, as well as in Germany, Japan, Mexico, Taiwan and the
United Kingdom. Final antidumping determinations are expected to be announced
in the second quarter of 1999.
In addition, with respect to electrical steels, in mid-1999 the U.S.
Department of Commerce and the International Trade Commission are expected to
review existing antidumping and countervailing duties involving Italian and
Japanese producers to determine whether these protections should be extended
for another five years. The failure to obtain or extend meaningful tariff
protections for any of the products Armco sells could adversely affect prices
and reduce profitability.
Assuming a favorable outcome in the stainless sheet and strip trade cases,
Armco expects prices for these products to stabilize in the first half of 1999
and show some improvement in the latter half of the year. Prices for certain
electrical and semi-finished steels, however, are expected to be lower than in
1998.
Overall results for the Specialty Flat-Rolled Steels segment are expected to
be negatively affected by higher retiree benefit expenses, primarily due to
lower expected returns on pension plan assets.
[A TABLE APPEARS HERE]
<TABLE>
UNION CONTRACT EXPIRATION DATES
<S> <C>
BUTLER OPERATIONS
Hourly 9/30/2001
Represented Non-exempt 9/30/2002
Plant Protection 9/30/2002
ZANESVILLE OPERATIONS
Hourly 5/20/2000
Represented Non-exempt 5/20/2000
MANSFIELD OPERATIONS
Hourly 9/1/1999
Plant Protection 11/1/1999
DOVER OPERATIONS
Hourly 9/1/1999
Represented Non-exempt 9/1/1999
SAWHILL TUBULAR DIVISION
Sharon Hourly 9/30/1999
Warren Hourly 9/30/2000
Wheatland Hourly 1/31/2000
</TABLE>
[A BAR CHART APPEARS HERE]
<TABLE>
SPECIALTY FLAT-ROLLED STEELS EXPORT SALES
$ MILLIONS
<CAPTION>
95 96 97 98
<S> <C> <C> <C> <C>
$86 $116 $138 $149
<FN>
Despite weak foreign economies and a strong U.S. dollar, international markets
are important areas for growth.
</TABLE>
Tubular Products
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $192.7 $209.4 $189.6
Income from continuing operations 2.4 5.6 0.8
- ------------------------------------------------------------------------------
</TABLE>
The Tubular Products business segment represents the results of Sawhill
Tubular, a manufacturer of steel pipe and tubing. Sawhill has plants in Sharon
and Wheatland, Pennsylvania and Warren, Ohio.
1998 vs. 1997: Net sales decreased on lower volume and selling prices, which
reflected a general oversupply in the market, including a high level of
imported pipe, and market softness in certain products. Although some cost
savings were achieved in 1998, income decreased as a direct result of lower
sales and margins.
1997 vs. 1996: Net sales increased 10% in 1997 primarily due to higher
shipments along most major product lines, as well as modest price increases.
Sawhill's income improved in 1997, driven by higher volume and lower operating
costs.
Outlook for 1999: Sawhill Tubular's sales and profitability are expected to
remain flat with slight volume increases, offset by increasing pressure on
pricing from excess capacity and imported pipe.
Armco has been, and continues to be, in negotiations for the sale of Sawhill
Tubular. However, no assurance can be given that a sale will be completed.
18 Armco 1998 Annual Report
<PAGE>
Other Businesses
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $94.9 $122.9 $113.2
Special charge - - (2.9)
Income from continuing operations 28.2 36.1 23.3
- ------------------------------------------------------------------------------
</TABLE>
The Other Businesses segment includes the results of Douglas Dynamics, LLC, a
manufacturer of snowplows and ice control products, with plants in Milwaukee,
Wisconsin, Rockland, Maine and Johnson City, Tennessee; and Greens Port
Industrial Park, which leases land, buildings and rail car storage facilities
and operates a deep water loading dock on the Houston Ship Channel.
1998 vs. 1997: Although light truck sales were strong, lower net sales
reflected significantly below average snowfall during the 1997/1998 winter in
Douglas Dynamics' major markets, resulting in lower income from continuing
operations. Greens Port's results improved during 1998 as all phases of its
business posted increases in revenues and profits over last year.
1997 vs. 1996: The segment's income from continuing operations, excluding the
special charge, improved 38% in 1997, due to manufacturing efficiencies
achieved during the year at Douglas Dynamics and reduced operating expenses
following the decision in 1996 to exit certain unprofitable product lines. In
1996, a $2.9 special charge was recorded in this segment primarily for the
writedown of assets and severance costs related to the decision to discontinue
a line of light truck equipment manufactured by Douglas Dynamics. In addition,
1997 results increased with the consolidation of Greens Port, which in the
prior year was an investment held for sale.
Outlook for 1999: Douglas Dynamics' 1999 sales will depend on the level of
four-wheel drive light truck sales and total snowfalls in its major markets.
Based on early snowfalls, snowplow shipments are expected to be somewhat
higher in 1999. Greens Port's results are expected to continue to improve due
to recent facility expansions.
DISCONTINUED OPERATIONS
Aerospace and Strategic Materials
Armco sold its Aerospace and Strategic Materials business segment in 1985.
Pursuant to the sales agreement, Armco retained the benefit of its share of
any net proceeds of certain tax refund claims for periods prior to the sale.
In 1996, Armco received a federal tax refund and recorded a $6.5 increase to
its gain on the sale of the segment. In 1997, Armco recognized another $2.7
gain for state and federal tax refunds.
Armco Financial Services Group (AFSG)
Armco's investment in AFSG represents the net assets of its discontinued
insurance and finance leasing businesses, which have been largely liquidated.
The insurance companies, including Northwestern National Insurance Company
(NNIC), have stopped writing new business and are being "run off." These
insurance companies have not written any new business for retention since 1986
except for an immaterial amount of guaranteed renewable accident and health
business.
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.
Liquidity and Financial Resources: AFSG is accounted for as a discontinued
operation under the liquidation basis of accounting, whereby future cash
inflows and outflows are considered. AFSG believes the existing invested
assets, related future income and other assets it owns will provide sufficient
funds to meet all future claims payments and other liabilities.
The loss reserves, net of reinsurance recoverables and future investment
income, decreased to $59.9 at December 31, 1998 from $88.1 at December 31,
1997. AFSG estimates that 60% of the claims will be paid in the next five
years and that substantially all of the claims will be paid by the year 2017.
The ultimate amount of the claims as well as the timing of claims payments are
estimated based on an annual review of loss reserves performed by independent
and consulting actuaries.
Outlook: Armco management continues to believe, based on current facts and
circumstances and the opinions of outside counsel and advisors, that future
charges, if any, resulting from the liquidation of AFSG, including matters
related to the voluntary liquidation of North Atlantic, will not be material
to Armco's financial condition or liquidity. However, it is possible that, due
to fluctuations in Armco's operating results, future developments could have a
material effect on the results of one or more future interim or annual
periods.
[A BAR CHART APPEARS HERE]
<TABLE>
LONG-TERM DEBT MATURITIES
$ MILLIONS
<CAPTION>
99 00 01 02 03
<S> <C> <C> <C> <C> <C>
$117 $6 $1 $1 $0
<FN>
In January 1999, Armco redeemed the remaining $111 million of a senior note
issue. Armco has no major debt due until 2007.
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, Armco had $270.8 of cash, cash equivalents and short-
term liquid investments, compared to $194.9 at December 31, 1997. Cash, cash
equivalents and short-term liquid investments increased $75.9 during 1998,
primarily as a result of $95.2 of cash generated by operations and $74.4 from
the issuance of new 8-7/8% 10-year Senior Notes in December. Major cash
payments during the year included $32.6 of capital expenditures, $51.2 for
debt retirement and $17.7 for preferred stock dividends.
The net proceeds of the new debt issue, along with other existing cash
balances, were used to retire Armco's 9-3/8% Senior Notes due 2000 on January
14, 1999. Holders of the 9-3/8% Senior Notes were notified on December 15,
1998 of Armco's intention to redeem this issue. At December 31, 1998, $111.0
of these notes were outstanding, all of which were retired, resulting in the
recognition of an extraordinary loss of $2.8 in the first quarter of 1999.
Armco has no other material debt payments due until the year 2007.
Armco 1998 Annual Report 19
<PAGE>
At December 31, 1998, Armco had in place two bank credit facilities, totaling
$170.0. In 1998, the terms of these facilities were extended and both will
expire in 2001.
Under a receivables facility, Armco sells substantially all its trade
receivables to a wholly owned subsidiary, Armco Funding Corporation (AFC). In
1998, AFC and its bank group amended its revolving credit agreement to
provide, depending on its available borrowing base, up to $100.0 for loans and
letters of credit secured by AFC's receivables. At December 31, 1998, there
were no outstanding borrowings under this credit facility. However, $61.1 of
the facility was used as support for letters of credit.
In 1998, Armco and its bank group amended its inventory facility to provide,
depending on its available borrowing base, up to $70.0 for loans and letters
of credit secured by Armco's inventories. The credit agreement subjects Armco
to certain restrictions and covenants related to, among other things, minimum
net worth, leverage ratio and interest coverage ratio requirements. At
December 31, 1998, there were no outstanding borrowings or letters of credit
under this facility. Under both bank credit facilities, a total of $93.3 was
available for borrowing at December 31, 1998.
Armco anticipates that its capital expenditures for 1999 will total
approximately $50.0 to $60.0. Armco expects that its 1999 cash requirements,
including amounts for capital expenditures, debt service and preferred stock
dividends will be paid out of existing cash balances and cash generated from
operations.
In prior years, certain of Armco's financing arrangements included covenants
that prohibited the payment of common stock dividends. These prohibitions have
been eliminated; however, at December 31, 1998, certain outstanding financing
arrangements contain financial tests which must be met before dividends can be
paid. Currently, Armco meets these covenant requirements and is not prohibited
from paying dividends under the terms of its credit facilities, long-term debt
issues or under Ohio law.
Armco is permitted to purchase shares of its capital stock under the terms of
Ohio law only to the extent that it has positive equity surplus. At December
31,1998, Armco had a negative equity surplus balance of $8.3.
On January 22, 1999, 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 March 31, 1999 to shareholders of
record on February 26, 1999. 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 April 1, 1999, to shareholders of record on
February 26, 1999.
[A BAR CHART APPEARS HERE]
<TABLE>
CASH AND LIQUID INVESTMENTS
$ MILLIONS
<CAPTION>
95 96 97 98
<S> <C> <C> <C> <C>
$137 $169 $195 $271
<FN>
Operations are generating strong cash flow, which is making it possible to
reduce debt. Late in 1998, Armco issued $75 million of debt, which with other
available funds, was used to redeem the remaining $111 million of higher
interest rate debt in January 1999.
</TABLE>
ENVIRONMENTAL MATTERS
In common with other U.S. manufacturers, Armco is subject to various federal,
state and local environmental requirements. Armco has spent substantial
amounts of money to control air and water pollution pursuant to applicable
environmental requirements. Armco has also spent, and will continue to spend,
substantial amounts for proper handling and disposal of waste material and for
the environmental investigation and cleanup of properties. During the period
1994 through 1998, Armco's capital expenditures for pollution control projects
amounted to $36.4, including $1.4 in 1998. Along with capital investments and
operating costs relating to environmental matters, from time to time Armco has
been and may be subject to penalties and other requirements as a result of
administrative action by regulatory agencies.
Statutory and regulatory requirements in this area continue to evolve and,
accordingly, Armco cannot predict with certainty the type and magnitude of
expenditures that will be required in the future. However, total expenditures
for capital projects for pollution control during the five-year period from
1999 through 2003 are estimated to be approximately $29.0. Of this amount,
approximately $7.4 is related to control of air pollution as required by
amendments to the federal Clean Air Act, corresponding state laws and
implementing regulations. A substantial portion of these capital expenditures
is also attributable to the control of water pollution under the Clean Water
Act. Although it cannot predict precisely how changes in environmental
requirements will affect its businesses, Armco does not believe such
requirements would affect its competitive position.
Armco is, and may in the future be, subject to other types of environmental
claims and costs, for which it accrues when it is probable that a liability
has been incurred and it is possible to reasonably estimate the amount or
range of any such loss.
Armco is a defendant, or identified as a potentially responsible party in
various pending claims regarding waste disposal sites. Joint and several
liability could be imposed on Armco or other parties for these or similar
matters; thus, theoretically, one party could be held liable for all costs
related to a site. Though the outcome of such matters cannot be predicted with
assurance, Armco's experience has been that, in most cases, ultimate liability
is apportioned among Armco and other financially viable parties. Periodically,
there are claims alleging property damage or personal injury in conjunction
with waste disposal or releases. Armco is also subject to claims for
contractual indemnification related to previously divested properties. If
Armco disposes of additional properties, it may incur additional environmental
exit costs. Armco accrues exit costs when it decides to dispose of a property
or records a sale.
20 Armco 1998 Annual Report
<PAGE>
While the outcome of environmental matters cannot be predicted with assurance,
Armco believes that the ultimate liability for such matters, identified to
date, will not materially affect its consolidated financial condition or
liquidity. This belief is based on current facts and circumstances known to
Armco, including current laws and regulations as well as Armco's experience
with site remediation. However, it is possible that due to fluctuations in
Armco's operating results, changes in the facts or circumstances of known
matters, or the addition of significant new matters, environmental liabilities
could have a material effect on the results of operations of future interim or
annual periods. It is not possible to determine whether additional loss will
occur or to reasonably estimate the amount or range of any such loss.
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. In
addition, Armco has surveyed its suppliers in 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. This plan is
expected to be completed 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 1998, Armco
spent approximately $6.0 on Year 2000 compliance activities and currently
anticipates spending an additional $11.0 in 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.
NEW ACCOUNTING STANDARD
In 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.
FORWARD-LOOKING STATEMENTS
Certain statements made in this Management's Discussion & Analysis, in the
Notes to Consolidated Financial Statements and in the Letter to Shareholders
contained in this Annual Report, 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 for 1999, Armco Financial Services Group
(AFSG), Liquidity and Capital Resources, Environmental Matters, The Year 2000
Issue and New Accounting Standard; and in Note 1, Summary of Significant
Accounting Policies, relating to Concentration of Credit Risk and New
Accounting Standard; Note 9, Litigation and Environmental Matters; and Note
10, Discontinued Operations, relating to AFSG.
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 noted in the statements
themselves, these factors include, but are not limited to, the following:
risks of a downturn in the general economy or in the highly cyclical steel
industry; 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.
Armco 1998 Annual Report 21
<PAGE>
RESPONSIBILITY FOR FINANCIAL REPORTING
Armco's management prepared the financial statements presented in this Annual
Report in accordance with generally accepted accounting principles in the
United States. These principles require choices among alternatives and
numerous estimates of financial matters. Armco believes the accounting
principles chosen are appropriate in the circumstances, and the estimates and
judgments involved in Armco's financial reporting are reasonable and
conservative.
Armco's management is responsible for the integrity and objectivity of the
financial information presented in this Annual Report. Armco maintains a
system of internal accounting control and a program of internal audits. They
are designed to provide reasonable assurance that the financial reports are
fairly presented and that Armco employees comply with stated policies and
procedures, including policies on the ethical conduct of business. Armco
continually reviews and updates its policies and system of internal accounting
control as businesses and business conditions change.
Management and the Audit Review Committee of the Board of Directors
recommended, and the Board of Directors approved, the hiring of Deloitte &
Touche LLP as independent auditors for Armco. Deloitte & Touche LLP expresses
an informed professional opinion on Armco's financial statements.
The Audit Review Committee, composed solely of independent outside directors,
oversees Armco's public financial reporting. The Audit Review Committee meets
periodically with management, Deloitte & Touche LLP and Armco's internal
auditors, both individually and jointly, to discuss internal accounting
control and financial reporting matters. Deloitte & Touche LLP and Armco's
internal auditors have free access to the Audit Review Committee to discuss
any matters.
We believe Armco's internal control system, combined with the activities of
the internal and independent auditors and the Audit Review Committee, provides
you reasonable assurance of the integrity of our financial reporting.
/s/ James F. Will
James F. Will
Chairman, President and
Chief Executive Officer
/s/ Jerry W. Albright
Jerry W. Albright
Vice President and
Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
Deloitte & 2500 One PPG Place
Touche LLP Pittsburgh, PA 15222
- --------------
[D&T LOGO]
Armco, Its Shareholders and Directors:
We have audited the accompanying consolidated balance sheets of Armco Inc. and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income and comprehensive income and of cash flows for each of
the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Armco Inc. and subsidiaries at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, in 1998 Armco Inc. changed
its method of amortizing unrecognized net gains and losses related to its
obligations for pension and other postretirement benefits.
/s/ Deloitte & Touche LLP
February 5, 1999
22 Armco 1998 Annual Report
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the years ended December 31, 1998, 1997 and 1996
<CAPTION>
- ------------------------------------------------------------------------------
(Dollars in millions, except per share amounts) 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 1,706.5 $ 1,829.3 $ 1,724.0
Cost of products sold (1,503.1) (1,623.9) (1,548.4)
Selling and administrative expenses (95.8) (100.0) (92.1)
Special charges (Note 7) - - (8.8)
- ------------------------------------------------------------------------------
Operating profit 107.6 105.4 74.7
Interest income 9.0 10.6 10.1
Interest expense (28.9) (35.5) (36.3)
Sundry other - net (Note 2) 27.7 (1.1) (21.1)
- ------------------------------------------------------------------------------
Income before income taxes 115.4 79.4 27.4
Provision for income taxes (Note 3) (5.8) (2.3) (1.4)
- ------------------------------------------------------------------------------
Income from continuing operations 109.6 77.1 26.0
Discontinued operation - Gain on disposal of
Aerospace and Strategic Materials (Note 10) - 2.7 6.5
- ------------------------------------------------------------------------------
Income before extraordinary loss and
cumulative effect of an accounting change 109.6 79.8 32.5
Extraordinary loss on retirement of debt
(Note 4) - (3.0) -
Cumulative effect of a change in accounting
for postretirement benefits (Note 2) 237.5 - -
- ------------------------------------------------------------------------------
Net income 347.1 76.8 32.5
Foreign currency translation adjustments 0.3 (1.4) 1.1
Minimum pension liability adjustment (2.6) - -
- ------------------------------------------------------------------------------
Comprehensive income $ 344.8 $ 75.4 $ 33.6
- ------------------------------------------------------------------------------
Basic earnings per share (Note 1)
Income from continuing operations $ 0.85 $ 0.55 $ 0.08
Income from discontinued operations - 0.03 0.06
Extraordinary loss on retirement of debt - (0.03) -
Cumulative effect of an accounting change 2.20 - -
- ------------------------------------------------------------------------------
Net income $ 3.05 $ 0.55 $ 0.14
- ------------------------------------------------------------------------------
Diluted earnings per share (Note 1)
Income from continuing operations $ 0.81 $ 0.55 $ 0.08
Income from discontinued operations - 0.03 0.06
Extraordinary loss on retirement of debt - (0.03) -
Cumulative effect of an accounting change 1.88 - -
- ------------------------------------------------------------------------------
Net income $ 2.69 $ 0.55 $ 0.14
- ------------------------------------------------------------------------------
Pro forma presentation assuming accounting
change applied retroactively
Income before extraordinary loss and
cumulative effect of an
accounting change $ 109.6 $ 83.5 $ 33.6
Basic earnings per share 0.85 0.61 0.15
Diluted earnings per share 0.81 0.59 0.15
Net income $ 109.6 $ 80.5 $ 33.6
Basic earnings per share 0.85 0.60 0.15
Diluted earnings per share 0.81 0.58 0.15
Dividends on preferred stock (Note 5)
$2.10 Class A $ 2.10 $ 2.10 $ 2.10
$3.625 Class A 3.625 3.625 3.625
$4.50 Class B 4.50 4.50 4.50
- ------------------------------------------------------------------------------
<FN>
See Notes to Consolidated Financial Statements on pages 26 through 35.
</TABLE>
Armco 1998 Annual Report 23
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<CAPTION>
- ------------------------------------------------------------------------------
(Dollars in millions, except per share amounts) 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents (Note 1) $ 263.8 $ 189.9
Short-term liquid investments 7.0 5.0
Accounts receivable
Trade (less allowance for doubtful accounts of
$3.4 in 1998 and $4.0 in 1997) 146.7 147.0
Other 11.2 9.6
Inventories (Note 1) 250.7 268.0
Other current assets 13.4 17.9
- ------------------------------------------------------------------------------
Total current assets 692.8 637.4
- ------------------------------------------------------------------------------
Investments
Investment in Armco Financial Services Group (Note 10) 85.6 85.6
Other (less allowance for impairment of $8.7 in 1998
and $8.1 in 1997) 28.4 30.3
Property, plant and equipment (net of accumulated deprec-
iation of $714.3 in 1998 and $653.0 in 1997) (Note 1) 621.8 652.5
Deferred tax asset (Note 3) 315.8 319.3
Goodwill and other intangible assets (Note 1) 128.6 137.4
Other assets 20.8 18.8
- ------------------------------------------------------------------------------
Total assets $1,893.8 $ 1,881.3
- ------------------------------------------------------------------------------
LIABILITIES
Current liabilities
Trade accounts and notes payable $ 115.7 $ 148.9
Employment-related liabilities (Note 2) 128.0 126.4
Other current liabilities 56.5 72.8
Current portion of long-term debt (Note 4) 116.9 38.2
- ------------------------------------------------------------------------------
Total current liabilities 417.1 386.3
- ------------------------------------------------------------------------------
Long-term debt (Note 4) 250.7 306.9
Long-term employee benefit liabilities (Note 2) 898.0 1,178.1
Other long-term liabilities 149.3 162.5
Commitments and contingencies (Notes 1, 9 and 10)
SHAREHOLDERS' EQUITY (DEFICIT) (Note 5)
Preferred stock - Class A 137.6 137.6
Preferred stock - Class B 48.3 48.3
Common stock (authorized 150,000,000 shares of $0.01 par
value; issued and outstanding 107,908,385 in 1998 and
107,129,561 in 1997) 1.1 1.1
Additional paid-in capital 972.0 967.7
Accumulated deficit (975.8) (1,305.0)
Other (4.5) (2.2)
- ------------------------------------------------------------------------------
Total shareholders' equity (deficit) 178.7 (152.5)
- ------------------------------------------------------------------------------
Total liabilities and shareholders' equity (deficit) $1,893.8 $ 1,881.3
- ------------------------------------------------------------------------------
<FN>
See Notes to Consolidated Financial Statements on pages 26 through 35.
</TABLE>
24 Armco 1998 Annual Report
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1997 and 1996
<CAPTION>
- ------------------------------------------------------------------------------
(Dollars in millions) 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 347.1 $ 76.8 $ 32.5
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 63.3 61.3 58.7
Net gain on disposal of investments and facilities (0.8) (4.5) (8.9)
Loss on retirement of debt - 3.0 -
Special charges - - 8.8
Cumulative effect of accounting change (237.5) - -
Other 5.8 6.4 6.3
Changes in assets and liabilities:
Trade accounts receivable 1.3 (9.1) 22.8
Inventories 18.6 (21.4) (33.3)
Payables and accrued operating expenses (25.1) 22.1 (13.2)
Employee benefit obligations (48.8) (13.5) (17.4)
Other assets and liabilities - net (28.7) (30.3) (13.7)
- ------------------------------------------------------------------------------
Net cash provided by operating activities 95.2 90.8 42.6
- ------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net proceeds from the sale of businesses and assets 1.7 7.7 14.0
Proceeds from the sale and maturity of
liquid investments 5.6 0.3 -
Proceeds from the sale of investments 6.0 15.1 78.7
Purchase of liquid investments (7.6) (5.0) (0.3)
Contributions to investees - - (3.0)
Capital expenditures (32.6) (41.9) (59.8)
Other 0.2 (0.2) (2.7)
- ------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (26.7) (24.0) 26.9
- ------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt 74.4 151.1 5.5
Payments on debt (51.2) (177.7) (24.3)
Dividends paid on preferred stock (17.7) (17.9) (17.9)
Other (0.1) (1.3) (0.7)
- ------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 5.4 (45.8) (37.4)
- ------------------------------------------------------------------------------
Net increase in cash and cash equivalents 73.9 21.0 32.1
Cash and cash equivalents:
Beginning of year 189.9 168.9 136.8
- ------------------------------------------------------------------------------
End of year $ 263.8 $ 189.9 $ 168.9
- ------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of capitalized interest) $ 28.8 $ 34.7 $ 35.1
Income taxes 2.5 2.8 0.1
Supplemental schedule of non-cash investing
and financing activities:
Issuance of restricted stock 4.0 2.7 2.0
Notes receivable in partial payment
for asset sales - 0.3 10.6
- ------------------------------------------------------------------------------
<FN>
See Notes to Consolidated Financial Statements on pages 26 through 35.
</TABLE>
Armco 1998 Annual Report 25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
- ------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
The accompanying financial statements consolidate the accounts of Armco and
all subsidiaries in which Armco has a controlling interest.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INVESTMENTS
Armco considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents. Cash equivalents consist of
commercial paper, corporate notes, time deposits and other money market
instruments, including mutual funds.
Under the definitions provided in Statement of Financial Accounting Standards
(SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities, Armco has securities which have been classified as held to
maturity and are, therefore, recorded at amortized cost. The carrying amounts
for these securities approximate fair value due to the short maturities of the
instruments. At December 31, 1998 and 1997, these securities were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Cash equivalents $256.7 $180.4
Short-term liquid investments 7.0 5.0
Restricted collateral deposits 10.1 15.5
- ------------------------------------------------------------------------------
Total securities $273.8 $200.9
- ------------------------------------------------------------------------------
</TABLE>
The restricted collateral deposits are primarily invested in certificates of
deposit which mature within one year and are principally used as security for
self-insurance programs and environmental and litigation bonds. These
securities are reported in other current assets or other investments. The
classification is determined based on the expected term of the collateral
requirement and not necessarily the maturity date of the underlying
securities.
At December 31, 1998 and 1997, other investments also included $11.2 for
Armco's limited partnership interest in North American Stainless. It is not
practicable to estimate the fair value of this closely held limited
partnership, in which Armco's ownership interest is less than 5%. At December
31, 1998 and 1997, Armco had no material investments in derivative financial
instruments.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost of inventories at
most domestic operations is measured on the LIFO - Last In, First Out -
method. Other inventories are measured principally at average cost. Inventory
balances at December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Inventories on LIFO
Finished and semi-finished $254.7 $280.3
Raw materials and supplies 15.8 25.8
Adjustment to state inventories at LIFO value (37.2) (54.0)
- ------------------------------------------------------------------------------
Total 233.3 252.1
- ------------------------------------------------------------------------------
Inventories on average cost
Finished and semi-finished 12.3 10.8
Raw materials and supplies 5.1 5.1
- ------------------------------------------------------------------------------
Total 17.4 15.9
- ------------------------------------------------------------------------------
Total inventories $250.7 $268.0
- ------------------------------------------------------------------------------
</TABLE>
RESEARCH AND DEVELOPMENT COSTS
Armco conducts a broad range of research and development activities. These
activities are aimed at improving existing products and manufacturing
processes and developing new products and processes. Research and development
costs are recorded as expense when incurred. The amounts incurred in 1998,
1997 and 1996 were $14.2, $15.3 and $13.1, respectively.
PROPERTY, PLANT AND EQUIPMENT
Depreciation is computed using the straight-line method based on the estimated
useful lives of the related assets. Leasehold improvements are depreciated
over the shorter of the life of the related asset or the life of the lease.
Generally, Armco depreciates its property, plant and equipment at annual rates
of 5% for land improvements, 3% to 5% for buildings and 5% to 33% for
machinery and equipment.
Armco's property, plant and equipment balances at December 31, 1998 and 1997
were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Land $ 28.8 $ 28.1
Buildings 95.7 93.2
Machinery and equipment 1,185.6 1,156.9
Construction in progress 26.0 27.3
- ------------------------------------------------------------------------------
Total property, plant and equipment 1,336.1 1,305.5
Accumulated depreciation (714.3) (653.0)
- ------------------------------------------------------------------------------
Property, plant and equipment-net $ 621.8 $ 652.5
- ------------------------------------------------------------------------------
</TABLE>
Armco had commitments to purchase property, plant and equipment (including
unexpended amounts relating to projects substantially underway) totaling
approximately $17.8 at December 31, 1998.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets primarily consist of goodwill recorded in
connection with the acquisition of Cyclops Industries, Inc. on April 24, 1992.
This goodwill is being amortized using the straight-line method over 40 years.
Also included are goodwill and other intangible assets acquired in the
purchase of Douglas Dynamics, LLC on July 2, 1991. These assets are being
amortized over their estimated
26 Armco 1998 Annual Report
<PAGE>
useful lives, the majority of which do not exceed 17 years. Annual
amortization expense for 1998, 1997 and 1996 was $6.1, $6.5 and $6.9,
respectively. At December 31, 1998 and 1997, accumulated amortization of
goodwill and other intangible assets was $42.6 and $36.5, respectively.
Armco assesses whether its goodwill and other intangible assets are impaired
as required by SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, based on an evaluation of
undiscounted projected cash flows through the remaining amortization period.
If an impairment exists, the amount of such impairment is calculated based on
the estimated fair value of the asset.
EARNINGS PER SHARE
The following information was used in the calculation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from continuing operations
Income as reported $109.6 $ 77.1 $ 26.0
Less: Preferred stock dividends (17.9) (17.9) (17.9)
- ------------------------------------------------------------------------------
Income available to common shareholders - Basic 91.7 59.2 8.1
Assumed conversion of $3.625 Class A
preferred stock 9.8 9.8 -
- ------------------------------------------------------------------------------
Income available to common shareholders - Diluted $101.5 $ 69.0 $ 8.1
- ------------------------------------------------------------------------------
Common shares (in millions)
Weighted average shares outstanding - Basic 107.8 107.0 106.6
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 126.2 125.3 106.6
- ------------------------------------------------------------------------------
</TABLE>
At the end of each year, Armco had outstanding exercisable stock options and
convertible preferred stock whose exercise or conversion could, under certain
circumstances, further dilute earnings per share. The following shares of
potentially issuable common stock were not included in the above weighted
average shares outstanding because to do so would have had an antidilutive
effect on earnings per share in the years presented:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Common shares (in millions)
Exercisable stock options 2.7 2.2 1.7
Convertible preferred stock (Note 5)
$2.10 Class A 2.2 2.2 2.2
$3.625 Class A - - 18.3
$4.50 Class B 2.2 2.2 2.2
- ------------------------------------------------------------------------------
</TABLE>
ENVIRONMENTAL LIABILITIES
Armco has participated in or funded various cleanup efforts at sites where its
facilities have disposed of wastes, including sites located on its own
properties. Costs related to these efforts are accrued when it is probable
that a liability has been incurred and the amount of that liability can be
reasonably estimated. It is Armco's policy not to accrue environmental exit
costs with respect to ongoing businesses until a decision is made to dispose
of the property.
CONCENTRATION OF CREDIT RISK
Armco is primarily a producer of stainless and electrical steels and steel
products, which are sold to a number of markets, including automotive,
industrial machinery and equipment, construction, power distribution and
appliances. Armco sells domestically to customers primarily in the Midwestern
and Eastern United States, while approximately 12% of sales are to foreign
customers, primarily in Canada, Mexico and Western Europe. Approximately 37%
of trade receivables outstanding at December 31, 1998 are due from businesses
that supply the U.S. automotive industry. Except in a few situations where the
risk warrants it, Armco does not require collateral on trade receivables; and
while it believes its trade receivables will be collected, Armco anticipates
that in the event of default it would follow normal collection procedures.
Overall, credit risk related to Armco's trade receivables is limited due to
the large number of customers in differing industries and geographic areas.
NEW ACCOUNTING STANDARD
In 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.
FAIR VALUE
The fair value of financial instruments is disclosed in Notes 1 and 4.
- ------------------------------------------------------------------------------
2. PENSION AND OTHER POSTRETIREMENT BENEFITS
Armco provides noncontributory pension benefits to most employees and provides
various health care and life insurance benefits to most retirees. Retiree
health and life insurance benefits are funded as claims are paid. Pension
benefits are funded as required. As of December 31, 1998, pension funding
credits of $57.3 were available to offset future minimum funding requirements
of the Employee Retirement Income Security Act of 1974.
The components of net periodic benefit cost, including amounts related to
divested units, are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Pension Benefits Other Benefits
-------------------------- --------------------------
1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cost of benefits earned
during the year $ 16.8 $ 15.4 $ 15.6 $ 4.4 $ 4.1 $ 4.9
Interest cost 140.4 147.8 141.0 50.7 58.3 61.8
Expected return on
plan assets (186.2) (167.5) (147.3) - - -
Amortization of unrecog-
nized net obligation 6.3 6.4 6.4 - - -
Amortization of prior
service cost 1.0 0.9 0.4 (9.0) (7.3) (3.8)
Amortization of losses
(gains) (7.6)* (2.1) 0.4 (5.1)* (7.7) -
- ------------------------------------------------------------------------------
Net periodic benefit
cost $(29.3)* $ 0.9 $16.5 $41.0* $47.4 $62.9
- ------------------------------------------------------------------------------
<FN>
* Note: Amount excludes the cumulative effect of a change in accounting in
1998.
</TABLE>
Armco 1998 Annual Report 27
<PAGE>
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 1998, Armco recognized income of $237.5, or $2.20
per share of common stock ($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 accounting method, Armco recognizes into income, as a fourth quarter
adjustment, any 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. Adoption of the new
method increased 1998 income from continuing operations by approximately $3.0,
or $0.03 per share of common stock.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Pension Benefits Other Benefits
------------------ --------------------
1998 1997 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in Benefit Obligation
Benefit obligation at beginning of
the year $2,099.0 $2,000.3 $ 755.2 $ 783.2
Service cost 16.8 15.4 4.4 4.1
Interest cost 140.4 147.8 50.7 58.3
Plan participants' contributions - - 8.5 7.8
Actuarial losses (gains) 37.2 138.5 23.9 (14.0)
Plan amendments 15.0 0.4 (18.0) (16.4)
Benefits paid (199.1) (203.4) (66.5) (67.8)
- ------------------------------------------------------------------------------
Benefit obligation at year end $2,109.3 $2,099.0 $ 758.2 $ 755.2
- ------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning
of year $2,106.4 $2,007.5 $ - $ -
Actual return on plan assets 166.1 300.6 - -
Employer contributions 2.0 1.7 58.0 60.0
Plan participants' contributions - - 8.5 7.8
Benefits paid (199.1) (203.4) (66.5) (67.8)
- ------------------------------------------------------------------------------
Fair value of plan assets at year end $2,075.4 $2,106.4 $ - $ -
- ------------------------------------------------------------------------------
Funded status $ (33.9) $ 7.4 $(758.2) $ (755.2)
Unrecognized net gain (41.4) (223.7) (47.3) (195.6)
Unrecognized prior service cost 18.2 4.2 (96.0) (86.9)
Unrecognized transition obligation 21.0 27.4 - -
- ------------------------------------------------------------------------------
Net amount recognized $ (36.1) $ (184.7) $(901.5) $(1,037.7)
- ------------------------------------------------------------------------------
Detail of Balance Sheet Amounts:
Accrued benefit liability $ (42.7) $ (189.4) $(901.5) $(1,037.7)
Intangible asset 4.0 4.7 - -
Accumulated other comprehensive income 2.6 - - -
- ------------------------------------------------------------------------------
Net amount recognized $ (36.1) $ (184.7) $(901.5) $(1,037.7)
- ------------------------------------------------------------------------------
</TABLE>
The following are weighted-average assumptions as of December 31:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Pension Benefits Other Benefits
------------------ --------------------
1998 1997 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate 6.75% 7.00% 6.75% 7.00%
Expected return on plan assets 8.75% 9.25% - -
Rate of compensation increase 4.00% 4.00% 4.00% 4.00%
- ------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, pension plan assets include 3.6 million shares of Armco
common stock with a fair value of $15.7. No Armco stock was held by the plans
at December 31,1997.
For measurement purposes, a 4.75% annual increase in health care costs is
assumed for post-age 64 retirees. Health care costs for pre-age 65 retirees
are assumed to increase 6% in 1999. This rate declines annually until it
reaches 4.75% in 2001 and thereafter.
Assumed health care cost trend rates have a significant effect on the amounts
reported for health care plans. A one percentage-point change in assumed
health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
One Percentage- One Percentage-
Point Increase Point Decrease
- ------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in total of service and
interest cost components $ 5.6 $ (5.0)
Increase (decrease) in postretirement
benefit obligation 63.5 (57.5)
- ------------------------------------------------------------------------------
</TABLE>
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for plans with accumulated benefit obligations in excess
of plan assets, including unfunded nonqualified pension plans, was $24.4,
$19.4 and $1.3, respectively, at December 31, 1998, and $19.3, $16.2 and $1.2,
respectively, at December 31, 1997.
In addition to the defined benefit pension plans, most employees are eligible
to participate in various defined contribution plans. Total company expense
related to these plans was $7.4, $6.7 and $2.9 for 1998, 1997 and 1996,
respectively. A portion of the expense of these plans varies based on Armco's
profitability.
28 Armco 1998 Annual Report
<PAGE>
EMPLOYEE BENEFIT OBLIGATIONS OF FORMER BUSINESS UNITS
Included in employee benefit liabilities is the present value of estimated
pension and health care benefits for former employees associated with
facilities that have been divested. Sundry other-net includes income of $24.2
in 1998 and expense of $2.0 and $22.1 in 1997 and 1996, respectively, related
to these liabilities. The decrease in costs in 1997 and 1998 was primarily due
to continuing favorable investment returns on pension plan assets and lower
than expected increases in medical benefit costs.
- ------------------------------------------------------------------------------
3. INCOME TAXES
Armco files a consolidated U.S. federal income tax return. This return
includes all domestic companies 80% or more owned by Armco and the
proportionate share of Armco's interest in partnership investments. State tax
returns are filed on a consolidated, combined or separate basis depending on
the applicable laws relating to Armco and its domestic subsidiaries.
The United States and foreign components of income before income taxes consist
of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $113.2 $77.8 $24.4
Foreign 2.2 1.6 3.0
- ------------------------------------------------------------------------------
Total $115.4 $79.4 $27.4
- ------------------------------------------------------------------------------
</TABLE>
Provisions for income taxes for Armco and consolidated subsidiaries are as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
U.S. federal $1.0 $1.2 $ -
U.S. state 0.2 0.3 -
Foreign 1.1 0.8 1.4
- ------------------------------------------------------------------------------
Total 2.3 2.3 1.4
- ------------------------------------------------------------------------------
Deferred
U.S. federal 3.5 - -
- ------------------------------------------------------------------------------
Total $5.8 $2.3 $1.4
- ------------------------------------------------------------------------------
</TABLE>
The following is a reconciliation of the statutory federal income tax rate
applied to income before income taxes with the provision for income taxes:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal taxes at statutory rate $ 40.4 $ 27.8 $ 9.6
State taxes, net of federal benefit 0.1 0.2 -
Change in deferred tax valuation allowance (34.7) (25.7) (8.2)
- ------------------------------------------------------------------------------
Total $ 5.8 $ 2.3 $ 1.4
- ------------------------------------------------------------------------------
</TABLE>
During 1998, Armco's net operating loss carryforwards decreased by
approximately $54.3 due to taxable income generated in the year. Armco's
capital loss carryforward decreased by approximately $50.4, of which $14.3 was
the result of taxable capital gains generated in the year, and $36.1 was due
to the expiration of unused capital losses available from 1993. The difference
between pretax book income of $115.4 and 1998 taxable income is primarily due
to costs associated with employee benefits, environmental and restructuring
actions, which had been accrued for financial accounting purposes in prior
years, but actually paid in 1998; and additional net deductions resulting from
the 1998 operations of the Armco Financial Services Group.
At December 31, 1998, Armco had capital loss and net operating loss (NOL)
carryforwards for federal tax purposes expiring as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Year Capital
expiring loss NOL
- ------------------------------------------------------------------------------
<S> <C> <C>
1999 $ - $ 106.7
2000 117.4 -
2001 46.0 123.3
2004 - 9.1
2005 - 129.4
2006 - 238.6
2007 - 186.2
2008 - 125.2
2009 - 29.9
2010 - 44.4
2011 - 31.1
- ------------------------------------------------------------------------------
Total loss carryforwards $163.4 $1,023.9
- ------------------------------------------------------------------------------
</TABLE>
Armco has $698.0 in U.S. alternative minimum tax net operating losses.
Additionally, Armco has $13.0 of alternative minimum tax credits that have no
expiration.
Deferred income taxes reflect the net tax effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes and (b) operating loss
and tax credit carryforwards. At December 31, 1998 and 1997, the net deferred
tax asset, included on the Consolidated Balance Sheets, was as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Other current assets $ 9.2 $ 9.2
Deferred tax asset 315.8 319.3
- ------------------------------------------------------------------------------
Net deferred tax asset $325.0 $328.5
- ------------------------------------------------------------------------------
</TABLE>
Armco 1998 Annual Report 29
<PAGE>
Major components of Armco's year-end net deferred tax asset are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Tax effects of
Operating loss and tax credit carryforwards $ 478.4 $ 522.2
Employee benefits 433.0 556.4
Other assets (including contingencies and accruals) 123.8 133.5
- ------------------------------------------------------------------------------
Gross deferred tax asset 1,035.2 1,212.1
Valuation allowance (448.6) (593.0)
- ------------------------------------------------------------------------------
Deferred tax asset 586.6 619.1
- ------------------------------------------------------------------------------
Property, plant and equipment (155.1) (148.8)
Other liabilities (106.5) (141.8)
- ------------------------------------------------------------------------------
Deferred tax liability (261.6) (290.6)
- ------------------------------------------------------------------------------
Net deferred tax asset $ 325.0 $ 328.5
- ------------------------------------------------------------------------------
</TABLE>
Management believes it is more likely than not that Armco will generate future
taxable income sufficient to realize that portion of the tax benefit
associated with future deductible temporary differences and NOL carryforwards,
represented by the $325.0 net deferred tax asset. Armco prepares a calculation
annually in which it estimates future income and schedules the future effects
of temporary differences and NOL carryforwards. Because any forecast has
inherent uncertainties and because of the structural changes Armco has
undergone over the last nine years, Armco uses what it believes to be
conservative estimates and assumptions. Considering all available evidence,
both positive and negative, Armco periodically determines if there has been a
significant change in the net deferred tax asset. During the last several
years, based on forecasts and consideration of available evidence, Armco
believes that there has been no significant change in the amount of its net
deferred tax asset.
Armco's belief that realization of its net deferred tax asset is more likely
than not is based on, among other factors, changes in operations that have
occurred during the 1990s, as well as consideration of available tax planning
strategies. Specifically, cost savings resulting from new capital investments
are being realized and are expected to continue to improve operating results.
Armco has operated in a highly cyclical industry and, consequently, has had a
history of generating and then utilizing significant amounts of NOL
carryforwards. In 1997 and 1998, in addition to using its temporary
differences, principally related to employee benefit obligations, to reduce
taxable income, Armco utilized approximately $70.0 of its NOL carryforwards.
These were the first two years of taxable income for Armco after seven years
of tax losses. However, if Armco is unable to generate sufficient taxable
income in the future through operating results, increases in the valuation
allowance may be required through a charge to income. On the other hand, if
Armco achieves sufficient profitability to utilize a greater portion of the
deferred tax asset, the valuation allowance will be reduced through a credit
to income.
United States income tax returns of Armco for 1994 and prior years have been
subject to examination by the Internal Revenue Service and are closed to
assessments. However, the NOL carryforwards from some of these years remain
open to adjustment. Armco has been in a cumulative NOL carryforward position
since 1983 and believes that it has sufficient loss carryforwards in excess of
any potential audit adjustments that might be made by the Internal Revenue
Service for any open years.
- ------------------------------------------------------------------------------
4. LONG-TERM DEBT AND OTHER FINANCING
LONG-TERM DEBT
At December 31, 1998 and 1997, Armco's long-term debt was as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Senior notes
8-7/8% due 2008 $ 75.0 $ -
9% due 2007 150.0 150.0
9-3/8% due 2000 111.0 125.0
Variable rate loan (LIBOR plus 2.75%) due 2001 - 31.2
5% loan due 2000 10.2 15.3
8-1/8% pollution control revenue bonds due 2005 - 12.1
Variable rate revenue refunding bonds due 2008
(1998 average 3.53%) 12.1 -
Variable rate economic development revenue bonds
due 2020 (1998 average 3.67%) 7.3 8.5
Other 2.0 3.0
- ------------------------------------------------------------------------------
Total debt 367.6 345.1
Less current maturities (116.9) (38.2)
- ------------------------------------------------------------------------------
Long-term debt $ 250.7 $ 306.9
- ------------------------------------------------------------------------------
</TABLE>
Maturities of existing long-term debt during the five years ending December
31, 2003, are as follows: 1999, $116.9; 2000, $5.9; 2001, $0.8; 2002, $0.8 and
2003, zero. The 1999 maturities include the January 14, 1999 redemption of
$111.0 of the 9-3/8% Senior Notes. These notes were redeemed with the proceeds
of the December 1998 issuance of $75.0 of 8-7/8% Senior Notes due 2008 and
other available funds. In the first quarter of 1999, Armco recognized an
extraordinary loss of $2.8 related to this redemption.
30 Armco 1998 Annual Report
<PAGE>
At December 31, 1998, the fair value of Armco's long-term debt, including
current maturities, was approximately $372.9. This amount was determined by
calculating a value based on cash flow yield to maturity and comparing that
amount to market information where possible. The fair value estimate was based
on pertinent information available to management as of December 31, 1998.
Management is not aware of any significant factors that would materially alter
this estimate since that date. The fair value of Armco's long-term debt,
including current maturities, at December 31, 1997, was approximately $347.4.
At December 31, 1998 and 1997, $13.2 and $50.2, respectively, of long-term
debt, including current maturities, represented financing utilized to
construct certain of Armco's fixed assets, which are pledged as collateral on
these loans.
During 1997, Armco recorded an extraordinary loss upon retiring certain of its
outstanding debt of $3.0 or $0.03 per share of common stock.
BANK CREDIT AGREEMENTS
At December 31, 1998, Armco had in place two bank credit facilities, totaling
$170.0. In 1998, the terms of these facilities were extended and both will
expire in 2001.
Under a receivables facility, Armco sells substantially all its trade
receivables to a wholly owned subsidiary, Armco Funding Corporation (AFC). In
1998, AFC and its bank group amended its revolving credit agreement to
provide, depending on its available borrowing base, up to $100.0 for loans and
letters of credit secured by AFC's receivables. At December 31, 1998, there
were no outstanding borrowings under this credit facility; however, $61.1 of
the facility was used as support for letters of credit.
In 1998, Armco and its bank group amended its revolving credit agreement to
provide, depending on its available borrowing base, up to $70.0 for loans and
letters of credit secured by Armco's inventories. This credit agreement
subjects Armco to certain restrictions and covenants related to, among other
things, minimum net worth, leverage ratio and interest coverage ratio
requirements. At December 31, 1998, there were no outstanding borrowings or
letters of credit under this facility. Under both bank credit facilities, a
total of $93.3 was available for borrowing at December 31, 1998.
LONG-TERM LEASES
Rental expense under operating leases was $6.7 in 1998, $6.9 in 1997 and $7.7
in 1996. At December 31, 1998, commitments to make future minimum lease
payments for operating leases are $4.3 in 1999, $2.9 in 2000, $2.4 in 2001,
$3.0 in 2002, $1.3 in 2003 and $1.2 thereafter.
- ------------------------------------------------------------------------------
5. SHAREHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK
Armco has outstanding two classes of preferred stock that rank equally with
respect to dividend payments, redemption and liquidation rights. The preferred
stock ranks senior to Armco's common stock with respect to dividends and upon
liquidation. At December 31, 1998 and 1997, there were authorized and issuable
in series, 6,697,231 shares of Class A preferred stock with no par value and
5,000,000 shares of $1 par value Class B preferred stock.
Armco has two series of Class A and one series of Class B preferred stock
outstanding. Except as noted, the following relates to each issue at December
31, 1998 and 1997:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
$2.10 $3.625 $4.50
Class A Class A Class B
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Number of shares outstanding 1,697,231 2,700,000 999,900
Total book value of shares outstanding $7.2 $130.4 $48.3
Per share data:
Cumulative dividend (annual rate) $2.10 $3.625 $4.50
Common stock conversion rate 1.27 6.78 2.22
Redemption price (at Armco's option) $40.00 $51.45* $50.00
Liquidation value $15.00 $50.00 $50.00
Voting rights 1 vote 1 vote No vote
- ------------------------------------------------------------------------------
<FN>
* Price as of December 31, 1998. This price declines at 12-month intervals to
$50 per share on and after October 15, 2002.
</TABLE>
COMMON STOCK
At December 31, 1998, 22,681,261 unissued shares of Armco's common stock were
reserved for the conversion of preferred stock and 4,343,247 unissued shares
of common stock were reserved for the exercise of stock options (see Note 6).
Activity for the years 1996, 1997 and 1998 related to Armco's common stock was
as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Additional
Paid-in
Shares Par Value Capital
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1995 106,102,560 $1.1 $963.0
Exercise of options 3,100 - -
Restricted stock issued -
net of cancellations 347,313 - 2.0
Directors' stock purchase plan 4,193 - -
- ------------------------------------------------------------------------------
Balance, December 31, 1996 106,457,166 1.1 965.0
Exercise of options 25,500 - -
Restricted stock issued -
net of cancellations 643,013 - 2.7
Directors' stock purchase plan 3,882 - -
- ------------------------------------------------------------------------------
Balance, December 31, 1997 107,129,561 1.1 967.7
Exercise of options 62,900 - 0.3
Restricted stock issued -
net of cancellations 707,802 - 4.0
Directors' stock purchase plan 8,122 - -
- ------------------------------------------------------------------------------
Balance, December 31, 1998 107,908,385 $1.1 $972.0
- ------------------------------------------------------------------------------
</TABLE>
SHAREHOLDER RIGHTS PLAN
In 1996, Armco adopted a Shareholder Rights Plan designed to deter coercive
takeover tactics and prevent an acquirer from gaining control of Armco without
offering a fair price to all of Armco's shareholders. Under the terms of the
plan, preferred stock purchase rights were distributed as a dividend at the
rate of one right for each share of common stock held as of the close of
business on June 26, 1996. Until the rights become exercisable, common stock
issued will also have one right attached. Each right will entitle shareholders
to buy one two-hundredth of a share of a currently unissued series of Class A
participating preferred stock of Armco at an exercise price of $20. Each right
will thereafter entitle the holder to receive upon exercise, common stock or,
in certain circumstances, preferred stock or other securities or assets of the
company having a value of $40. The rights will be exercisable only if a person
or group acquires beneficial ownership of
Armco 1998 Annual Report 31
<PAGE>
20% or more of Armco's common stock or announces a tender or exchange offer,
after which such person or group would beneficially own 20% or more of the
common stock, or if the Board of Directors declares any person to be an
"adverse person" as defined in the plan. A total of 750,000 shares of Class A
participating preferred stock have been reserved for issuance upon exercise of
the rights.
Armco, except as otherwise provided in the plan, will generally be able to
redeem the rights at $0.0025 per right at any time during a ten-day period
following public announcement that a 20% position in Armco has been acquired
or after the effective date the Board of Directors declares any person to be
an "adverse person." During this ten-day period, Armco may also extend the
time during which it may redeem the rights. The rights are not exercisable
until the expiration of the redemption period. The rights will expire on June
26, 2006.
ACCUMULATED DEFICIT, DEFERRED COMPENSATION AND ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS)
Activity for the years 1996, 1997 and 1998 related to Armco's accumulated
deficit, deferred compensation and accumulated other comprehensive income
(loss) was as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Accumulated Other
Comprehensive
Income (Loss)
--------------------
Foreign Minimum
Accumulated Deferred Currency Pension
Deficit Compensation Translation Liability
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $(1,378.5) $(2.8) $ 0.9 $ -
Net income 32.5 - - -
Preferred stock dividends declared (17.9) - - -
National-Oilwell foreign currency
translation - - 1.4 -
Foreign currency translation
adjustment - - (0.4) -
Amortization and cancellation of
deferred compensation - 2.0 - -
Deferred compensation on
restricted stock issued - (1.2) - -
- ------------------------------------------------------------------------------
Balance, December 31, 1996 (1,363.9) (2.0) 1.9 -
Net income 76.8 - - -
Preferred stock dividends declared (17.9) - - -
Foreign currency translation
adjustment - - (1.4) -
Amortization and cancellation of
deferred compensation - 1.7 - -
Deferred compensation on
restricted stock issued - (2.4) - -
- ------------------------------------------------------------------------------
Balance, December 31, 1997 (1,305.0) (2.7) 0.5 -
Net income 347.1 - - -
Preferred stock dividends declared (17.9) - - -
Foreign currency translation
adjustment - - 0.3 -
Amortization and cancellation of
deferred compensation - 2.0 - -
Deferred compensation on
restricted stock issued - (2.0) - -
Minimum pension liability
adjustment - - - (2.6)
- ------------------------------------------------------------------------------
Balance, December 31, 1998 $ (975.8) $(2.7) $ 0.8 $(2.6)
- ------------------------------------------------------------------------------
</TABLE>
DIVIDENDS
In prior years, certain of Armco's financing arrangements included covenants
that prohibited the payment of common stock dividends. These prohibitions have
been eliminated; however, at December 31, 1998, certain outstanding financing
arrangements contain financial tests which must be met before dividends can be
paid. Currently, Armco meets these covenant requirements and is not prohibited
from paying dividends under the terms of its credit facilities, long-term debt
issues or under Ohio law.
Armco is permitted to purchase shares of its capital stock under the terms of
Ohio law only to the extent that it has positive equity surplus. At December
31,1998, Armco had a negative equity surplus balance of $8.3.
The Board of Directors at its January 1999 meeting declared the regular
quarterly dividends payable on both series of Armco's Class A preferred stock
and on its Class B preferred stock.
- ------------------------------------------------------------------------------
6. COMMON STOCK OPTIONS
Armco maintains plans that provide for granting options to purchase common
stock for not less than 100% of its market price on the date the option is
granted. The vesting period for stock options granted under these plans is two
years from the date of grant and, although they may terminate earlier under
certain conditions, stock options generally expire 10 years after the grant
date. Armco also has plans that provide for issuing stock, subject to
restrictions as to sale and forfeiture over a three- to five-year period.
Under certain circumstances, this vesting schedule may be accelerated by one
year.
At December 31, 1998, 5,492,769 shares of common stock were available for
granting of awards under these plans. During 1996, 1997 and 1998, stock option
activity was as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Weighted Average
Shares Exercise Price
- ------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1995 3,193,517 $ 7.58
Granted 947,158 5.24
Exercised (3,100) 4.94
Forfeited (159,645) 6.15
Expired (441,672) 9.38
- ------------------------------------------------------------------------------
Outstanding at December 31, 1996 3,536,258 6.80
Granted 472,201 4.13
Exercised (25,500) 4.76
Forfeited (8,700) 6.39
Expired (464,125) 10.27
- ------------------------------------------------------------------------------
Outstanding at December 31, 1997 3,510,134 6.00
Granted 1,117,239 5.31
Exercised (62,900) 4.74
Forfeited (34,926) 5.46
Expired (186,300) 8.83
- ------------------------------------------------------------------------------
Outstanding at December 31, 1998 4,343,247 5.72
- ------------------------------------------------------------------------------
</TABLE>
The total number of options exercisable at the end of each year was as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Weighted Average
Shares Exercise Price
- ------------------------------------------------------------------------------
<S> <C> <C>
1996 1,741,811 $7.66
1997 2,161,324 6.72
1998 2,756,807 6.16
- ------------------------------------------------------------------------------
</TABLE>
32 Armco 1998 Annual Report
<PAGE>
The following relates to the options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Exercise Price Ranges $4.09 - $7.56 $12.06
- ------------------------------------------------------------------------------
<S> <C> <C>
Options outstanding
Number of shares 4,219,347 123,900
Weighted average exercise price $5.54 $12.06
Average remaining contractual life 7 years 1 year
Options exercisable
Number of shares 2,632,907 123,900
Weighted average exercise price $5.88 $12.06
- ------------------------------------------------------------------------------
</TABLE>
In 1996, Armco adopted SFAS No. 123, Accounting for Stock-Based Compensation.
SFAS No. 123 provides that companies may change their method of accounting for
stock options to a fair value method using an option pricing model. Armco uses
the intrinsic value approach specified in Accounting Principles Board Opinion
No. 25 in accounting for stock options and did not change from this method
upon adoption of the new standard. Had Armco changed its accounting method,
its net income for 1998 would have been reduced by $1.7 to $345.4, or $3.04
per basic share and $2.67 per diluted share. Net income for 1997 would have
been reduced by $1.2 to $75.6, or $0.54 per basic and diluted share, and net
income for 1996 would have been reduced by $1.7 to $30.8, or $0.12 per basic
and diluted share. These pro forma adjustments were calculated using the
Black-Scholes option pricing model under the following assumptions in each
year:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk free interest rate 5.5% 6.25% 5.5%
Expected volatility 40% 35% 30%
Expected life of options 5 years 5 years 5 years
Expected dividends None None None
- ------------------------------------------------------------------------------
</TABLE>
Based on the option pricing model, options granted during 1998, 1997 and 1996
had fair values of $2.32, $1.72 and $1.90 per share, respectively.
During 1998, 1997 and 1996, Armco issued to certain employees 786,562, 646,013
and 570,158 shares of common stock, subject to restrictions, with weighted
average grant-date fair values of $5.31, $4.07 and $5.69 per share,
respectively. Total compensation cost recognized in income for stock-based
employee compensation awards was $1.7 in 1998, $1.6 in 1997 and $1.1 in 1996.
- ------------------------------------------------------------------------------
7. SPECIAL CHARGES
In 1996, Armco recognized a special charge of $5.9 to record a loss on the
sale of its nonresidential construction business, which was sold effective
January 1, 1997. The charge primarily related to the writedown of assets and
recognition of additional employee benefit liabilities.
Also in 1996, Armco recorded a $2.9 special charge primarily for the writedown
of assets and severance costs related to its decision to discontinue a line of
light truck equipment manufactured by Armco's snowplow and ice control
products business.
- ------------------------------------------------------------------------------
8. SEGMENT INFORMATION
Armco's reportable operating segments are three separately managed business
units that offer different products and services. They are: (1) Specialty
Flat-Rolled Steels, consisting of plants in Butler, Pennsylvania and
Coshocton, Dover, Mansfield and Zanesville, Ohio that produce and finish flat-
rolled stainless, electrical and galvanized carbon steels for the automotive,
industrial machinery and equipment, construction, and service center markets;
and international trading companies, that buy and sell steel and manufactured
steel products. (2) Tubular Products, consisting of Sawhill Tubular with
operations in Sharon and Wheatland, Pennsylvania and Warren, Ohio that produce
steel pipe and tubular products for the industrial machinery, construction and
appliance markets. And, (3) Other Businesses, consisting of Douglas Dynamics,
LLC with plants in Milwaukee, Wisconsin, Rockland, Maine and Johnson City,
Tennessee, that manufacture snowplows and ice control equipment for four-wheel
drive light trucks and Greens Port Industrial Park, which leases land,
buildings and rail car storage facilities and operates a deep water loading
dock on a ship channel in Houston, Texas. A substantial portion of the Other
Businesses segment represents the snowplow and ice control products business.
Accounting policies of the segments are the same as those described in the
summary of significant accounting policies in Note 1. Armco's management
evaluates segment performance based on income from continuing operations.
Armco does not allocate interest expense, interest income, income tax expense
or employee benefits for certain divested businesses to its segments.
Armco's segment information is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales
Specialty Flat-Rolled Steels $1,418.9 $1,497.0 $1,421.2
Tubular Products 192.7 209.4 189.6
Other Businesses 94.9 122.9 113.2
- ------------------------------------------------------------------------------
Total $1,706.5 $1,829.3 $1,724.0
- ------------------------------------------------------------------------------
Income from continuing operations
Specialty Flat-Rolled Steels $ 105.7 $ 91.3 $ 72.9
Tubular Products 2.4 5.6 0.8
Other Businesses 28.2 36.1 23.3
Corporate (26.7) (55.9) (71.0)
- ------------------------------------------------------------------------------
Total $ 109.6 $ 77.1 $ 26.0
- ------------------------------------------------------------------------------
Depreciation
Specialty Flat-Rolled Steels $ 54.2 $ 52.6 $ 50.4
Tubular Products 4.5 4.3 4.1
Other Businesses 3.0 2.9 2.6
Corporate 1.6 1.5 1.6
- ------------------------------------------------------------------------------
Total $ 63.3 $ 61.3 $ 58.7
- ------------------------------------------------------------------------------
Capital expenditures
Specialty Flat-Rolled Steels $ 22.2 $ 31.4 $ 55.9
Tubular Products 2.8 2.6 1.4
Other Businesses 4.6 5.5 1.7
Corporate 3.0 2.4 0.8
- ------------------------------------------------------------------------------
Total $ 32.6 $ 41.9 $ 59.8
- ------------------------------------------------------------------------------
Total assets
Specialty Flat-Rolled Steels $ 871.2 $ 923.7 $ 934.2
Tubular Products 103.6 100.5 92.8
Other Businesses 76.7 78.6 70.4
Corporate 756.7 692.9 684.8
Discontinued operations 85.6 85.6 85.6
- ------------------------------------------------------------------------------
Total $1,893.8 $1,881.3 $1,867.8
- ------------------------------------------------------------------------------
</TABLE>
Armco 1998 Annual Report 33
<PAGE>
Total assets include the following assets reported in Corporate:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and liquid investments $268.5 $192.0 $162.5
Deferred taxes 325.0 328.5 328.5
Goodwill and other intangibles 114.7 121.0 126.0
Other - net 48.5 51.4 67.8
- ------------------------------------------------------------------------------
Total Corporate $756.7 $692.9 $684.8
- ------------------------------------------------------------------------------
</TABLE>
Other Businesses income from continuing operations for 1996 includes a $2.9
special charge (see Note 7).
Armco's net sales to customers located outside the United States totaled
$196.7, $185.4 and $165.4 for 1998, 1997 and 1996, respectively.
- ------------------------------------------------------------------------------
9. LITIGATION AND ENVIRONMENTAL MATTERS
Armco and its subsidiaries are involved in various pending claims regarding
product liability, patent, employee benefits, environmental matters,
reinsurance and insurance arrangements, and other matters arising out of the
conduct of Armco's business. The actual liability for legal claims against
Armco at December 31, 1998 cannot be determined, but in Armco's opinion, based
on current facts and circumstances, the ultimate liability resulting from such
claims will not materially affect its consolidated financial position or
liquidity. However, it is possible that due to fluctuations in Armco's
operating results, future developments with respect to such matters could have
a material effect on its results of operations in future interim or annual
periods.
In common with other U.S. manufacturers, Armco is subject to various federal,
state and local environmental laws. These laws necessitate expenditures to
meet environmental compliance requirements 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. Environmental exit costs are accrued when a decision is made to
dispose of a property or a sale is recorded.
Armco is a defendant, or identified as a potentially responsible party, in
proceedings alleging liability for remediation, property damage or personal
injury related to certain waste disposal sites. Armco has also received claims
for indemnification for some properties it has previously owned or leased. In
most cases involving waste disposal sites, Armco is one of many potentially
responsible parties. In these cases, joint and several liability could be
imposed on Armco or other parties; thus, theoretically, one party could be
held liable for all costs related to a site. However, based on its experience
and a review of current claims, Armco believes that any ultimate liability
will be apportioned among Armco and other financially viable parties. Armco
accrues its estimate of remediation and other costs for sites where it is
probable that a liability has been incurred and the amount can be reasonably
estimated.
In establishing liabilities, Armco assesses the range of reasonably estimated
outcomes and determines the most likely outcome for its liabilities within the
range. Costs are estimated based on experience with site remediation, an
understanding of current environmental laws and regulations, environmental
assessments, the existence of other financially viable parties, expected
remediation methods and the years in which Armco is expected to make payments
toward each remediation (which range from the current year to 30 years or more
in the future). These liabilities are not discounted. The cost estimates are
reviewed regularly to assess changed conditions, including current
interpretations of environmental laws and regulations, and changes in
remediation technology and methods. Adjustments are made if changed conditions
have a significant effect on cost estimates. Liabilities have not been
adjusted for expected recoveries from insurers or other parties.
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 requirements at existing sites and Armco's share of
liability at multi-party sites. It is not possible to determine whether
additional loss, due to such changed circumstances, will occur or to
reasonably estimate the amount or range of any potential additional loss.
At December 31, 1998, Armco had recorded on its Consolidated Balance Sheets,
$11.4 in other current liabilities and $50.4 in other long-term liabilities
for estimated probable costs relating to legal and environmental matters.
- ------------------------------------------------------------------------------
10. DISCONTINUED OPERATIONS
AEROSPACE AND STRATEGIC MATERIALS
Oregon Metallurgical Corporation (Oremet), formerly 80% owned by Armco, was
part of the Aerospace and Strategic Materials business segment that Armco sold
in 1985. Prior to the sale, Armco filed a suit on behalf of Oremet in the U.S.
Claims Court, claiming refunds and interest on federal and state taxes.
Pursuant to the sales agreement, Armco retained the benefit of its share of
any proceeds of this action, net of taxes imposed on Oremet and the buyer. In
1996, Armco and Oremet reached agreement with the Internal Revenue Service
that a previous refund of taxes and interest should not itself have been
taxable to Oremet, further increasing the net proceeds, which resulted in
Armco recording an additional $6.5 gain on the sale. In 1997, Armco received
an additional $2.7 in state and federal tax refunds.
ARMCO FINANCIAL SERVICES GROUP (AFSG)
Armco's investment in AFSG represents the net assets of its discontinued
insurance and finance leasing businesses, which have been largely liquidated.
The insurance companies, including Northwestern National Insurance Company
(NNIC), have stopped writing new business and are being "run off." These
companies are accounted for as discontinued operations under the liquidation
basis of accounting, whereby future cash inflows and outflows are considered.
Armco believes, based on current facts and circumstances, including the
opinion of outside actuaries, that future changes in estimates of net losses
relating to the ultimate liquidation of AFSG will not be material to Armco's
financial position or liquidity. The following sets forth AFSG's consolidated
summarized financial information at December 31, 1998:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
<S> <C>
Assets
Invested assets $151.9
Reinsurance recoverable 79.1
Other 12.2
- ------------------------------------------------------------------------------
Total assets 243.2
- ------------------------------------------------------------------------------
Liabilities
Losses and loss reserves (net of future investment
income of $35.1) 139.0
Other 18.6
- ------------------------------------------------------------------------------
Total liabilities 157.6
- ------------------------------------------------------------------------------
Net assets $ 85.6
- ------------------------------------------------------------------------------
</TABLE>
34 Armco 1998 Annual Report
<PAGE>
At December 31, 1998, AFSG's invested assets included $23.0 of various Senior
Notes of Armco. On January 14, 1999, AFSG tendered $5.0 of the Senior Notes,
which were redeemed by Armco on that date (see Note 4).
Currently, insurance regulators having supervisory authority over the AFSG
insurance companies retain substantial control over certain transactions,
including the payment of dividends to Armco.
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.
There are various pending matters relating to litigation, arbitration and
regulatory affairs, including the above-mentioned voluntary liquidation. The
ultimate liability from such matters at December 31, 1998 cannot be determined
but, in Armco's opinion, based on current facts and circumstances and the
views of outside counsel and advisors, any liability resulting will not
materially affect Armco's financial position or liquidity. 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.
- ------------------------------------------------------------------------------
11. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1998 4Q 3Q 2Q 1Q
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 1,706.5 $ 393.3 $ 415.4 $ 450.1 $ 447.7
Cost of products sold (1,503.1) (342.0) (360.6) (396.1) (404.4)
Income from discon-
tinued operations (1) - - - - -
Income before extra-
ordinary loss and
cumulative effect of
an accounting change 109.6 27.5 30.7 31.1 20.3
Extraordinary loss (2) - - - - -
Cumulative effect of a
change in accounting
for postretirement
benefits (3) 237.5 - - - 237.5
Net income 347.1 27.5 30.7 31.1 257.8
Basic earnings per share
Income from discon-
tinued operations - - - - -
Income before extra-
ordinary loss and
cumulative effect of
an accounting change 0.85 0.21 0.24 0.25 0.15
Extraordinary loss - - - - -
Cumulative effect of a
change in accounting
for postretirement
benefits 2.20 - - - 2.21
Net income 3.05 0.21 0.24 0.25 2.36
Diluted earnings per share
Income from discon-
tinued operations - - - - -
Income before extra-
ordinary loss and
cumulative effect of
an accounting change 0.81 0.20 0.23 0.23 0.15
Extraordinary loss - - - - -
Cumulative effect of a
change in accounting
for postretirement
benefits 1.88 - - - 1.89
Net income 2.69 0.20 0.23 0.23 2.04
<CAPTION>
- ------------------------------------------------------------------------------
1997 4Q 3Q 2Q 1Q
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 1,829.3 $ 436.4 $ 461.3 $ 490.3 $ 441.3
Cost of products sold (1,623.9) (387.4) (402.9) (436.1) (397.5)
Income from discontinued
operation (1) 2.7 1.4 - 1.3 -
Income before extra-
ordinary loss and
cumulative effect of
an accounting change 79.8 19.2 29.7 21.5 9.4
Extraordinary loss (2) (3.0) - (3.0) - -
Cumulative effect of a
change in accounting
for postretirement
benefits (3) - - - - -
Net income 76.8 19.2 26.7 21.5 9.4
Basic earnings per share
Income from discontinued
operation 0.03 0.01 - 0.01 -
Income before extra-
ordinary loss and
cumulative effect of
an accounting change 0.58 0.14 0.24 0.16 0.05
Extraordinary loss (0.03) - (0.03) - -
Cumulative effect of a
change in accounting
for postretirement
benefits - - - - -
Net income 0.55 0.14 0.21 0.16 0.05
Diluted earnings per share
Income from discontinued
operation 0.03 0.01 - 0.01 -
Income before extra-
ordinary loss and
cumulative effect of
an accounting change 0.58 0.14 0.22 0.16 0.05
Extraordinary loss (0.03) - (0.02) - -
Cumulative effect of a
change in accounting
for postretirement
benefits - - - - -
Net income 0.55 0.14 0.20 0.16 0.05
- ------------------------------------------------------------------------------
<FN>
(1) See Note 10.
(2) See Note 4.
(3) See Note 1.
</TABLE>
Armco 1998 Annual Report 35
<PAGE>
<TABLE>
PRICE RANGE AND DIVIDENDS OF ARMCO STOCK (UNAUDITED)
(Stock price lines reflect weekly closing prices)
<CAPTION>
- ------------------------------------------------------------------------------
- ---------
1997 1998
- ------------------------------------------------------------------------------
- ---------
Q1 Q2 Q3 Q4 Q1 Q2 Q3
Q4
- ------------------------------------------------------------------------------
- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
<C>
COMMON STOCK
NYSE: AS
High 4-7/8 4-1/8 6-3/8 6-3/16 6-1/4 7-1/16 6-9/16
5-1/4
Low 3-3/8 3-3/8 3-13/16 4-1/2 4-7/16 5-1/4 3
3-11/16
$2.10 CLASS A
PREFERRED STOCK
Quarterly dividend
per share: $.525
High 24 23-7/8 26 26-3/16 25-9/16 26-1/8 25-15/16
26
Low 21 21-1/4 23-1/2 24-1/4 23-1/2 21-5/8 22
22-1/2
$3.625 CLASS A
PREFERRED STOCK
Quarterly dividend
per share: $.90625
High 43-1/4 42-7/8 52-1/8 51-3/4 52 54-3/4 52-1/4
44-1/2
Low 39 41-1/4 42-7/8 46-3/8 45-1/4 49 41-11/16
39-1/8
$4.50 CLASS B
PREFERRED STOCK
Quarterly dividend
per share: $1.125
High 49-1/2 49 51-3/4 51-3/16 51-1/2 52-1/4 51-3/4
51-5/16
Low 46-1/4 47 48-9/16 49-5/8 49-1/2 50-3/8 49-3/16
47-5/8
- ------------------------------------------------------------------------------
- --------
</TABLE>
36 Armco 1998 Annual Report
<PAGE>
<TABLE>
Exhibit 21
ARMCO INC.
SUBSIDIARIES
<CAPTION>
State/Country of
Name Incorporation
---- ------------------
<S> <S>
AFSG Holdings, Inc. Delaware
Armco Europe Limited United Kingdom
Armco Financial Services Corporation Delaware
Armco Financial Services International, Inc. Ohio
Armco Financial Services International, Ltd. Delaware
Armco Funding Corporation Delaware
Armco Insurance Group Inc. Delaware
Armco Limited United Kingdom
Armco Management Corporation Delaware
Armco Pacific Financial Services Limited Vanuatu
Armco Pacific Limited Singapore
Compass Insurance Company Delaware
Douglas Dynamics, L.L.C. Delaware
FSA Services Corp. Delaware
Materials Insurance Company Cayman Islands
Northwestern National Insurance Company Wisconsin
of Milwaukee, Wisconsin
Talbico, Inc. New York
</TABLE>
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-24258, 33-24259, 33-60405, 33-54351, 33-54353, 33-54355, 33-65946, 333-
01687 and 333-67801 and in Post-Effective Amendment No. 1 to Registration
Statement Nos. 33-20852 and 33-20853 of Armco Inc., all on Form S-8, of our
report dated February 5, 1999 on the consolidated financial statements of
Armco Inc. and subsidiaries incorporated by reference in this Annual Report on
Form 10-K of Armco Inc. for the year ended December 31, 1998.
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
March 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE ARMCO INC. CONSOLIDATED BALANCE
SHEETS AND CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME 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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 263,800
<SECURITIES> 7,000
<RECEIVABLES> 161,300
<ALLOWANCES> 3,400
<INVENTORY> 250,700
<CURRENT-ASSETS> 692,800
<PP&E> 1,336,100
<DEPRECIATION> 714,300
<TOTAL-ASSETS> 1,893,800
<CURRENT-LIABILITIES> 417,100
<BONDS> 250,700
0
185,900
<COMMON> 1,100
<OTHER-SE> (8,300)
<TOTAL-LIABILITY-AND-EQUITY> 1,893,800
<SALES> 1,706,500
<TOTAL-REVENUES> 1,706,500
<CGS> 1,503,100
<TOTAL-COSTS> 1,503,100
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,900
<INCOME-PRETAX> 115,400
<INCOME-TAX> 5,800
<INCOME-CONTINUING> 109,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 237,500
<NET-INCOME> 347,100
<EPS-PRIMARY> 3.05
<EPS-DILUTED> 2.69
</TABLE>
Exhibit 99
DESCRIPTION OF CAPITAL STOCK
General
The authorized capital stock of Armco Inc. ("Armco" or the "Company")
consists of (i) 150,000,000 shares of Common Stock, par value $.01 per share
("Armco Common Stock"), of which, at February 26, 1999, 107,912,948 shares
were issued and outstanding; (ii) 6,697,231 shares of Class A Preferred Stock,
no par value ("Class A Preferred Stock"), issuable in series, of which, at
February 26, 1999, 1,697,231 shares of Armco $2.10 Cumulative Convertible
Preferred Stock ("$2.10 Preferred Stock") were issued and outstanding and
2,700,000 shares of $3.625 Cumulative Convertible Preferred Stock ("$3.625
Preferred Stock") were issued and outstanding; and of which 750,000 shares had
been designated Participating Preferred Stock (the "Participating Preferred
Stock"), none of which have been issued; and (iii) 5,000,000 shares of Class B
Preferred Stock, par value $1 per share ("Class B Preferred Stock"), issuable
in series, of which, at February 26, 1999, 999,900 shares of $4.50 Cumulative
Convertible Preferred Stock ("$4.50 Preferred Stock") were issued and
outstanding. The Class A Preferred Stock and the Class B Preferred Stock are
sometimes referred to herein as the "Armco Preferred Stock." No class of
authorized capital stock of Armco, including the Armco Common Stock, has
preemptive or other subscription rights.
Armco is authorized to issue the Armco Preferred Stock in one or more
series with such designations, powers, preferences and rights, and
qualifications, limitations or restrictions thereon, as are permitted under
Armco's Amended Articles of Incorporation and as shall be stated in the
resolutions providing for the issue thereof as may be adopted by the Armco
Board of Directors. The Class A Preferred Stock and the Class B Preferred
Stock rank equally, whether or not dividend rates, dividend payment dates,
redemption or liquidation prices per share of any series of Class A Preferred
Stock differ from those of the Class B Preferred Stock, and the holders of
Class A Preferred Stock and Class B Preferred Stock shall be entitled to the
receipt of dividends and of the amounts distributable upon liquidation,
dissolution or winding up, in proportion to their respective rates or
liquidation prices, without preference or priority one over the other. Shares
of Class A Preferred Stock that shall have been purchased, redeemed or
otherwise acquired by Armco, including shares that have been converted or
exchanged into another class or series of capital stock or other securities of
Armco, shall be deemed retired and shall not be reissued or resold. Shares of
Class B Preferred Stock purchased, redeemed or otherwise acquired by Armco
will be restored to the status of authorized but unissued shares of Class B
Preferred Stock, without designation as to series, and may thereafter be
issued by the Armco Board of Directors.
Each issued and outstanding share of Armco Preferred Stock is currently
convertible into shares of Common Stock -- each $2.10 Preferred Stock share
into 1.27 shares, each $4.50 Preferred Stock share into 2.22 shares and each
$3.625 Preferred Stock share into 6.78 shares; provided, that the conversion
rights of any shares of Armco Preferred Stock called for redemption shall
terminate at the close of business on the business day (or on the fifth day,
in the case of the $3.625 Preferred Stock) preceding the date fixed for
redemption, unless there shall be a default in payment of the redemption
price. The
-1-
<PAGE>
number of shares of Armco Common Stock into which such Armco Preferred Stock
shares are convertible is subject to adjustment under certain circumstances,
such as splits or combinations of the Armco Common Stock or dividends on the
Armco Common Stock paid in Armco Common Stock or non-cash assets. In
addition, under certain circumstances involving a Change of Control (as
defined in the terms of the $3.625 Preferred Stock), each issued and
outstanding share of the $3.625 Preferred Stock may be converted, at the
option of the holder, for a limited period into a number of shares of Armco
Common Stock determined by formula. These special conversion rights of the
$3.625 Preferred Stock may deter certain mergers, tender offers or other
takeover attempts.
On February 23, 1996, the Armco Board of Directors adopted a Stockholder
Rights Plan and declared a dividend distribution of one preferred stock
purchase right (a "Right") for each outstanding share of Armco Common Stock to
stockholders of record at the close of business on June 26, 1996. Each Right,
when exercisable, entitles the registered holder to purchase from Armco a unit
consisting of one two-hundredths of a share of Participating Preferred Stock.
Prior to the earlier of the Distribution Date and the Expiration Date (each as
hereinafter defined), one Right will be distributed with each share of Armco
Common Stock issued. See "Preferred Stock Purchase Rights." Armco's prior
existing Stockholder Rights Plan expired on June 26, 1996.
The documents defining the terms and provisions of the Armco Common
Stock, the Rights and the Armco Preferred Stock are available for inspection
upon request at the office of the Secretary of Armco. Such documents are also
on file with and available for inspection at the Securities and Exchange
Commission, 450 Fifth Street N.W., Washington, D.C. 20549, and the New York
Stock Exchange, Inc., 20 Broad Street, New York, New York 10005. The
statements set forth below are only summaries of such terms and provisions and
reference should be made to such documents and instruments for complete
statements of such terms and provisions.
Dividend Rights
Subject to the prior rights of the holders of Armco Preferred Stock to
receive dividends in cash at the rate provided for, and subject to any
restrictions or limitations contained in the express terms and provisions of
any shares of Armco Preferred Stock, dividends may be declared and paid upon
the Armco Common Stock, as and when determined by the Armco Board of
Directors, out of funds legally available therefor. The corporate statute of
Ohio, the Company's state of incorporation, provides that Ohio corporations
that recognize immediately the full amount of their transition obligation
under Statement of Financial Accounting Standards ("SFAS"), SFAS 106, as Armco
did, could increase the amount available for payment of dividends by adding to
the corporation's surplus at the time of the dividend the amount of the
difference between the reduction in the corporation's surplus that resulted
from the immediate recognition of the SFAS 106 transition obligation and the
amount of the transition obligation that would have been recognized at the
time of the dividend had the corporation elected to amortize its recognition
of such transition obligation.
The express terms and provisions of the $4.50 Preferred Stock provide
that the holders of shares of $4.50 Preferred Stock are entitled to receive
cumulative dividends at the annual rate of $4.50 per share before cash
dividends are paid on the Armco Common Stock. The express terms and
provisions of the $3.625 Preferred Stock provide that the holders of shares of
$3.625 Preferred Stock are entitled to receive cumulative dividends at the
annual rate of $3.625 per share before cash dividends are paid on the
-2-
<PAGE>
Armco Common Stock. The express terms and provisions of the $2.10 Preferred
Stock provide that the holders of shares of $2.10 Preferred Stock are entitled
to receive cumulative dividends at the annual rate of $2.10 per share before
cash dividends are paid on the Armco Common Stock. If Armco has failed to pay
any accrued cumulative dividends on any shares of Armco Preferred Stock or has
not paid or declared and provided for the dividends on outstanding shares of
Armco Preferred Stock for the then current dividend period, Armco may not
purchase or redeem any shares of Armco Common Stock. See "Dividend Payment
and Stock Purchase Restrictions".
Voting Rights
Except as otherwise required by law, the holders of Armco Common Stock,
as well as the holders of Class A Preferred Stock, are entitled at all times
to one vote for each share of such stock owned by them. Except as set forth
below, the holders of Class B Preferred Stock are not entitled to vote on any
matter.
If proper and timely notice is given by any shareholder before the time
fixed for holding a meeting for the election of directors that such
shareholder desires to cumulate his votes at such election, and if an
announcement of the giving of such notice is made upon the convening of the
meeting, each shareholder shall have the right to cumulate his votes and give
one candidate as many votes as equal the number of directors to be elected
multiplied by the number of votes to which he is entitled, or to distribute
them on the same principle among as many candidates as such shareholder sees
fit.
Shareholders who are entitled to vote in the election of directors
generally may nominate director candidates for election. Such shareholders
must deliver written notice thereof to the Secretary of Armco not later than
(i) with respect to an election to be held at any annual meeting of
shareholders, 90 days prior to the date that is one year from the date of the
immediately preceding annual meeting of shareholders, and (ii) with respect to
an election to be held at any special meeting of shareholders for the election
of directors, the close of business on the tenth day following the date on
which notice of such meeting is first given to shareholders. The provision
relating to director nomination may have the effect of delaying, deferring or
preventing a change in control of Armco.
In the event of a default in the payment of the equivalent of six
quarterly dividends payable to holders of the Class A Preferred Stock or the
Class B Preferred Stock, the respective holders of the outstanding shares of
the Class A Preferred Stock or the Class B Preferred Stock, as the case may
be, voting as a class, are entitled to elect two additional directors to serve
on the Armco Board of Directors until such default is cured. In addition, as
a prerequisite to the adoption of (i) any amendment of the Armco Amended
Articles of Incorporation (the "Armco Articles") materially altering any
existing provision of the Class A Preferred Stock or the Class B Preferred
Stock, such amendment must receive the affirmative approval of at least two-
thirds of the outstanding shares of the Class A Preferred Stock or the Class B
Preferred Stock, as the case may be, voting as a class, and (ii) any amendment
of the Armco Articles that increases the authorized number of shares of the
Class A Preferred Stock or the Class B Preferred Stock or creates any class of
shares that ranks equally with or prior to the Class A Preferred Stock or the
Class B Preferred Stock, such amendment must receive the affirmative approval
of a majority of the outstanding shares of the Class A Preferred Stock or the
Class B Preferred Stock, as the case may be, voting as a class.
-3-
<PAGE>
Liquidation Rights
In the event of any voluntary or involuntary liquidation of Armco, the
holders of shares of the $4.50 Preferred Stock will be entitled to receive
from the assets of Armco, prior to any payment to the holders of Armco Common
Stock, the sum of $50 per share, plus dividends accrued and unpaid to the date
of payment. In the event of any voluntary or involuntary liquidation of
Armco, the holders of shares of the $3.625 Preferred Stock will be entitled to
receive from the assets of Armco, prior to any payment to the holders of Armco
Common Stock, the sum of $50 per share, plus dividends accrued and unpaid to
the date of payment. In the event of the voluntary liquidation of Armco, the
holders of shares of the $2.10 Preferred Stock will be entitled to receive
from the assets of Armco, prior to any payment to the holders of Armco Common
Stock, the sum of $40 per share, plus dividends accrued and unpaid to the date
of payment. In the event of the involuntary liquidation of Armco, the holders
of shares of the $2.10 Preferred Stock similarly will be entitled to receive
from the assets of Armco the sum of $15 per share, plus dividends accrued and
unpaid to the date of payment, prior to any distribution to holders of Armco
Common Stock. After such payments to the holders of Armco Preferred Stock,
any remaining assets available for distribution to common shareholders will be
distributed to the holders of the Armco Common Stock pro rata in accordance
with their respective shares.
Redemptions
Shares of the $4.50 Preferred Stock may be redeemed at Armco's option for
a purchase price of $50 per share, plus dividends accrued and unpaid to the
date of redemption. Shares of the $3.625 Preferred Stock may be redeemed at
Armco's option for a purchase price of $51.45 per share and declining, at 12-
month intervals, to $50 on and after October 15, 2002, plus dividends accrued
and unpaid to the date of redemption. Shares of the $2.10 Preferred Stock may
be redeemed at Armco's option for a purchase price of $40 per share, plus
dividends accrued and unpaid to the date of redemption. Notice of any
redemption of shares of Armco Preferred Stock shall be given not less than
thirty days prior to the date fixed for redemption to the holders of record of
the shares to be redeemed by mail to the respective addresses of such holders
as the same shall appear on the stock books of Armco and, if the Armco Board
of Directors so determines, by publication of notice in the manner prescribed
by the Board of Directors.
Dividend Payment and Stock Purchase Restrictions
Armco has restrictive covenants under various loan agreements relating to
the payment of dividends on, or the purchase of, its capital stock. At
December 31, 1998, Armco and Armco Funding Corporation, a wholly owned
subsidiary, had two credit facilities with a group of banks, which together
provide for borrowings of up to $170 million on a revolving credit basis with
security provided by certain of Armco's receivables and inventories. Under a
receivables purchase agreement, Armco sells substantially all of its trade
receivables to Armco Funding Corporation. These receivables are used to
secure a $100 million receivables credit facility between Armco Funding
Corporation and the banks. Under an inventory credit facility, Armco has a
revolving credit agreement with a group of banks providing $70 million for
revolving credit loans secured by Armco's inventories. Both facilities expire
in 2001.
-4-
<PAGE>
The inventory credit agreement subjects Armco to certain restrictions and
covenants related to, among other things, minimum net worth, leverage ratio
and interest coverage ratio requirements. The inventory credit facility
permits the payment of dividends on the outstanding $4.50 Preferred Stock, the
outstanding $3.625 Preferred Stock and the outstanding $2.10 Preferred Stock
so long as Armco is not in default under the credit facility. Under the terms
of the inventory credit facility, Armco is permitted to pay cash dividends on
its common stock up to an amount not exceeding 30% of Net Income (as defined
therein) for the immediately preceding fiscal year so long as it is not in
default under the credit facility.
Under the terms of Ohio law, Armco is currently permitted to purchase
shares of its capital stock only to the extent that it has positive equity
surplus. At December 31, 1998, Armco had a negative equity surplus of $8.3
million.
Preferred Stock Purchase Rights
The Rights are issued under a Rights Agreement between Armco and Fifth
Third Bank. Each Right entitles the registered holder to purchase a unit
consisting of one two-hundredths of a share (a "Unit") of Participating
Preferred Stock at a purchase price of $20.00 per Unit, subject to adjustment.
The Rights are attached to all Armco Common Stock certificates
representing shares outstanding, and no separate Rights Certificates were
distributed. The Rights will separate from the Armco Common Stock and a
distribution date (the "Distribution Date") will occur upon the earliest of
(i) ten business days following a public announcement (the "Stock Acquisition
Date") that a person or group of affiliated or associated persons (a "Person")
has acquired, or obtained the right to acquire, beneficial ownership of 20% or
more of the outstanding shares of Armco Common Stock (an "Acquiring Person")
or (ii) ten business days following the commencement of a tender offer or
exchange offer that would, if consummated, result in a Person becoming an
Acquiring Person or (iii) ten business days after the Board of Directors of
the Company shall declare any Person to be an "Adverse Person," upon a
determination that such Person has or will become the beneficial owner of 10%
or more of the outstanding shares of Armco Common Stock (provided that any
such determination shall not be effective until such Person has become the
Beneficial Owner of 10% or more of the outstanding shares of Armco Common
Stock) and a determination by at least a majority of the "Continuing
Directors" (who generally are those directors who were directors of Armco on
February 23, 1996 or who subsequently became directors and whose elections or
nominations were approved by a majority of the continuing directors) including
consultation with such persons as such directors shall deem appropriate, that
(a) such beneficial ownership by such Person is intended to cause, is
reasonably likely to cause or will cause the Company to repurchase the Armco
Common Stock beneficially owned by such Person or to cause pressure on the
Company to take action or enter into a transaction or series of transactions
intended to provide such Person with short-term financial gain under
circumstances where the Board of Directors determines that the best long-term
interests of the Company and its stockholders would not be served by taking
such action or entering into such transactions or series of transactions at
the time or (b) such beneficial ownership is causing or is reasonably likely
to cause a material adverse impact (including, but not limited to, impairment)
of relationships with customers or impairment of the Company's ability to
maintain its competitive position) on the business or prospects of the Company
or (c) such beneficial ownership otherwise is determined to be not in the best
interests of the Company and its stockholders, employees, customers and
communities in which the Company and its subsidiaries do business.
-6-
<PAGE>
However, the Board of Directors may not declare a Person to be an Adverse
Person if, prior to the time that the Person acquired 10% or more of the
shares of Armco Common Stock then outstanding, such Person provided to the
Board of Directors in writing a statement of the Person's purpose and
intentions in connection with the proposed acquisition of Armco Common Stock,
together with any other information reasonably requested of the Person by the
Board of Directors, and the Board of Directors, based on such statement and
reasonable inquiry and investigation as it deems appropriate, determines to
notify and notifies such person in writing that it will not declare the Person
to be an Adverse Person; provided, however, that the Board of Directors may
expressly condition in any manner a determination not to declare a Person an
Adverse Person on such conditions as the Board of Directors may select,
including, without limitation, such Person's not acquiring more than a
specified amount of stock and/or on such Person's not taking actions
inconsistent with the purposes and intentions disclosed by such Person in the
statement provided to the Board of Directors. In the event that the Board of
Directors should at any time determine, upon reasonable inquiry and
investigation, that such Person has not met or complied with any conditions
specified by the Board of Directors, the Board of Directors may at any time
thereafter declare the Person to be an Adverse Person.
Until the Distribution Date (i) the Rights will be evidenced by the Armco
Common Stock certificates and will be transferred with and only with such
Armco Common Stock certificates, (ii) new Armco Common Stock certificates
issued after June 26, 1996 will contain a notation incorporating the Rights
Agreement by reference and (iii) the surrender for transfer of any
certificates for Armco Common Stock outstanding will also constitute the
transfer of the Rights associated with the Armco Common Stock represented by
such certificate.
The Rights are not exercisable until the Distribution Date and will
expire at the close of business on June 26, 2006 (the "Expiration Date"),
unless earlier redeemed by the Company as described below.
As soon as practicable after the Distribution Date, Rights Certificates
will be mailed to holders of record of the Armco Common Stock as of the close
of business on the Distribution Date and, thereafter, the separate Rights
Certificates alone will represent the Rights. Except for certain issuances in
connection with outstanding options and convertible securities and as
otherwise determined by the Board of Directors, only shares of Armco Common
Stock issued prior to the Distribution Date will be issued with Rights.
In the event that the Board of Directors determines that a Person is an
Adverse Person or, at any time following the Distribution Date, a Person
becomes the beneficial owner of 25% or more of the then-outstanding shares of
Armco Common Stock, each holder of a Right will thereafter have the right to
receive at the time specified in the Rights Agreement, (x) upon exercise and
payment of the exercise price, Armco Common Stock (or, in certain
circumstances, cash, property or other securities of Armco) having a value
equal to two times the exercise price of the Right or (y) at the discretion of
the Board of Directors, upon exercise and without payment of the exercise
price, Armco Common Stock (or, in certain circumstances, cash, property or
other securities of Armco) having a value equal to the difference between the
exercise price of the Right and the value of the consideration which would be
payable under clause (x). Notwithstanding the foregoing, following the
occurrence of any of the events set forth in this paragraph, all Rights that
are, or (under circumstances specified in the Rights Agreement) were,
beneficially owned by any Acquiring Person or Adverse Person will be null and
void. However, Rights are not exercisable following the occurrence of either
of the events set forth above until such time as the Rights are no longer
redeemable by Armco as set forth below.
-6-
<PAGE>
In the event that, at any time following the Stock Acquisition Date, (i)
Armco is acquired in a merger or other business combination transaction in
which the Company is not the surviving corporation (other than a merger which
follows an offer described above), or (ii) 50% or more of the Company's assets
or earning power is sold or transferred, each holder of a Right (except Rights
that previously have been voided) shall thereafter have the right to receive,
upon exercise, common stock of the acquiring company having a value equal to
two times the exercise price of the Right. The events set forth are
hereinafter referred to as the "Triggering Events."
The Purchase Price payable, and the number of Units of Preferred Stock or
other securities or property issuable, upon exercise of the Rights are subject
to adjustment from time to time to prevent dilution (i) in the event of a
stock dividend on, or a subdivision, combination or reclassification of, the
Preferred Stock, (ii) if holders of the Preferred Stock are granted certain
rights or warrants to subscribe for Preferred Stock or convertible securities
at less than the current market price of the Preferred Stock, or (iii) upon
the distribution to holders of the Preferred Stock of evidences of
indebtedness or assets (excluding regular quarterly cash dividends) or of
subscription rights or warrants (other than those referred to above).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. No fractional Units will be issued and, in lieu thereof, an adjustment
in cash will be made based on the market price of the Preferred Stock on the
last trading date prior to the date of exercise.
In general, the Company may redeem the Rights in whole, but not in part,
at a price of $0.0025 per Right, at any time until 10 business days following
the Stock Acquisition Date; provided, however, that with certain exceptions
the Company shall be so entitled to redeem the Rights only if the Board of
Directors then consists of a majority of Continuing Directors. Moreover,
redemption would not be permitted after 10 business days following the
effective date of any declaration by the Board of Directors that any Person is
an Adverse Person. After the redemption period has expired, the Company's
right of redemption may be reinstated if an Acquiring Person or Adverse Person
reduces his beneficial ownership to less than 10% of the outstanding shares of
Armco Common Stock in a transaction or series of transactions not involving
the Company and there are no other Acquiring Persons or Adverse Persons.
Immediately upon the action of the Board of Directors ordering redemption of
the Rights, the Rights will terminate and the only right of the holders of
Rights will be to receive the $0.0025 redemption price.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the
right to vote or to receive dividends. While the distribution of the Rights
will not be taxable to stockholders or to the Company, stockholders may,
depending upon the circumstances, recognize taxable income in the event that
the Rights become exercisable for stock (or other consideration) of the
Company or for common stock of the acquiring company as set forth above.
Other than those provisions relating to the principal economic terms of
the Rights, any of the provisions of the Rights Agreement may be amended by
the Board of Directors prior to the Distribution Date. After the Distribution
Date, the provisions of the Rights Agreement may be amended by the Board of
Directors in order to cure any ambiguity, to make changes that do not
adversely affect the interests of holders of Rights (excluding the interests
of any Acquiring Person or Adverse Person), or to shorten or lengthen any time
period under the Rights Agreement; provided, however, that no amendment to
adjust
-7-
<PAGE>
the time period governing redemption shall be made when the Rights are not
redeemable; and provided further, that any amendment to the redemption
provision shall be effective only if the Board of Directors consists of a
majority of Continuing Directors.
Participating Preferred Stock
The Participating Preferred Stock purchasable upon exercise of the Rights
will be non-redeemable and will rank in parity with all other series of Armco
Preferred Stock as to the payment of dividends and distribution of assets.
Each share of Participating Preferred Stock will be entitled to receive a
preferential quarterly dividend equal to the greater of (i) $75 or (ii),
subject to certain adjustments, 200 times all dividends or other
distributions, other than a dividend payable in shares of Armco Common Stock
or a subdivision of the outstanding shares of Armco Common Stock, declared on
the Armco Common Stock, since the last dividend payment date. In the event of
any liquidation of Armco, the holders of the Participating Preferred Stock
will receive a preferred liquidation payment of $7,000 per share, plus an
amount equal to accrued and unpaid dividends and distributions thereon, and,
if greater, will be entitled to receive an aggregate liquidation payment equal
to 200 times the payment made per share of Armco Common Stock, subject to
certain adjustments. Each share of Participating Preferred Stock will have
one vote. The Participating Preferred Stock is not convertible into Armco
Common Stock or any other security of Armco and is not redeemable. The
foregoing rights of the Participating Preferred Stock are protected against
dilution in the event additional shares of Armco Preferred Stock or other
capital stock are issued pursuant to a stock split, stock dividend or similar
recapitalization.
Miscellaneous
The Armco Common Stock has no conversion rights, and there are no
redemption or sinking fund provisions applicable thereto.
The Fifth Third Bank is transfer agent and registrar for the Armco Common
Stock, $4.50 Preferred Stock , $3.625 Preferred Stock and $2.10 Preferred
Stock.
The Armco Common Stock, $4.50 Preferred Stock, $3.625 Preferred Stock and
$2.10 Preferred Stock are traded on the New York Stock Exchange, the principal
market therefor. In addition, the Armco Common Stock is traded on the Midwest
Stock Exchange and other regional exchanges.
