1996
Second Quarter
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1996 Commission file number 1-164
------------- -----
ASARCO Incorporated
-------------------
(Exact name of registrant as specified in its charter)
New Jersey 13-4924440
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
180 Maiden Lane, New York, N.Y. 10038
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 212-510-2000
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
---- ----
As of July 31, 1996 there were outstanding 42,730,798 shares of Asarco Common
Stock, without par value.
<PAGE>
ASARCO Incorporated
and Subsidiaries
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I. Financial Information:
Item 1. Financial Statements (unaudited)
Consolidated Statement of Earnings
Three Months and Six Months Ended
June 30, 1996 and 1995 2
Consolidated Balance Sheet
June 30, 1996 and December 31, 1995 3
Consolidated Statement of Cash Flows
Three Months and Six Months Ended
June 30, 1996 and 1995 4
Notes to Consolidated Financial Statements 5-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10-15
Report of Independent Accountants 16
Part II. Other Information:
Item 1. Legal Proceedings 17
Signatures 18
Exhibit I - Independent Accountants' Awareness Letter
Exhibit 11- Statement re Computation of Earnings per Share
</TABLE>
- 1 -
<PAGE>
ASARCO Incorporated
and Subsidiaries
CONSOLIDATED STATEMENT OF EARNINGS
(unaudited)
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended
June 30, June 30,
1996 1995 1996 1995
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Sales of products and services $680,954 $787,464 $1,398,964 $1,578,471
Operating costs and expenses:
Cost of products and services 525,011 580,571 1,079,654 1,150,657
Selling, administrative and other 32,266 31,409 65,382 64,418
Depreciation and depletion 28,223 30,425 58,926 62,056
Research and exploration 7,093 7,656 13,996 12,766
------- ------- --------- ---------
Total operating costs and expenses 592,593 650,061 1,217,958 1,289,897
------- ------- --------- ---------
Operating income 88,361 137,403 181,006 288,574
Interest expense (20,414) (24,424) (42,514) (43,327)
Other income 6,665 5,643 18,269 13,884
Gain on sale of shares of MIM Holdings Ltd. 60,075 - 60,075 -
Gain on sale of interest in Silver Bell - - 11,083 -
-------- -------- --------- ---------
Earnings before taxes on income and minority interests 134,687 118,622 227,919 259,131
Taxes on income 40,058 37,277 72,987 80,705
-------- -------- --------- ---------
Earnings before minority interests 94,629 81,345 154,932 178,426
Minority interests in net earnings of consolidated
subsidiaries (22,226) (24,935) (46,844) (56,304)
-------- -------- --------- ---------
Net earnings $ 72,403 $ 56,410 $ 108,088 $ 122,122
======== ======== ========= =========
Net earnings (a) $ 1.70 $ 1.34 $ 2.53 $ 2.90
======== ======== ========= =========
Cash dividends $ 0.20 $ 0.20 $ 0.40 $ 0.30
Weighted average number of shares outstanding
42,693 42,212 42,655 42,183
</TABLE>
(a) The effect on the calculation of net earnings per common share of the
Company's Common Stock equivalents (shares under option) was
insignificant.
The accompanying notes are an integral part of these financial statements.
- 2 -
<PAGE>
ASARCO Incorporated
and Subsidiaries
CONSOLIDATED BALANCE SHEET
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 257,621 $ 238,400
Marketable securities - 42,453
Accounts and notes receivable, net 470,399 514,368
Inventories 378,182 360,861
Other assets 58,094 60,480
--------- ---------
Total current assets 1,164,296 1,216,562
Investments:
Cost and available-for-sale 399,584 822,192
Equity 60,224 61,758
Property 4,313,708 4,209,177
Accumulated depreciation and depletion (2,142,450) (2,098,911)
Intangible and other assets 129,099 115,945
---------- ----------
Total Assets $3,924,461 $4,326,723
========== ==========
LIABILITIES
Current liabilities:
Bank loans $ 773 $ 29,451
Current portion of long-term debt 42,273 29,826
Accounts payable 337,003 329,977
Salaries and wages 32,826 33,815
Taxes on income 58,102 103,282
Reserve for closed plant and environmental matters 46,120 53,042
Other current liabilities 42,906 72,254
---------- ----------
Total current liabilities 560,003 651,647
---------- ----------
Long-term debt 805,444 1,062,588
Deferred income taxes 174,812 211,270
Reserve for closed plant and environmental matters 48,884 62,484
Postretirement benefit obligations other than pensions 97,761 95,125
Other liabilities and reserves 65,778 72,225
---------- ----------
Total non-current liabilities 1,192,679 1,503,692
---------- ----------
MINORITY INTERESTS 475,240 463,900
---------- ----------
COMMON STOCKHOLDERS' EQUITY
Common stock (a) 608,445 599,777
Unrealized gain on securities reported at fair value 30,230 131,600
Retained earnings 1,057,864 976,107
---------- ----------
Total Common Stockholders' Equity 1,696,539 1,707,484
---------- ----------
Total Liabilities, Minority Interests and Common Stockholders' Equity $3,924,461 $4,326,723
========== ==========
(a) Common shares: authorized 80,000; outstanding: 42,717 42,571
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 3 -
<PAGE>
ASARCO Incorporated
and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended
June 30, June 30,
1996 1995 1996 1995
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $72,403 $56,410 $108,088 $122,122
Adjustments to reconcile net earnings to net cash provided
from operating activities:
Depreciation and depletion 28,223 30,425 58,926 62,056
Provision (benefit) deferred income taxes 13,777 10,112 19,656 22,163
Treasury stock used for employee benefits 1,388 1,223 3,441 2,831
Undistributed equity (earnings) losses (308) 84 586 406
Gain on sale of interest in Silver Bell - - (11,083) -
Gain on sale of investment in MIM Holdings Ltd. (60,075) - (60,075) -
Net gain on sale of investments and property (12) (1,301) (90) (1,753)
Decrease in reserve for closed plant and environmental matters (9,608) (8,039) (20,522) (30,574)
Minority interests 22,227 24,935 46,844 56,304
Cash provided from (used for) operating assets and liabilities, net
of the consolidation of SPCC:
Accounts and notes receivable 2,065 33,714 42,858 36,407
Inventories (13,200) (31,784) (18,632) (16,306)
Accounts payable and accrued liabilities 25,419 5,124 (35,103) (31,674)
Other operating assets and liabilities (10,536) (570) (45,486) (9,868)
Foreign currency transaction (gains) losses (1,158) 977 (2,459) (1,279)
------- ------- ------- -------
Net cash provided from operating activities 70,605 121,310 86,949 210,835
------- ------- ------- -------
INVESTING ACTIVITIES
Capital expenditures (70,449) (110,035) (122,159) (186,382)
Sale of investments and property 1,121 1,271 1,813 2,819
Sale of available-for-sale securities 4,478 2,914 15,920 9,144
Sale of interest in Silver Bell - - 15,000 -
Sale of investment in MIM Holdings Ltd. 326,218 - 326,218 -
Proceeds from held-to-maturity investments 2 19,223 42,455 59,746
Purchase of available-for-sale securities (4,776) (3,644) (15,978) (10,352)
Purchase of held-to-maturity investments - - (2) (33,676)
Purchase of investments (3,294) (938) (4,968) (2,334)
Release of restricted cash - 58,954 - 58,273
Acquisition of additional interest in SPCC - (116,444) - (116,444)
Consolidation of the opening cash balance of SPCC - - - 93,348
------- ------- ------- -------
Net cash provided from (used for) investing activities 253,300 (148,699) 258,299 (125,858)
------- ------- ------- -------
FINANCING ACTIVITIES
Debt incurred 33 154,733 47,352 164,723
Debt retired (313,988) (12,277) (323,611) (29,167)
Net treasury stock transactions 451 471 651 235
Distributions to minority interests (11,132) (2,771) (36,734) (15,562)
Dividends paid to common stockholders (8,540) (8,443) (17,065) (12,659)
------- ------- ------- -------
Net cash provided from (used for) financing activities (333,176) 131,713 (329,407) 107,570
------- ------- ------- -------
Effect of exchange rate changes on cash 1,483 (480) 3,380 (345)
------- ------- ------- -------
Increase (decrease) in cash and cash equivalents (7,788) 103,844 19,221 192,202
Cash and cash equivalents at beginning of period 265,409 106,679 238,400 18,321
------- ------- ------- -------
Cash and cash equivalents at end of period $257,621 $210,523 $257,621 $210,523
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 4 -
<PAGE>
ASARCO Incorporated
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A. In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the Company's financial position
as of June 30, 1996 and the results of operations and cash flows for the
three months and six months ended June 30, 1996 and 1995. Certain
reclassifications have been made in the financial statements from amounts
previously reported. This financial data has been subjected to a limited
review by Coopers & Lybrand L.L.P., the Company's independent accountants.
The results of operations for the three month and six month periods are not
necessarily indicative of the results to be expected for the full year. The
accompanying consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's 1995 annual report on Form 10-K.
B. In May the Company sold its 15.0% interest in MIM Holdings Limited for
$326.2 million, net of expenses, resulting in a $60.1 million pre-tax and
an after-tax gain of $39.0 million. The Company's first quarter 1996
results included an $11.1 million pre-tax gain ($7.2 million after-tax) on
the sale of a 25% interest in its Silver Bell project to Mitsui & Co., Ltd.
C. Inventories were as follows:
(in millions)
<TABLE>
<CAPTION>
June 30, Dec. 31,
1996 1995
<S> <C> <C>
Inventories of smelters and refineries at lower of LIFO cost or market $ 18.1 $ 12.9
Provisional cost of metals received from suppliers for which prices have
not yet been fixed 37.7 34.0
Mine inventories at lower of FIFO cost or market 114.3 111.1
Metal inventory at lower of average cost or market 36.9 35.2
Materials and supplies at lower of average cost or market 145.6 139.1
Other 25.6 28.6
------ ------
Total $378.2 $360.9
====== ======
</TABLE>
At June 30, 1996, replacement cost exceeded inventories carried at LIFO
cost by approximately $117.7 million (December 31, 1995 - $136.8 million).
D. Metal Hedging and Trading Activities:
Hedging: Depending on the market fundamentals of a metal and other
conditions, the Company may purchase put options or synthetic put options
to reduce or eliminate the risk of metal price declines on its anticipated
future production. Put options purchased by the Company establish a minimum
sales price for the production covered by such put options and permit the
Company to participate in price increases above the strike price. Synthetic
put options are established by entering into a forward sale and purchasing
a call option for the same quantity of the relevant metal for the time
period relating to such forward sale. Gains or losses, net of unamortized
acquisition costs, are recognized in the period in which the underlying
hedged production is sold.
- 5 -
<PAGE>
During the second quarter Asarco sold copper put options with a average
strike price of $1.00 per pound covering 9% of its remaining 1996 domestic
copper production and 1% of estimated 1997 domestic copper production. In
addition, the Company closed out the forward sale component of synthetic
put options with an average strike price of $1.04 per pound covering 19,842
tons or approximately 6% of estimated 1997 production. SPCC sold copper put
options with an average strike price of $0.95 per pound covering 11% and
1%, respectively of its estimated remaining 1996 and 1997 copper
production.
The tables below detail the option sales concluded in the second quarter
and the options remaining at June 30, 1996:
<TABLE>
<CAPTION>
Second Quarter Option Sales
(dollars in millions)
Pre-tax
Unamortized Gain to be Period to be
Tons Proceeds Cost Recognized Recognized
<S> <C> <C> <C> <C> <C>
ASARCO 39,188 $15.3 $ 2.8 $12.5 7/96 - 12/97
SPCC 17,913 4.8 0.5 4.3 7/96 - 3/97
------ ----- ----- -----
Consolidated 57,101 $20.1 $ 3.3 $16.8
Asarco beneficial interest 48,564 $17.8 $ 3.1 $14.8
====== ===== ===== =====
</TABLE>
In addition to the above, SPCC recognized proceeds of $0.8 million on
options covering 3,583 tons of copper which were sold in the second quarter
of 1996. The cost of these options was $.1 million. Asarco's beneficial
interest in the sales was a pre-tax gain of $0.4 million.
<TABLE>
<CAPTION>
Copper Put Options held at June 30,1996
(dollars in millions, except per lb. amounts)
Percent of
Option Strike Price Unamortized Estimated
Tons Period Per lb. Cost Production
<S> <C> <C> <C> <C> <C>
ASARCO 86,559 7/96 - 12/96 $ 1.01 $ 3.8 49%
37,368 1/97 - 6/97 $ 1.00 1.8 22%
-----
$ 5.6
SPCC 58,366 7/96 - 12/96 $ 0.95 $ 1.6 37%
35,384 1/97 - 3/97 $ 0.95 0.7 43%
-----
$ 2.3
</TABLE>
In addition to the sales of options described above, the Company sold
copper put options in July 1996. Details for the total of the July and the
second quarter option sales are contained in the table below:
<TABLE>
<CAPTION>
July and Second Quarter Option Sales
(dollars in millions)
Pre-tax
Gain to be Period to be
Tons Proceeds Cost Recognized Recognized
<S> <C> <C> <C> <C> <C>
ASARCO 81,600 $28.5 $ 4.8 $23.7 7/96 - 12/97
SPCC 44,533 11.3 1.1 10.2 7/96 - 3/97
------- ----- ----- -----
Consolidated 126,133 $39.8 $ 5.9 $33.9
Asarco beneficial interest 104,910 $34.4 $ 5.4 $29.1
======= ===== ===== =====
</TABLE>
- 6 -
<PAGE>
The Company's beneficial interest in the total proceeds through July 31,
1996 as a result of the copper option sales was $34.8 million, including
the Company's proportionate interest in the proceeds realized by SPCC. This
represents proceeds of 16.3 cents per pound over the future prevailing
price when the underlying production is sold or a pre-tax gain of 13.9
cents per pound net of the unamortized costs of the puts sold.
Trading: As part of its price protection program, the Company may also use
synthetic put options which consist of a forward sale and a call. Each
component of a synthetic put option may be purchased or sold at different
times. In those cases where the forward sale component has not been entered
into or has been sold, call options are accounted for as trading activities
and the carrying values of such call options are marked to market and any
related adjustments are recorded in earnings.
As of June 30, 1996, the Company held call options covering 30,754 tons of
copper exercisable in 1997 at a strike price of $1.03. The carrying value
of the call options was $2.1 million.
Gains and (Losses): The pre-tax earnings (loss) of the Company's metal
hedge and trading activities which predominately consist of the
amortization of the costs of put options, net of transaction costs, were as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(in thousands) June 30, June 30,
<S> <C> <C> <C> <C>
Metal 1996 1995 1996 1995
Copper $ (448) $(1,011) $(1,752) $(1,746)
Zinc (12) (10) (12) (49)
Lead 163 (90) 163 (105)
Silver - 251 - 215
------- -------- ------- -------
Total Gain (Loss) $ (297) $ (860) $(1,601) $(1,685)
</TABLE>
E. Supplemental disclosures of cash flow information:
(in millions)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
<S> <C> <C> <C> <C>
1996 1995 1996 1995
Cash paid for:
Interest (net of amounts capitalized) $24.0 $20.9 $43.5 $38.7
Income taxes (net of refunds) 31.8 16.8 97.0 26.3
</TABLE>
F. Contingencies and Litigation:
The Company is a defendant in lawsuits in Arizona brought by Indian tribes
and some other Arizona water users contesting the right of the Company and
numerous other individuals and entities to use water and, in some cases,
seeking damages for water usage and contamination of ground water. The
lawsuits could potentially affect the Company's use of water at its Ray
Complex, Mission Complex and other Arizona operations. The Company and
certain subsidiaries are defendants in sixteen class and non-class lawsuits
in Texas seeking substantial compensatory and punitive damages for personal
injury and contamination of property allegedly caused by present and former
operations, primarily in Texas, and product sales of the Company and its
subsidiaries.
- 7 -
<PAGE>
The Company and two subsidiaries, at June 30, 1996, are defendants in 1,061
lawsuits brought by 4,507 primary and 1,848 secondary plaintiffs seeking
substantial actual and punitive damages for personal injury or death
allegedly caused by exposure to asbestos. One subsidiary is a defendant in
one lawsuit seeking damages for removal or containment of
asbestos-containing products in structures. In addition, the Company and
certain subsidiaries are defendants in product liability lawsuits involving
various other products, including metals. A subsidiary of SPCC, the
Company, other present and former corporate shareholders of the subsidiary
of SPCC and certain other companies are defendants in a lawsuit in federal
district court in Corpus Christi, Texas brought in September 1995 by 698
Peruvian plaintiffs seeking damages for personal injury and property damage
allegedly caused by the operations of SPCC's subsidiary in Peru. Plaintiffs
have filed a notice of appeal from the district court order dismissing the
complaint and from an earlier order of that court denying plaintiffs'
motion to remand the case to state court.
On March 22, 1996 the United States government filed an action in United
States District Court in Boise, Idaho against the Company and three other
mining companies under CERCLA and the federal Clean Water Act for alleged
natural resource damages to the Coeur d'Alene River Basin in Idaho. The
government contends that the defendants are liable for damages to natural
resources in a 1,500 square mile area caused by mining and related
activities that they and others undertook over approximately the period
between the mid-1800s and the mid-1960s. The action also seeks a
declaration that defendants are liable for remediation of the area. The
Company believes, and has been advised by its outside legal counsel, that
it has strong legal defenses to the lawsuit.
The Company and certain of its subsidiaries have received notices from the
United States Environmental Protection Agency (EPA) that they and in most
cases numerous other parties are potentially responsible to remediate
alleged hazardous substance releases at certain sites under the
Comprehensive Environmental Response, Compensation and Liability Act of
1980 (CERCLA or Superfund). In addition, the Company and certain of its
subsidiaries are defendants in lawsuits brought under CERCLA or state laws
which seek substantial damages and remediation. Remedial action is being
undertaken by the Company at some of the sites.
In connection with the sites referred to above, as well as at other closed
plants and sites where the Company is working with the EPA and state
agencies to resolve environmental issues, the Company has made reasonable
estimates, where possible, of the extent and cost of necessary remedial
action and damages. As a result of feasibility studies, public hearings,
engineering studies and discussions with the EPA and similar state
agencies, for sites where it is probable that liability has been incurred
and the amount of cost could be reasonably estimated, the Company recorded
charges to earnings in the fourth quarter of 1995 of $59.2 million and in
1994 of $51.2 million. Reserves for closed plants and environmental matters
total $95.0 million at June 30, 1996. The Company anticipates that
expenditures relating to these reserves will be made over the next several
years. Net cash expenditures charged to these reserves for the three months
ended June 30, 1996 and 1995 were $10.7 million and $9.4 million,
respectively and for the six months ended June 30, 1996 and 1995 were $23.9
and $32.3 million respectively.
- 8 -
<PAGE>
Future environmental related expenditures cannot be reliably determined in
many circumstances due to the early stages of investigation, the
uncertainties relating to specific remediation methods and costs, the
possible participation of other potentially responsible parties and
changing environmental laws and interpretations. It is the opinion of
management that the outcome of the legal proceedings and environmental
contingencies mentioned, and other miscellaneous litigation and proceedings
now pending, will not materially adversely affect the financial position of
Asarco and its consolidated subsidiaries. However, it is possible that
litigation and environmental contingencies could have a material effect on
quarterly or annual operating results, when they are resolved in future
periods. This opinion of management is based on considerations including
experience related to previous court judgments and settlements and
remediation costs and terms. The financial viability of other potentially
responsible parties has been considered when relevant and no credit has
been assumed for any potential insurance recoveries when the availability
of insurance has not been determined.
G. The Financial Accounting Standards Board issued SFAS No. 123 "Accounting
for Stock-Based Compensation" in October 1995. In accordance with this
pronouncement, the Company has a choice of adopting the accounting
provisions of SFAS No. 123 or continuing its current accounting with
additional disclosure required. The Company has elected the disclosure only
alternative and will continue its current accounting.
- 9 -
<PAGE>
Part I Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company reported net earnings of $72.4 million, or $1.70 per share, for the
second quarter ended June 30, 1996, compared with net earnings of $56.4 million,
or $1.34 per share, for the second quarter of 1995. Results for the second
quarter include an after-tax gain of $39.0 million, or $0.92 per share, on the
sale of the Company's remaining 15% interest in M.I.M. Holdings Limited (MIM).
For the six month period ended June 30, 1996, the Company reported net income of
$108.1 million, or $2.53 per share, compared with net income of $122.1 million
or $2.90 per share for the comparable 1995 period. The Company's earnings in the
second quarter of 1996 and six month period ended June 30, 1996 were
significantly affected by a decline in copper prices when compared with the same
periods in 1995.
The decline in the price of copper over the comparable periods of 1995 reduced
the Company's net earnings by an estimated $37.0 million for the second quarter
of 1996 and $77.0 million for the six month period ended June 30, 1996. Final
pricing for these sales will occur in the third quarter of this year. Results
for the second quarter of 1996 also included the reversal of income taxes
accrued in prior years of $5.0 million.
In May, the Company sold its 15.0% interest in MIM for $326.2 million, resulting
in a pre-tax gain of $60.1 million and an after-tax gain of $39.0 million. The
sale of the Company's interest in MIM provided significant cash to reduce debt
and will allow the Company to focus its attention on investments which it
operates and manages directly. The sale allowed the Company to take a major step
toward achieving its long-term goal of reducing its debt to 25% of total
capitalization. At June 30, 1996 the Company's debt as a percentage of total
capitalization was 28.1%, compared with 34.1% at December 31, 1995.
The Company's beneficial interest in mined copper production in the second
quarter of 1996 was 257.8 million pounds, an increase over the same period in
1995 of 19.4%. The increase was attributable to higher production at the
Company's Mission and Ray mines and at SPCC which is 54% owned by the Company.
For the first six months of 1996, beneficial mined copper production increased
over 20% from the first half of 1995 to 509.2 million pounds. Production at the
Company's Ray mine increased 17% mainly due to full operations at the Hayden
concentrator which had been curtailed during the accelerated mine development
program undertaken at Ray from mid 1994 to mid 1995. The Company's beneficial
interest in production at SPCC was up 43% for the first six months of 1996 as
compared to the same period in 1995 reflecting the Company's increased ownership
of SPCC as of April 1995 as well as a full six months of production from SPCC's
new solvent extraction/electrowinning (SX/EW) facility which began production in
the fourth quarter of 1995. SPCC's SX/EW production was 22.8 million pounds in
the second quarter and 45.4 million pounds for the six months ending June 30,
1996.
In the second quarter of 1996 the Company completed a union labor agreement
covering 965 employees at its Ray copper mine. The agreement provides for annual
increases in wages and benefits of 2.8% over the six year term and continues a
joint Labor-Management Participation Process which has developed production
efficiencies and cost savings at Ray.
- 10 -
<PAGE>
In July, the Company announced the formation of a joint venture with Minto
Exploration Ltd. of Canada to develop the Minto Mine in the Yukon Territory,
Canada. The Company will have an 87% interest and will manage the project. The
Minto Mine is expected to produce an annual average of 27 million pounds of
copper, 10,000 ounces of gold and 160,000 ounces of silver contained in
concentrate. The initial life of the mine is expected to be 13 years. Start up
of the project is expected early in 1998.
Sales: Sales in the second quarter of 1996 were $681.0 million, compared with
$787.5 million in the second quarter of 1995. Sales for the six month period
ended June 30, 1996 were $1,399.0 million, compared with $1,578.5 million for
the comparable 1995 period. The decline in sales for the second quarter and for
the six months ending June 30, 1996 over the same periods in 1995 were
principally a result of lower copper prices. Metal sales volumes and prices for
the quarter and six month periods were as follows:
Metal Sales Volume:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Copper (000s pounds)
Asarco 247,800 257,800 512,600 515,400
SPCC 161,800 151,700 330,800 278,900
------- ------- ------- -------
Consolidated 409,600 409,500 843,400 794,300
Asarco Beneficial Interest (2) 332,400 336,800 685,600 649,400
Lead (000s pounds)
Asarco 70,000 98,800 152,600 198,200
Silver (000s ounces)
Asarco 9,669 9,255 17,621 18,831
SPCC 726 931 1,545 1,598
------- ------- ------- -------
Consolidated 10,395 10,186 19,166 20,429
Asarco Beneficial Interest (2) 10,049 9,740 18,429 19,604
Zinc (000s pounds) (1)
Asarco 57,900 70,300 115,800 127,500
Molybdenum (000s pounds) (1)
Asarco 1,529 1,229 3,071 2,560
SPCC 1,937 1,526 3,804 3,418
------- ------- ------- -------
Consolidated 3,466 2,755 6,875 5,978
Asarco Beneficial Interest (2) 2,542 2,024 5,061 4,172
</TABLE>
(1) The Company's zinc and molybdenum production is sold in the
form of concentrates. Volume represents tons of zinc and
molybdenum metal contained in concentrate.
(2) Prior to April 1995, the minority interest in SPCC represented
by Labor Shares in its Peruvian Branch resulted in the Company
having a beneficial interest in SPCC of 43.2%. Effective April
5, 1995, the Company's equity ownership of SPCC increased to
63% and its beneficial interest increased to 52.1%. Effective
December 31, 1995, the Company's equity ownership of SPCC was
54% and its beneficial interest was 52.3% reflecting the
effects of SPCC's completed labor share exchange offer.
- 11 -
<PAGE>
Average Metal Prices:
Prices for the Company's metals are established principally on the New York
Commodity Exchange ("COMEX") or the London Metal Exchange ("LME").
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Copper (per pound - COMEX) $1.16 $ 1.33 $1.17 $ 1.35
Copper (per pound - LME) 1.12 1.31 1.14 1.32
Lead (per pound - LME) .37 .27 .36 .28
Silver (per ounce - Handy & Harman) 5.30 5.48 5.42 5.09
Silver (per ounce - COMEX) 5.29 5.47 5.42 5.08
Zinc (per pound - LME) .47 .47 .47 .48
Molybdenum (per pound - Metals Week Dealer Oxide) 3.15 7.21 3.56 10.49
</TABLE>
Metal Hedging and Trading Activities:
Hedging: Depending on the market fundamentals of a metal and other conditions,
the Company may purchase put options or synthetic put options to reduce or
eliminate the risk of metal price declines on its anticipated future production.
Put options purchased by the Company establish a minimum sales price for the
production covered by such put options and permit the Company to participate in
price increases above the strike price. Synthetic put options are established by
entering into a forward sale and purchasing a call option for the same quantity
of the relevant metal for the time period relating to such forward sale. Gains
or losses, net of unamortized acquisition costs, are recognized in the period in
which the underlying hedged production is sold.
During the second quarter Asarco sold copper put options with a average strike
price of $1.00 per pound covering 9% of its estimated remaining 1996 domestic
copper production and 1% of estimated 1997 domestic copper production. In
addition, the Company closed out the forward sale component of synthetic put
options with an average strike price of $1.04 per pound covering 19,842 tons or
approximately 6% of estimated 1997 production. SPCC sold copper put options with
an average strike price of $0.95 per pound covering 11% and 1%, respectively of
its estimated remaining 1996 and 1997 copper production.
The tables below detail the option sales concluded in the second quarter and the
options remaining at June 30, 1996:
<TABLE>
<CAPTION>
Second Quarter Option Sales
(dollars in millions)
Pre-tax
Unamortized Gain to be Period to be
Tons Proceeds Cost Recognized Recognized
<S> <C> <C> <C> <C> <C>
ASARCO 39,188 $15.3 $ 2.8 $12.5 7/96 - 12/97
SPCC 17,913 4.8 0.5 4.3 7/96 - 3/97
------ ----- ----- -----
Consolidated 57,101 $20.1 $ 3.3 $16.8
Asarco beneficial interest 48,564 $17.8 $ 3.1 $14.8
====== ===== ===== =====
</TABLE>
In addition to the above, SPCC recognized proceeds of $0.8 million on options
covering 3,583 tons of copper which were sold in the second quarter of 1996. The
cost of these options was $.1 million. Asarco's beneficial interest in the sales
was a pre-tax gain of $0.4 million.
- 12 -
<PAGE>
<TABLE>
<CAPTION>
Copper Put Options held at June 30,1996
(dollars in millions, except per lb. amounts)
Percent of
Option Strike Price Unamortized Estimated
Tons Period Per lb. Cost Production
<S> <C> <C> <C> <C> <C>
ASARCO 86,559 7/96 - 12/96 $ 1.01 $ 3.8 49%
37,368 1/97 - 6/97 $ 1.00 1.8 22%
-----
$ 5.6
SPCC 58,366 7/96 - 12/96 $ 0.95 $ 1.6 37%
35,384 1/97 - 3/97 $ 0.95 0.7 43%
-----
$ 2.3
</TABLE>
In addition to the sales of options described above, the Company sold copper put
options in July 1996. Details for the total of the July and the second quarter
option sales are contained in the table below:
<TABLE>
<CAPTION>
July and Second Quarter Option Sales
(dollars in millions)
Pre-tax
Gain to be Period to be
Tons Proceeds Cost Recognized Recognized
<S> <C> <C> <C> <C> <C>
ASARCO 81,600 $28.5 $ 4.8 $23.7 7/96 - 12/97
SPCC 44,533 11.3 1.1 10.2 7/96 - 3/97
------- ----- ----- -----
Consolidated 126,133 $39.8 $ 5.9 $33.9
Asarco beneficial interest 104,910 $34.4 $ 5.4 $29.1
======= ===== ===== =====
</TABLE>
The Company's beneficial interest in the total proceeds through July 31, 1996 as
a result of the copper option sales was $34.8 million, including the Company's
proportionate interest in the proceeds realized by SPCC. This represents
proceeds of 16.3 cents per pound over the future prevailing price when the
underlying production is sold or a pre-tax gain of 13.9 cents per pound net of
the unamortized costs of the puts sold.
Trading: As part of its price protection program, the Company may also use
synthetic put options which consist of a forward sale and a call. Each component
of a synthetic put option may be purchased or sold at different times. In those
cases where the forward sale component has not been entered into or has been
sold, call options are accounted for as trading activities and the carrying
values of such call options are marked to market and any related adjustments are
recorded in earnings.
As of June 30, 1996, the Company held call options covering 30,754 tons of
copper exercisable in 1997 at a strike price of $1.03. The carrying value of the
call options was $2.1 million.
- 13 -
<PAGE>
Gains and (Losses): The pre-tax earnings (loss) of the Company's metal hedge and
trading activities which predominately consist of the amortization of the costs
of put options, net of transaction costs, were as follows:
<TABLE>
<CAPTION>
(in thousands) Three Months Ended Six Months Ended
June 30, June 30,
Metal 1996 1995 1996 1995
<S> <C> <C> <C> <C>
Copper $ (448) $(1,011) $(1,752) $(1,746)
Zinc (12) (10) (12) (49)
Lead 163 (90) 163 (105)
Silver - 251 - 215
------ ------- ------- -------
Total Gain (Loss) $ (297) $ (860) $(1,601) $(1,685)
====== ======= ======= =======
</TABLE>
Cost of Products & Services: Cost of products and services were $525.0 million
in the second quarter of 1996, compared with $580.6 million in the second
quarter of 1995. The decrease in costs reflected the lower price and volume
effect on costs of outside copper purchases. The Company purchased 11,600 tons
of refined copper to meet customer commitments in the second quarter of 1996
compared to 17,400 tons in the second quarter of 1995.
Cost of products and services for the six month period ended June 30, 1996 were
$1,079.7 million, compared with $1,150.7 million for the comparable 1995 period.
The decrease in costs reflected the lower price and volume effect on costs of
outside copper purchases. The Company purchased 28,200 tons of refined copper to
meet customer commitments for the six months in 1996 compared to 39,300 tons for
the six months in 1995.
Nonoperating Items: Interest expense was $20.4 million in the second quarter of
1996, and $42.5 million for the six month period ended June 30, 1996, compared
with $24.4 million and $43.3 million for the respective periods in 1995. The
decrease primarily reflected lower borrowings resulting from the use of proceeds
from the sale of the Company's interest in MIM to reduce debt. Other income
reflects higher interest income on higher cash balances at SPCC and dividend
income.
Cash Flows:
Second Quarter - Net cash provided from operating activities was $70.6 million
in the second quarter of 1996, compared with $121.3 million in the second
quarter of 1995. The decrease is primarily a result of lower operating income in
1996. Net cash provided from investing activities was $253.3 million in the
second quarter of 1996, compared with cash used of $148.7 million in the second
quarter of 1995.
Investing activities for the second quarter of 1996 included the cash proceeds
from the sale of the Company's 15% interest in MIM. The second quarter of 1995
investing activities included the purchase of an additional 10.7% interest in
SPCC and the release of cash previously restricted under a commitment to fund
certain capital projects. Lower capital spending in 1996 as compared to 1995
reflected the completion of the SPCC SX/EW facility in the fourth quarter of
1995.
Cash used for financing activities in the second quarter of 1996 was $333.2
million as compared with cash provided from financing activities in 1995 of
$131.7 million and reflected the use of proceeds from the sale of MIM stock in
the second quarter of 1996 to repay a portion of the Company's revolving credit
debt. Financing activities in the second quarter of 1995 included proceeds from
the sale of $150 million of fixed rate 8.5% debentures.
Six months - Net cash provided from operating activities was $86.9 million for
the six month period ended June 30, 1996, compared with $210.8 million in the
corresponding prior period. The decrease reflects lower operating income and the
payment of income taxes and employee participation payments accrued in 1995 and
paid in the first quarter of 1996.
- 14 -
<PAGE>
Cash provided from investing activities was $258.3 million for the six month
period ended June 30, 1996, compared with cash used of $125.9 million in the
corresponding prior period. Investing activities for the six month period ending
June 30, 1996 included cash proceeds from the sale of MIM common shares and a
25% interest in the Company's Silver Bell project and the expiration of held to
maturity investments. Cash used for investing activities for the six month
period ending June 30, 1995 reflected the effect of the consolidation of SPCC
and the acquisition of an additional 10.7% interest in SPCC. The decrease in
capital spending in 1996 from 1995 reflected the completion of the SPCC SX/EW
facility in the fourth quarter of 1995.
For the six months ended June 30, 1996 cash used for financing activities was
$329.4 million compared with cash provided of $107.6 million in the
corresponding prior period. Use of proceeds from the sale of MIM stock was used
to repay a portion of the Company's revolving credit debt in 1996. Financing
activities in 1995 including proceeds from the sale $150 million in 8.5%
debentures and the prepayment of $40 million of 9 3/4% debentures.
Liquidity and Capital Resources: At June 30, 1996, the Company's debt as a
percentage of total capitalization (total debt, minority interest and
stockholders equity) was 28.1%, compared with 34.1% at December 31, 1995. The
change in the Company's debt to capitalization ratio is largely attributable to
the use of the proceeds from the sale of MIM to pay down debt. Consolidated debt
at the end of the second quarter 1996 was $848.5 million compared with $1,121.9
million at the end of 1995. Additional indebtedness permitted under the terms of
the Company's credit agreements totaled $690.3 million at June 30, 1996.
The Company expects that it will meet its cash requirements for 1996 and beyond
from internally generated funds, cash on hand and from borrowings under its
revolving credit agreements or from additional debt or equity financing.
In July, the Board of Directors declared a quarterly dividend on the common
stock of 20 cents per share payable September 2, 1996 to stockholders of record
at the close of business on August 14, 1996.
Impact of New Accounting Standards: The Financial Accounting Standards Board
issued SFAS No. 123 "Accounting for Stock-Based Compensation" in October 1995.
In accordance with this pronouncement, the Company has a choice of adopting the
accounting provisions of SFAS No. 123 or continuing its current accounting with
additional disclosure required. The Company has elected the disclosure only
alternative and will continue its current accounting.
Cautionary Statement: Statements in this report regarding expected commencement
dates of mining or metal production operations, projected quantities of future
metal production, and anticipated production rates, operating efficiencies,
costs and expenditures are forward-looking statements. Actual results could
differ materially depending upon the availability of materials, equipment,
required permits or approvals and financing, the occurrence of unusual weather
or operating conditions, lower than expected ore grades or the failure of
equipment or processes to operate in accordance with specifications. Results of
operations are directly affected by metals prices on commodity exchanges which
can be volatile.
- 15 -
<PAGE>
COOPERS & LYBRAND L.L.P.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of ASARCO Incorporated:
We have reviewed the accompanying interim condensed consolidated balance sheet
of ASARCO Incorporated and Subsidiaries as of June 30, 1996 and the related
interim condensed consolidated statements of earnings and cash flows for the
three month and six month periods ended June 30, 1996 and 1995. These interim
condensed consolidated financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying interim condensed consolidated financial statements
for them to be in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
New York, New York
July 22, 1996
- 16 -
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
1. Asarco and two of its wholly-owned subsidiaries, Lac d'Amiante du Quebec,
Ltee ("LAQ") and Capco Pipe Company, Inc. ("Capco"), have been named as
defendants, among numerous other defendants, in additional asbestos personal
injury lawsuits of the same general nature as the lawsuits reported on Form 10-K
for 1995 and prior years and Form 10-Q for the first quarter of 1996. As of June
30, 1996, there were pending against Asarco and its subsidiaries 1,061 lawsuits
brought by 4,507 primary and 1,848 secondary plaintiffs in 26 states seeking
substantial damages for personal injury or death allegedly caused by exposure to
asbestos. As of June 30, 1996, LAQ, Asarco and Capco have settled or have been
dismissed from a total of 5,723 asbestos personal injury lawsuits brought by
approximately 74,865 primary and 49,677 secondary plaintiffs.
2. With respect to the asbestos property damage litigation reported on Form 10-K
for 1995 and prior years, LAQ's 1992 settlement of a nationwide class action of
colleges and universities received final court approval in May 1996, and LAQ was
dismissed from another lawsuit in May 1996. LAQ remains a defendant in one
asbestos property damage action as of June 30, 1996.
3. In June 1996, the Company was sued in state court in Salt Lake City, Utah
along with numerous other companies alleged to have been engaged in mining or
smelting in the Bingham Canyon area of Utah. Plaintiffs, thirty-six individuals
alleged to be members of four families that resided in homes located in the
historic flood plains of the Bingham Creek, seek compensatory and punitive
damages for personal injury, fear of cancer and wrongful death allegedly caused
by exposure to toxic wastes including arsenic, lead and cadmium, from the
defendants' mining and smelting activities in the area.
4. With respect to notices of potential liability previously received by the
Company pursuant to the Comprehensive Environmental Response, Compensation and
Liability Act or similar state laws, the Environmental Protection Agency issued,
on June 14, 1996, a Unilateral Administrative Order directing the Company and
the other potentially responsible parties to implement the remedy specified in
the Record of Decision for the Mine Operable Unit of the Butte Montana Superfund
site issued on September 29, 1994. The Company also received in July 1996 a
notice from the State of Montana identifying the Company as potentially liable
pursuant to the state superfund law for environmental remediation of the Barker
mining district, in which it formerly owned a mine and a mill.
- 17 -
<PAGE>
SIGNATURES
Pursuant to the requirement 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.
ASARCO Incorporated
(Registrant)
Date: August 13, 1996 /s/ Kevin R. Morano
-------------------
Kevin R. Morano
Vice President, Finance and
Chief Financial Officer
Date: August 13, 1996 /s/ William Dowd
----------------
William Dowd
Controller
- 18 -
<PAGE>
Exhibit I
COOPERS & LYBRAND L.L.P.
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
We are aware that our report dated July 22, 1996 on our review of the interim
financial information of ASARCO Incorporated and Subsidiaries as of June 30,
1996 and for the three month and six month periods ended June 30, 1996 and 1995
and included in this Form 10-Q for the quarter ended June 30, 1996 is
incorporated by reference in the Company's Registration Statements on Form S-8
(File Nos. 2-67732, 2-83782, and 33-34606) and Form S-3 (File Nos. 33-45631,
33-55993 and 333-02359). Pursuant to Rule 436(c) under the Securities Act of
1933, this report should not be considered a part of the Registration Statements
prepared or certified by us within the meaning of Sections 7 and 11 of that Act.
Coopers & Lybrand L.L.P.
New York, New York
August 13, 1996
<PAGE>
Exhibit 11 Statement re Computation of Earnings per Share
This calculation is submitted in accordance with Regulation S-K item 601(b)(11)
although not required by footnote 2 to paragraph 14 of APB Option No. 15 because
it results in dilution of less than 3%.
Fully Diluted Earnings per Common Share
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net earnings applicable to common stock $ 72,403 $ 56,410 $108,088 $122,122
======== ======== ======== ========
Weighted average number of common shares outstanding 42,693 42,212 42,655 42,183
Shares issuable from assumed exercise of Stock Options 140 140 124 140
-------- -------- -------- --------
Weighted average number of common shares outstanding,
as adjusted 42,833 42,352 42,779 42,323
======== ======== ======== ========
Fully diluted earnings per share:
- ---------------------------------
Net earnings applicable to common stock $ 1.69 $ 1.33 $ 2.53 $ 2.89
======== ======== ======== ========
Primary earnings per share:
- ---------------------------
Net earnings applicable to common stock $ 1.70 $ 1.34 $ 2.53 $ 2.90
======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 257621
<SECURITIES> 0
<RECEIVABLES> 481645
<ALLOWANCES> 11246
<INVENTORY> 378182
<CURRENT-ASSETS> 1164296
<PP&E> 4313708
<DEPRECIATION> 2142450
<TOTAL-ASSETS> 3924461
<CURRENT-LIABILITIES> 560003
<BONDS> 0
0
0
<COMMON> 608445
<OTHER-SE> 1088094
<TOTAL-LIABILITY-AND-EQUITY> 3924461
<SALES> 1398964
<TOTAL-REVENUES> 1398964
<CGS> 1079654
<TOTAL-COSTS> 1079654
<OTHER-EXPENSES> 138304
<LOSS-PROVISION> 813
<INTEREST-EXPENSE> 42514
<INCOME-PRETAX> 227919
<INCOME-TAX> (72987)
<INCOME-CONTINUING> 154932
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 108088
<EPS-PRIMARY> 2.53
<EPS-DILUTED> 2.53
</TABLE>
