1996
Third 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 September 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 October 31, 1996 there were outstanding 42,785,526 shares of Asarco Common
Stock, without par value.
<PAGE>
ASARCO Incorporated
and Subsidiaries
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
<S> <C>
Page No.
Part I. Financial Information:
Item 1. Financial Statements (unaudited)
Consolidated Statement of Earnings
Three Months and Nine Months Ended
September 30, 1996 and 1995 2
Consolidated Balance Sheet
September 30, 1996 and December 31, 1995 3
Consolidated Statement of Cash Flows
Three Months and Nine Months Ended
September 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
Item 6(a) Exhibits on Form 10Q 18
Exhibit 11 - Statement re Computation of Earnings per Share
Exhibit 12 - Statement re Computation of Consolidated Ratio of Earnings to Fixed
Charges and Combined Fixed Charges and Preferred Share Dividend
Requirements
Signatures 19
Exhibit I - Independent Accountants' Awareness Letter
</TABLE>
- 1 -
<PAGE>
ASARCO Incorporated
and Subsidiaries
CONSOLIDATED STATEMENT OF EARNINGS
(unaudited)
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Sales of products and services $647,819 $819,721 $2,045,204 $2,398,192
Operating costs and expenses:
Cost of products and services 520,559 587,259 1,598,634 1,740,129
Selling, administrative and other 32,964 32,493 98,346 94,698
Depreciation and depletion 30,195 26,645 89,121 88,701
Research and exploration 12,427 6,693 26,422 19,459
-------- -------- --------- ---------
Total operating costs and expenses 596,145 653,090 1,812,523 1,942,987
-------- -------- --------- ---------
Operating income 51,674 166,631 232,681 455,205
Interest expense (16,835) (25,287) (59,349) (68,614)
Other income 5,508 (433) 23,775 13,450
Gain on sale of shares of MIM Holdings Ltd. - - 60,075 -
Gain on sale of interest in Silver Bell - - 11,083 -
------- -------- -------- --------
Earnings before taxes on income and minority interests 40,347 140,911 268,265 400,041
Taxes on income 16,124 46,636 89,110 127,340
------- -------- -------- --------
Earnings before minority interests 24,223 94,275 179,155 272,701
Minority interests in net earnings of consolidated
subsidiaries (18,271) (35,959) (65,115) (92,263)
-------- ------- ------- -------
Net earnings $ 5,952 $ 58,316 $114,040 $180,438
======== ======== ======== ========
Per share amounts:
Net earnings (a) $ 0.14 $ 1.38 $ 2.67 $ 4.27
======== ======== ======== ========
Cash dividends $ 0.20 $ 0.20 $ 0.60 $ 0.50
Weighted average number of shares outstanding 42,741 42,402 42,683 42,264
</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>
September 30, December 31,
1996 1995
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 243,559 $ 238,400
Marketable securities 1,000 42,453
Accounts and notes receivable, net 476,617 514,368
Inventories 379,311 360,861
Other assets 59,321 60,480
--------- ----------
Total current assets 1,159,808 1,216,562
Investments:
Cost and available-for-sale 445,375 822,192
Equity 60,294 61,758
Property 4,397,167 4,209,177
Accumulated depreciation and depletion (2,156,308) (2,098,911)
Intangible and other assets 129,013 115,945
---------- ----------
Total Assets $4,035,349 $4,326,723
========== ==========
LIABILITIES
Current liabilities:
Bank loans $ 30,494 $ 29,451
Current portion of long-term debt 43,272 29,826
Accounts payable 393,528 329,977
Salaries and wages 31,967 33,815
Taxes on income 52,221 103,282
Reserve for closed plant and environmental matters 48,370 53,042
Other current liabilities 58,357 72,254
--------- ----------
Total current liabilities 658,209 651,647
--------- ----------
Long-term debt 773,716 1,062,588
Deferred income taxes 190,715 211,270
Reserve for closed plant and environmental matters 37,897 62,484
Postretirement benefit obligations other than pensions 98,990 95,125
Other liabilities and reserves 70,048 72,225
---------- ----------
Total non-current liabilities 1,171,366 1,503,692
---------- ----------
MINORITY INTERESTS 481,451 463,900
---------- ----------
COMMON STOCKHOLDERS' EQUITY
Common stock (a) 611,506 599,777
Unrealized gain on securities reported at fair value 59,058 131,600
Retained earnings 1,053,759 976,107
--------- ----------
Total Common Stockholders' Equity 1,724,323 1,707,484
--------- ----------
Total Liabilities, Minority Interests and Common Stockholders' Equity $4,035,349 $4,326,723
========== ==========
(a) Common shares: authorized 80,000; outstanding: 42,772 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 9 Months Ended
September 30, September 30,
1996 1995 1996 1995
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $5,952 $ 58,316 $114,040 $180,438
Adjustments to reconcile net earnings to net cash provided
from operating activities:
Depreciation and depletion 30,195 26,645 89,121 88,701
Provision for deferred income taxes 4,771 12,950 24,427 35,113
Treasury stock used for employee benefits 1,136 939 4,577 3,770
Undistributed equity (earnings) losses 44 (946) 630 (540)
Gain on sale of interest in Silver Bell - - (11,083) -
Gain on sale of investment in MIM Holdings Ltd. - - (60,075) -
Net gain on sale of investments and property (174) 4,749 (264) 2,996
Decrease in reserve for closed plant and environmental matters (8,737) (21,425) (29,259) (51,999)
Minority interests 18,271 35,959 65,115 92,263
Cash provided from (used for) operating assets and liabilities, net
of the consolidation of SPCC:
Accounts and notes receivable (5,805) (72,356) 37,053 (35,949)
Inventories (998) 26,664 (19,630) 10,358
Accounts payable and accrued liabilities 51,082 20,729 15,979 (10,945)
Other operating assets and liabilities 15,117 28,611 (30,369) 18,743
Foreign currency transaction (gains) losses (1,720) 38 (4,179) (1,241)
-------- -------- -------- --------
Net cash provided from operating activities 109,134 120,873 196,083 331,708
-------- -------- -------- --------
INVESTING ACTIVITIES
Capital expenditures (98,970) (89,399) (221,129) (275,781)
Sale of investments and property (823) 9,146 990 11,965
Sale of available-for-sale securities 5,711 4,823 21,631 13,967
Sale of interest in Silver Bell - - 15,000 -
Sale of investment in MIM Holdings Ltd. - - 326,218 -
Proceeds from held-to-maturity investments - 16,927 42,455 76,673
Purchase of available-for-sale securities (5,500) (4,623) (21,478) (14,975)
Purchase of held-to-maturity investments (1,000) - (1,002) (33,676)
Purchase of investments (4,533) (1,545) (9,501) (3,879)
Release of restricted cash - 2,177 - 60,450
Acquisition of additional interest in SPCC - - - (116,444)
Consolidation of the opening cash balance of SPCC - - - 93,348
--------- --------- -------- ---------
Net cash provided from (used for) investing activities (105,115) (62,494) 153,184 (188,352)
--------- --------- -------- ---------
FINANCING ACTIVITIES
Debt incurred 5,918 65,057 53,270 229,780
Debt retired (4,048) (92,272) (327,659) (121,439)
Net treasury stock transactions 246 5,108 897 5,343
Distributions to minority interests (9,890) (7,920) (46,624) (23,482)
Dividends paid to common stockholders (8,549) (8,487) (25,614) (21,146)
-------- -------- -------- --------
Net cash provided from (used for) financing activities (16,323) (38,514) (345,730) 69,056
-------- --------- -------- --------
Effect of exchange rate changes on cash (1,758) (1,295) 1,622 (1,640)
-------- --------- -------- --------
Increase (decrease) in cash and cash equivalents (14,062) 18,570 5,159 210,772
Cash and cash equivalents at beginning of period 257,621 210,523 238,400 18,321
-------- -------- -------- --------
Cash and cash equivalents at end of period $243,559 $229,093 $243,559 $229,093
======== ======== ======== ========
</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 September 30, 1996 and the results of operations and cash flows for
the three months and nine months ended September 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 nine 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 the second quarter of 1996 the Company sold its 15.0% interest in MIM
Holdings Limited for $326.2 million, net of expenses, resulting in a
pre-tax gain of $60.1 million 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>
September 30, Dec. 31,
1996 1995
<S> <C> <C>
Inventories of smelters and refineries at lower of LIFO cost or market $19.2 $ 12.9
Provisional cost of metals received from suppliers for which prices have
not yet been fixed 39.4 34.0
Mine inventories at lower of FIFO cost or market 111.7 111.1
Metal inventory at lower of average cost or market 39.7 35.2
Materials and supplies at lower of average cost or market 142.0 139.1
Other 27.3 28.6
------ ------
Total $379.3 $360.9
====== ======
</TABLE>
At September 30, 1996, replacement cost exceeded inventories carried at
LIFO cost by approximately $124.3 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 below the option
strike price on a portion of 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 option 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.
- 5 -
<PAGE>
Depending upon market conditions the Company may either sell put options it
holds or exercise the options at maturity. Gains or losses, net of
unamortized acquisition costs, are recognized in the period in which the
underlying hedged production is sold. Third quarter results include a
pre-tax gain of $13.7 million (including the Company's proportionate
interest in the pre-tax gain of SPCC) from the sale or exercise of copper
put options held by the Company with respect to copper sales in the period.
Results for the nine months include a pre-tax gain of $14.1 million
(including the Company's proportionate interest in SPCC) from the sale or
exercise of copper put options held by the Company with respect to copper
sales in the nine month period.
The table below details copper put options purchased and held by the
Company at September 30, 1996:
<TABLE>
<CAPTION>
Copper Put Options held at September 30,1996
(in millions, except per lb. amounts)
Percent of
Option Strike Price Estimated
Lbs. Period Per lb. Cost Sales
<S> <C> <C> <C> <C> <C>
ASARCO 44.0 10/96 - 12/96 $1.04 $1.2 28%
38.0 1/97 - 3/97 $1.00 0.9 23%
---- ----
82.0 $2.1
SPCC 38.7 10/96 - 12/96 $0.95 $0.6 25%
41.3 1/97 - 3/97 $0.95 0.4 26%
---- ----
80.0 $1.0
</TABLE>
In October 1996, the Company sold or exercised additional copper put
options covering 44.0 million pounds of fourth quarter 1996 copper sales
with an average strike price of $1.04. The total pre-tax gain from the
October option activity was $4.5 million. SPCC sold or exercised copper put
options covering 38.7 million pounds of fourth quarter 1996 copper sales
with an average strike price of $0.95. The total pre-tax gain from SPCC's
October activity was $1.7 million.
The Company's beneficial interest in the pre-tax gain from 1996 copper
option sales and exercises through October 31, 1996 is $43.9 million,
including the Company's proportionate interest in the pre-tax gain realized
by SPCC. Of that amount $29.8 million remains to be recognized, $14.3
million in the fourth quarter of 1996 and $15.5 million in 1997.
Trading: As part of its price protection program, the Company may also use
synthetic put options. 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 September 30, 1996, the Company held call options covering 61.5
million pounds of copper exercisable in 1997 at a strike price of $1.03.
The carrying value of the call options was $1.1 million.
- 6 -
<PAGE>
Gains and (Losses): The recognized pre-tax gains (losses) of the Company's
metal hedge and trading activities, were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(in thousands) September 30, September 30,
Metal 1996 1995 1996 1995
----- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Copper $12,587 $(655) $10,835 $(2,401)
Zinc - (32) (12) (81)
Lead 50 (180) 213 (285)
Silver - 286 - 501
------- ------ ------- -------
Total Gain (Loss) $12,637 $(581) $11,036 $(2,266)
======= ====== ======= =======
</TABLE>
E. Supplemental disclosures of cash flow information:
(in millions)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash paid for:
Interest (net of amounts capitalized) $15.5 $25.3 $ 59.0 $64.0
Income taxes (net of refunds) 17.3 19.6 114.3 45.9
</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 seventeen 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.
The Company and two subsidiaries, at September 30, 1996, are defendants in
736 lawsuits brought by 4,428 primary and 1,670 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.
- 7 -
<PAGE>
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 the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (CERCLA or Superfund) 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 restoration
of the area. The Company believes, and has been advised by 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 CERCLA. 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 $86.3 million at September 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 September 30, 1996 and 1995 were $10.4 million and $22.6 million,
respectively, and for the nine months ended September 30, 1996 and 1995
were $34.3 million and $54.9 million, respectively.
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. Similarly, due to the
uncertainty of the outcome of court proceedings, future expenditures
related to litigation cannot be reliably determined. 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.
- 8 -
<PAGE>
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.
The American Institute of Certified Public Accountants issued Statement of
Position 96-1, "Environmental Remediation Liabilities" ("SOP 96-1") in
October 1996. SOP 96-1 provides authoritative guidance on specific
accounting issues in connection with recognizing, measuring and disclosing
environmental cleanup liabilities. The Company is currently assessing the
impact of this statement, which is effective for fiscal years beginning
after December 15, 1996.
- 9 -
<PAGE>
Part I Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company reported net earnings of $6.0 million, or $0.14 per share, for the
third quarter ended September 30, 1996, compared with net earnings of $58.3
million, or $1.38 per share, for the third quarter of 1995. For the nine month
period ended September 30, 1996, the Company reported net income of $114.0
million, or $2.67 per share, compared with net income of $180.4 million or $4.27
per share for the comparable 1995 period. Results for the nine month period
ended September 30, 1996 include an after-tax gain of $39.0 million, or $0.91
per share, on the sale of the Company's remaining 15% interest in M.I.M.
Holdings Limited (MIM) and a $7.2 million, or $0.17 per share gain on the sale
of a 25% interest in the Company's Silver Bell mine. The Company's earnings in
the third quarter of 1996 and nine month period ended September 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 $67.0 million for the third quarter
of 1996 and $144.0 million for the nine month period ended September 30, 1996.
In the second quarter of 1996, 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 September 30, 1996 the
Company's debt as a percentage of total capitalization was 27.8%, compared with
34.1% at December 31, 1995.
The Company's beneficial interest in mined copper production in the third
quarter of 1996 was 251.3 million pounds, an increase over the same period in
1995 of 11.0%. The increase was attributable to higher production at all of the
Company's major copper properties and at SPCC which is 54% owned by the Company.
For the first nine months of 1996, beneficial mined copper production increased
over 17% from the first nine months of 1995 to 760.5 million pounds. The
Company's beneficial interest in production at SPCC was up 36% for the first
nine 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 nine
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 24.4 million pounds in the third quarter and 69.8 million pounds
for the nine months ending September 30, 1996.
In the second quarter of 1996, 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.
- 10 -
<PAGE>
In the third quarter of 1996 the Company announced that operations at one of the
two concentrators at its Ray Complex will be partially curtailed to reduce
copper concentrate inventories. This curtailment will permit the Company to
process excess concentrates through its smelters and is expected to last through
the first quarter of 1997. This curtailment will not have any effect on the
Company's smelter or refined copper production.
In October the Company announced that it will indefinitely shut down its
Leadville mine in Colorado beginning December 31, 1996 due to depressed lead and
zinc concentrate prices. The unit will be placed on a care-and-maintenance basis
in order to conserve ore reserves. The Company has also put its New Market zinc
mine in Tennessee on a care and maintenance basis due to depressed zinc prices.
Operations at the Company's three other zinc mines in Tennessee will continue.
Sales: Sales in the third quarter of 1996 were $647.8 million, compared with
$819.7 million in the third quarter of 1995. Sales for the nine month period
ended September 30, 1996 were $2,045.2 million, compared with $2,398.2 million
for the comparable 1995 period. The decline in sales for the third quarter and
for the nine months ending September 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 nine month periods were as follows:
<TABLE>
<CAPTION>
Metal Sales Volume:
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Copper (000s pounds)
Asarco 299,100 240,000 811,700 755,400
SPCC 188,600 189,700 519,400 468,800
------- ------- --------- --------
Consolidated 487,700 429,700 1,331,100 1,224,200
Asarco Beneficial Interest (2) 398,100 339,000 1,083,700 988,400
Lead (000s pounds)
Asarco 75,300 104,400 227,900 302,600
Silver (000s ounces)
Asarco 5,601 9,583 23,222 28,414
SPCC 818 1,110 2,363 2,708
------ ------- ------- -------
Consolidated 6,419 10,693 25,585 31,122
Asarco Beneficial Interest (2) 6,030 10,162 24,459 29,766
Zinc (000s pounds) (1)
Asarco 48,232 58,796 163,947 186,388
Molybdenum (000s pounds) (1)
Asarco 1,741 1,145 4,812 3,705
SPCC 2,152 2,656 5,956 6,074
------- ------- ------- -------
Consolidated 3,893 3,801 10,768 9,779
Asarco Beneficial Interest (2) 2,870 2,530 7,931 6,702
</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) Asarco consolidated SPCC effective January 1, 1995 based on Asarco's
52.3% equity ownership which, net of minority interests, constituted a
beneficial interest of 43.2%. Effective April 1995, Asarco's beneficial
interest increased to 52.1%. At September 30, 1996, Asarco's beneficial
interest in SPCC is 52.5%.
- 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 Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Copper (per pound - COMEX) $ .91 $ 1.36 $1.08 $ 1.36
Copper (per pound - LME) .90 1.37 1.06 1.34
Lead (per pound - LME) .36 .28 .36 .28
Silver (per ounce - Handy & Harman) 5.05 5.33 5.29 5.17
Zinc (per pound - LME) .45 .46 .46 .47
Molybdenum (per pound - Metals Week Dealer Oxide) 3.29 4.37 3.47 8.45
</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 below the option strike price on a
portion of 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
option 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.
Depending upon market conditions the Company may either sell put options it
holds or exercise the options at maturity. Gains or losses, net of unamortized
acquisition costs, are recognized in the period in which the underlying hedged
production is sold. Third quarter results include a pre-tax gain of $13.7
million (including the Company's proportionate interest in the pre-tax gain of
SPCC) from the sale or exercise of copper put options held by the Company with
respect to copper sales in the period. Results for the nine months include a
pre-tax gain of $14.1 million (including the Company's proportionate interest in
SPCC) from the sale or exercise of copper put options held by the Company with
respect to copper sales in the nine month period.
The table below details copper put options purchased and held by the Company at
September 30, 1996:
<TABLE>
<CAPTION>
Copper Put Options held at September 30,1996
(in millions, except per lb. amounts)
Percent of
Option Strike Price Estimated
Lbs. Period Per lb. Cost Sales
<S> <C> <C> <C> <C> <C>
ASARCO 44.0 10/96 - 12/96 $1.04 $1.2 28%
38.0 1/97 - 3/97 $1.00 0.9 23%
---- ----
82.0 $2.1
SPCC 38.7 10/96 - 12/96 $0.95 $0.6 25%
41.3 1/97 - 3/97 $0.95 0.4 26%
---- ----
80.0 $1.0
</TABLE>
- 12 -
<PAGE>
In October 1996, the Company sold or exercised additional copper put options
covering 44.0 million pounds of fourth quarter 1996 copper sales with an average
strike price of $1.04. The total pre-tax gain from the October option activity
was $4.5 million. SPCC sold or exercised copper put options covering 38.7
million pounds of fourth quarter 1996 copper sales with an average strike price
of $0.95. The total pre-tax gain from SPCC's October activity was $1.7 million.
The Company's beneficial interest in the pre-tax gain from 1996 copper option
sales and exercises through October 31, 1996 is $43.9 million, including the
Company's proportionate interest in the pre-tax gain realized by SPCC. Of that
amount $29.8 million remains to be recognized, $14.3 million in the fourth
quarter of 1996 and $15.5 million in 1997.
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 September 30, 1996, the Company held call options covering 61.5 million
pounds of copper exercisable in 1997 at a strike price of $1.03. The carrying
value of the call options was $1.1 million.
Gains and (Losses): The recognized pre-tax gains (losses) of the Company's metal
hedge and trading activities, were as follows:
<TABLE>
<CAPTION>
(in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
Metal 1996 1995 1996 1995
- ----- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Copper $12,587 $(655) $10,835 $(2,401)
Zinc - (32) (12) (81)
Lead 50 (180) 213 (285)
Silver - 286 - 501
------- ------ ------- -------
Total Gain (Loss) $12,637 $(581) $11,036 $(2,266)
======= ====== ======= =======
</TABLE>
Cost of Products & Services: Cost of products and services were $520.6 million
in the third quarter of 1996, compared with $587.3 million in the third quarter
of 1995. The decrease in costs reflected the lower price effect on costs of
outside copper purchases. The Company purchased 12,500 tons of refined copper to
meet customer commitments in the third quarter of 1996 compared to 9,100 tons in
the third quarter of 1995. In addition, SPCC's cost of sales was 23% lower in
the third quarter of 1996 than the same period in 1995. The decline is
principally attributable to the reduction of sales of copper produced from
purchased concentrates which were replaced by sales of copper produced from the
Company's new low-cost SX/EW operation.
Cost of products and services for the nine month period ended September 30, 1996
were $1,598.6 million, compared with $1,740.1 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 40,700 tons of refined
copper to meet customer commitments for the nine months in 1996 compared to
48,300 tons for the nine months in 1995.
- 13 -
<PAGE>
Nonoperating Items: Interest expense was $16.8 million in the third quarter of
1996, and $59.3 million for the nine month period ended September 30, 1996,
compared with $25.3 million and $68.6 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:
Third quarter - Net cash provided from operating activities was $109.1 million
in the third quarter of 1996, compared with $120.9 million in the third quarter
of 1995. The decrease is primarily a result of lower operating income in 1996
partially offset by an increase in cash provided from working capital. The
change in working capital is due to proceeds from the sale of copper put options
and the effect of declining metal prices on account receivable balances. Net
cash provided from investing activities was $105.1 million in the third quarter
of 1996, compared with cash used of $62.5 million in the third quarter of 1995.
The increase in cash used for investing activities in the third quarter of 1996
is due to higher capital expenditures in 1996 and the proceeds from the maturity
of held-to-maturity securities at SPCC in 1995. The higher capital spending in
1996 is a result of environmental control expenditures at the Company's East
Helena and Glover lead plants and an expansion of the Company's specialty
chemicals operation in Singapore.
Cash used for financing activities in the third quarter of 1996 was $16.3
million as compared with $38.5 million in 1995. The decrease reflects the
prepayment of $13.5 million of the Company's 8 3/4% pollution control revenue
bonds and the prepayment by SPCC of $77.0 million, substantially all of the
outstanding balance, under the $115 million credit facility in 1995, offset by
the borrowing by SPCC in 1995, of $35 million from the Export-Import Bank of the
United States for use in its capital investment program.
Nine months - Net cash provided from operating activities was $196.1 million for
the nine month period ended September 30, 1996, compared with $331.7 million in
the corresponding prior period. The decrease reflects cash flows attributable to
lower operating income and the payment of income taxes and employee
participation payments offset by a reduction in working capital. The change in
cash provided from working capital in 1996 is due to proceeds from the sale of
copper put options and the effect of declining metal prices on accounts
receivable partially offset by an increase in concentrate inventory in the first
and second quarters of 1996.
Cash provided from investing activities was $153.2 million for the nine month
period ended September 30, 1996, compared with cash used of $188.4 million in
the corresponding prior period. Investing activities for the nine month period
ending September 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 nine month period ending September 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 nine months ended September 30, 1996 cash used for financing activities
was $345.7 million compared with cash provided of $69.1 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. 1995
financing activities that contributed to the increase in cash used were the sale
of $150.0 million in 8.5% debentures and the prepayment of $40 million of 9 3/4%
debentures, as well as the prepayment by SPCC of $77.0 million under the $115
million credit facility offset by $35 million of borrowings from the
Export-Import Bank of the United States.
- 14 -
<PAGE>
Liquidity and Capital Resources: At September 30, 1996, the Company's debt as a
percentage of total capitalization (total debt, minority interest and
stockholders equity) was 27.8%, 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 third quarter 1996 was $847.5 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 $787.1 million at September 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 October, the Board of Directors declared a quarterly dividend on the common
stock of 20 cents per share payable December 2, 1996 to stockholders of record
at the close of business on November 13, 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.
The American Institute of Certified Public Accountants issued Statement of
Position 96-1, "Environmental Remediation Liabilities" ("SOP 96-1") in October
1996. SOP 96-1 provides authoritative guidance on specific accounting issues in
connection with recognizing, measuring and disclosing environmental cleanup
liabilities. The Company is currently assessing the impact of this statement,
which is effective for fiscal years beginning after December 15, 1996.
Cautionary Statement: Forward-looking statements in this report and in other
Company statements include statements regarding expected commencement dates of
mining or metal production operations, projected quantities of future metal
production, anticipated production rates, operating efficiencies, costs and
expenditures as well as projected demand or supply for the Company's products.
Actual results could differ materially depending upon factors including the
availability of materials, equipment, required permits or approvals and
financing, the occurrence of unusual weather or operating conditions, lower than
expected ore grades, the failure of equipment or processes to operate in
accordance with specifications, labor relations, environmental risks as well as
political and economic risk associated with foreign operations. 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 September 30, 1996 and the related
interim condensed consolidated statements of earnings and cash flows for the
three month and nine month periods ended September 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
October 21, 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 and second quarters of
1996. As of September 30, 1996, there were pending against Asarco and its
subsidiaries 736 lawsuits brought by 4,428 primary and 1,670 secondary
plaintiffs in 26 states seeking substantial damages for personal injury or death
allegedly caused by exposure to asbestos. As of September 30, 1996, LAQ, Asarco
and Capco have settled or have been dismissed from a total of 6,127 asbestos
personal injury lawsuits brought by approximately 78,742 primary and 51,755
secondary plaintiffs.
2. On October 4, 1996, the Company responded to an August 30, 1996 General
Notice Letter from the United States Environmental Protection Agency ("EPA") and
offered to perform certain remediation activities at the Circle Smelting site in
Beckemeyer, Illinois, an area where a subsidiary of the Company previously
operated a zinc smelter. Negotiations are underway between the EPA and the
Company concerning the scope of remediation.
3. With respect to the March 1996 notice of violation related to the El Paso
plant, reported on Form 10-Q for the first quarter of 1996, in September 1996
the Company signed an Agreed Order with the Texas Natural Resources Conservation
Commission, which had issued the notice with EPA oversight. The Agreed Order
requires abatement of noted violations, investigation of soil and groundwater
impacts, and payment of a penalty assessed at $168,400. Asarco has paid $84,200
and will perform a supplemental environmental project in lieu of paying the
balance of the penalty.
4. With respect to the lawsuit in federal court in Tacoma, Washington, reported
on Form 10-K for 1995, by a retirement home seeking damages for diminution of
property value, response costs and attorneys' fees, on September 19, 1996 the
suit was dismissed on the grounds that plaintiff's claims were barred by lack of
subject matter jurisdiction, lack of actual and substantial damages, or by the
applicable statute of limitations. On October 16, 1996, a notice of appeal was
filed by plaintiff.
5. On August 12, 1996, a lawsuit was filed in state district court in San
Patricio County, Texas, against Asarco and two of its wholly-owned subsidiaries,
Encycle, Inc. and Encycle/Texas, Inc. and ten other defendants by approximately
457 plaintiffs who allegedly own property and/or reside near a landfill in
Sinton, Texas. Plaintiffs seek compensatory and punitive damages for personal
injury and property damage allegedly caused by defendants' disposal of toxic and
hazardous wastes at the landfill. This landfill is the same one that was the
subject of a previous lawsuit in Duval County, Texas, by nearby residents,
settlement of which was reported on Form 10-K for 1995.
- 17 -
<PAGE>
Item 6(a) - Exhibits on Form 10Q
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
<S> <C>
11 Statement re Computation of Earnings per Share
12 Statement re Computation of Consolidated Ratio of Earnings to Fixed Charges and Combined Fixed
Charges and Preferred Share Dividend Requirements
</TABLE>
- 18 -
<PAGE>
Exhibit 11 Statement re Computation of Earnings per Share
This calculation is submitted in accordance with Regulation S-K item 601(b)(11).
Fully Diluted Earnings per Common Share
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings applicable to common stock $ 5,952 $ 58,316 $114,040 $180,438
======= ======== ======== ========
Weighted average number of common shares outstanding 42,741 42,402 42,683 42,264
Shares issuable from assumed exercise of Stock Options 27 163 76 131
------ ------ ------ ------
Weighted average number of common shares outstanding, as
adjusted 42,768 42,565 42,759 42,395
====== ====== ====== ======
Fully diluted earnings per share:
Net earnings applicable to common stock $ 0.14 $ 1.37 $ 2.67 $ 4.26
====== ====== ====== ======
Primary earnings per share:
Net earnings applicable to common stock $ 0.14 $ 1.38 $ 2.67 $ 4.27
====== ====== ====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit 12 Statement re Computation of Consolidated Ratio of Earnings to Fixed Charges and Combined Fixed Charges and
----------------------------------------------------------------------------------------------------------
Preferred Share Dividend Requirements
Nine Months
Ended
September 30,
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
NET EARNINGS (LOSS) $114,040 $169,153 $ 64,034 $ 15,619 $(83,091) $45,957
Adjustments
Taxes on Income 88,543 122,465 9,375 (36,503) (37,371) 2,199
Equity Earnings, Net of Taxes (2,175) (1,837) (47,653) (27,384) (2,575) (10,393)
Cumulative Effect of Change in
Accounting Principle - - - (86,295) 53,964 -
Dividends received from non-
consolidated associated
companies 3,372 1,828 14,301 1,676 803 2,078
Total Fixed Charges 64,887 99,516 66,377 64,359 62,200 62,653
Interest Capitalized (2,281) (3,256) (869) (4,010) (7,433) (12,347)
Capitalized Interest Amortized 1,621 2,949 1,727 1,629 1,825 1,840
Minority interest 65,115 129,543 809 693 615 720
-------- -------- -------- -------- -------- -------
EARNINGS (LOSS) $333,122 $520,361 $108,101 $(70,216) $(11,063) $92,707
======== ======== ======== ======== ======== =======
FIXED CHARGES
Interest Expense $ 59,349 $ 91,954 $ 62,529 $ 57,321 $ 51,230 $46,227
Interest Capitalized 2,281 3,256 869 4,010 7,433 12,347
Imputed Interest Expense 3,257 4,306 2,979 3,028 3,537 4,079
-------- -------- -------- -------- -------- -------
TOTAL FIXED CHARGES $ 64,887 $ 99,516 $ 66,377 $ 64,359 $ 62,200 $62,653
======== ======== ======== ======== ======== =======
Ratio of Earnings to Fixed Charges 5.1 5.2 1.6 (1.1) (0.2) 1.5
======== ======== ======== ======== ======== =======
</TABLE>
<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: November 13, 1996 /s/ Kevin R. Morano
-------------------
Kevin R. Morano
Vice President, Finance and
Chief Financial Officer
Date: November 13, 1996 /s/ William Dowd
William Dowd
Controller
- 19 -
<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 October 21, 1996 on our review of the interim
financial information of ASARCO Incorporated and Subsidiaries as of September
30, 1996 and for the three month and nine month periods ended September 30, 1996
and 1995 and included in this Form 10-Q for the quarter ended September 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
November 12, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 243559
<SECURITIES> 1000
<RECEIVABLES> 486553
<ALLOWANCES> 9936
<INVENTORY> 379311
<CURRENT-ASSETS> 1159808
<PP&E> 4397167
<DEPRECIATION> 2156308
<TOTAL-ASSETS> 4035349
<CURRENT-LIABILITIES> 658209
<BONDS> 0
0
0
<COMMON> 611506
<OTHER-SE> 1112817
<TOTAL-LIABILITY-AND-EQUITY> 4035349
<SALES> 2045204
<TOTAL-REVENUES> 2045204
<CGS> 1598634
<TOTAL-COSTS> 1598634
<OTHER-EXPENSES> 213889
<LOSS-PROVISION> 1439
<INTEREST-EXPENSE> 59349
<INCOME-PRETAX> 268265
<INCOME-TAX> (89110)
<INCOME-CONTINUING> 179155
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 114040
<EPS-PRIMARY> 2.67
<EPS-DILUTED> 2.67
</TABLE>
