First 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 March 31, 1997 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 April 30, 1997 there were outstanding 42,942,768 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 Ended March 31, 1997 and 1996 2
Consolidated Balance Sheet
March 31, 1997 and December 31, 1996 3
Consolidated Statement of Cash Flows
Three Months Ended March 31, 1997 and 1996 4
Notes to Consolidated Financial Statements 5-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10-14
Report of Independent Accountants 15
Part II. Other Information:
Item 1. Legal Proceedings 16-17
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6(a) Exhibits on Form 10Q 19
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 20
Exhibit I - Independent Accountants' Awareness Letter
</TABLE>
- 1 -
<PAGE>
ASARCO Incorporated
and Subsidiaries
CONSOLIDATED STATEMENT OF EARNINGS
(unaudited)
<TABLE>
<CAPTION>
3 Months Ended
March 31,
1997 1996
(in thousands)
<S> <C> <C>
Sales of products and services $715,599 $735,003
Operating costs and expenses:
Cost of products and services 531,848 566,479
Selling, administrative and other 33,369 33,116
Depreciation and depletion 30,231 30,703
Research and exploration 9,804 6,903
Environmental and other closed plant
charges, net of recoveries 4,364 5,157
-------- --------
Total operating costs and expenses 609,616 642,358
Operating income 105,983 92,645
Interest expense (16,545) (22,100)
Other income 4,966 11,603
Gain on sale of interest in Silver Bell - 11,083
-------- --------
Earnings before taxes on income and minority interests 94,404 93,231
Taxes on income 26,622 32,929
-------- --------
Earnings before minority interests 67,782 60,302
Minority interests in net earnings of consolidated subsidiaries (27,202) (24,617)
--------- --------
Net earnings $ 40,580 $ 35,685
========= ========
Per share amounts:
Net earnings (a) $ 0.95 $ 0.84
========= ========
Cash dividends $ 0.20 $ 0.20
Weighted average number of shares outstanding 42,881 42,618
</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>
March 31, December 31,
1997 1996
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 190,253 $ 192,408
Accounts and notes receivable, net 557,065 540,560
Inventories 376,015 383,281
Prepaid expenses 101,207 43,478
Other assets 19,069 25,417
---------- ----------
Total current assets 1,243,609 1,185,144
Investments:
Available-for-sale and other cost 468,780 442,707
Equity 59,561 59,787
Net property 2,302,522 2,274,088
Other assets including intangibles, net 156,972 158,623
---------- ----------
Total Assets $4,231,444 $4,120,349
========== ==========
LIABILITIES
Current liabilities:
Bank loans $ 23,653 $ 15,913
Current portion of long-term debt 40,435 39,815
Accounts payable 351,961 436,604
Salaries and wages 30,090 32,427
Taxes on income 64,434 57,695
Reserve for closed plant and environmental matters 39,362 38,128
Other current liabilities 55,960 51,975
---------- ----------
Total current liabilities 605,895 672,557
---------- ----------
Long-term debt 818,276 758,583
Deferred income taxes 181,348 173,245
Reserve for closed plant and environmental matters 85,169 90,205
Postretirement benefit obligations other than pensions 100,906 99,945
Other liabilities and reserves 147,658 93,163
---------- ----------
Total non-current liabilities 1,333,357 1,215,141
---------- ----------
MINORITY INTERESTS 510,829 495,706
---------- ----------
COMMON STOCKHOLDERS' EQUITY
Common stock (a) 620,850 614,443
Unrealized gain on securities reported at fair value 73,419 56,311
Retained earnings 1,087,094 1,066,191
---------- ----------
Total Common Stockholders' Equity 1,781,363 1,736,945
---------- ----------
Total Liabilities, Minority Interests and Common
Stockholders' Equity $4,231,444 $4,120,349
========== ==========
(a) Common shares: authorized 80,000; outstanding: 42,924 42,824
</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
March 31,
1997 1996
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 40,580 $ 35,685
Adjustments to reconcile net earnings to net cash provided from (used for)
operating activities:
Depreciation and depletion 30,231 30,703
Provision for deferred income taxes 4,095 5,879
Treasury stock used for employee benefits 2,139 2,053
Undistributed equity (earnings) losses (1,836) 894
Net gain on sale of investments and property (234) (11,161)
Decrease in reserves for closed plant
and environmental matters (3,802) (10,914)
Minority interests 27,202 24,617
Cash provided from (used for) operating assets and liabilities:
Accounts receivable (19,086) 40,793
Inventories 6,410 (5,432)
Accounts payable and accrued liabilities (78,845) (60,522)
Other operating assets and liabilities 7,180 (34,950)
Foreign currency transaction losses (90) (1,301)
-------- --------
Net cash provided from operating activities 13,944 16,344
-------- --------
INVESTING ACTIVITIES
Capital expenditures (62,780) (51,710)
Sale of securities, investments and property 54 15,692
Purchase of investments (1,515) (1,674)
Sale of available-for-sale securities 31,519 11,442
Purchase of available-for-sale securities (30,833) (11,202)
Proceeds from held-to-maturity investments 1,004 42,451
-------- --------
Net cash (used for) provided from investing activities (62,551) 4,999
-------- --------
FINANCING ACTIVITIES
Debt incurred 82,770 47,319
Debt repaid (14,623) (9,623)
Net treasury stock transactions (203) 200
Purchase of minority interests (1,753) -
Distributions to minority interests (11,793) (25,852)
Contributions from minority interests 750 250
Dividends paid to common stockholders (8,579) (8,525)
--------- ---------
Net cash provided from (used for) financing activities 46,569 3,769
Effect of exchange rate changes on cash (117) 1,897
-------- --------
Increase (decrease) in cash and cash equivalents (2,155) 27,009
Cash and cash equivalents at beginning of period 192,408 238,400
-------- --------
Cash and cash equivalents at end of period $190,253 $265,409
======== ========
</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 unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the Company's financial
position as of March 31, 1997 and the results of operations and cash flows
for the three months ended March 31, 1997 and 1996. 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 period are not necessarily
indicative of the results to be expected for the full year. The
accompanying unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's 1996 annual report on Form 10-K.
B. The Company's first quarter 1996 results include 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. In the first quarter of 1997, the Government of Peru approved a
reinvestment allowance for a program of Southern Peru Copper Corporation
(SPCC), a 54.1% owned subsidiary of the Company, to expand the Cuajone
mine. The reinvestment allowance provides SPCC with tax incentives in Peru
and, as a result, certain U.S. tax credit carryforwards, for which no
benefit has previously been recorded, are expected to be realized. The
Company's beneficial interest in the estimated net earnings impact of the
reduction in the effective tax rate, principally as a result of the
reinvestment allowance, for the first quarter of 1997 is approximately $2.5
million. Pursuant to the reinvestment allowance SPCC will receive tax
deductions in Peru in amounts equal to the cost of the qualifying property
(approximately $245 million). As qualifying property is acquired, the book
carrying value of the qualifying property will be reduced to reflect the
tax benefit associated with the reinvestment allowance (approximately $73
million). As a result, book depreciation expense related to the qualifying
property will be reduced over its useful life (approximately 15 years).
- 5 -
<PAGE>
D. Inventories were as follows:
(in millions)
<TABLE>
<CAPTION>
March 31, Dec. 31,
1997 1996
<S> <C> <C>
Inventories of smelters and refineries at lower of
LIFO cost or market $ 9.7 $ 10.3
Provisional cost of metals received from suppliers
for which prices have not yet been fixed 63.2 44.5
Mine inventories at lower of FIFO cost or market 88.8 105.8
Metal inventory at lower of average cost or market 41.4 49.5
Materials and supplies at lower of average cost or
market 142.9 141.0
Other 30.0 32.2
------ ------
Total $376.0 $383.3
====== ======
</TABLE>
At March 31, 1997, replacement cost exceeded inventories carried at LIFO
cost by approximately $117.6 million (December 31, 1996 - $115.2 million).
E. Metal Hedging and Trading Activities:
Hedging: Depending on the market fundamentals of a metal and other
conditions, the Company may purchase put options or establish synthetic put
options to reduce or eliminate the risk of metal price declines 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 purchasing a
call option and entering into a forward sale for the same quantity of metal
at approximately the same price and for the same time period as the call
option. The cost of options is amortized on a straight-line basis during
the period in which the options are exercisable. Depending upon market
conditions the Company may sell 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 production is sold. The
Company also uses futures contracts to hedge the effect of price changes on
a portion of the metals it sells. Gains and losses on hedge contracts are
reported as a component of the underlying transaction.
First quarter 1997 earnings include pre-tax gains of $11.2 million ($7.3
million after-tax), including the Company's proportionate interest in the
pre-tax gains of SPCC, from the sale of put options in 1996 covering copper
sold in the first quarter of 1997. A pre-tax gain of $6.1 million ($4.0
million after-tax) from the sale of put options in 1996 remains to be
recognized in 1997 when the underlying production is sold.
As of March 31, 1997, the Company held synthetic puts covering 42.6 million
pounds of copper at an average strike price of $1.05 per pound covering a
portion of production to be sold primarily in the second quarter of 1997.
- 6 -
<PAGE>
Trading: As part of its price protection program, the Company may establish
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 offset, 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. First quarter 1997 earnings include pre-tax gains of $0.4 million
($0.3 million after-tax) from the sale or exercise of call options in the
first quarter of 1997 and $4.4 million ($2.9 million after-tax) of
unrealized mark to market gains.
As of March 31, 1997, the Company held call options covering 88.1 million
pounds of copper exercisable in the remaining three quarters of 1997 at a
strike price of $1.04. The carrying value of the call options was $4.4
million.
Gainsand (Losses): The recognized pre-tax gains (losses) of the Company's
metal hedging and trading activities, were as follows:
<TABLE>
<CAPTION>
(in thousands) Three Months Ended
March 31,
Metal 1997 1996
----- ---- ----
<S> <C> <C>
Copper $15,071 $(1,304)
Zinc 900 -
------- -------
Total Gain (Loss) $15,971 $(1,304)
======= ========
</TABLE>
F. Supplemental disclosures of cash flow information:
(in millions)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
---- ----
<S> <C> <C>
Cash paid for:
Interest (net of amounts capitalized) $15.0 $19.5
Income taxes (net of refunds) $16.7 $65.2
</TABLE>
G. Contingencies and Litigation:
The Company is a defendant in lawsuits in Arizona involving the United
States, Native Americans and 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.
- 7 -
<PAGE>
The Company and certain subsidiaries are defendants in four class action
and fourteen other 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. Most of the cases name
additional corporations as defendants.
The Company and two subsidiaries, at March 31, 1997, are defendants in 599
lawsuits brought by 6,779 primary and 1,696 secondary plaintiffs seeking
substantial actual and punitive damages for personal injury or death
allegedly caused by exposure to asbestos. Three of these lawsuits are
purported statewide class actions brought on behalf of classes of persons
who are not yet known to have asbestos related injury, one of which has
been dismissed subject to appeal. One subsidiary was dismissed from one
lawsuit seeking damages for removal or containment of asbestos-containing
products in structures. Plaintiffs have appealed. 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 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 appealed 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. The United States
Court of Appeals for the Fifth Circuit heard argument on the appeal in
December 1996. A decision is expected in 1997.
In March 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) and the U.S. Forest
Service 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.
- 8 -
<PAGE>
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 accrues for these
losses when such losses are probable and reasonably estimable. Such
accruals are adjusted as new information develops or circumstances change
and are not discounted to their present value. Recoveries of environmental
remediation costs from other parties are recorded as assets when the
recovery is deemed probable.
The Company incurred expenses of $15.0 million ($72.0 million in charges
offset by $57.0 million in insurance and other recoveries) in 1996 for
environmental and closed plant liabilities, including $10.0 million for the
effect of the application of the American Institute of Certified Public
Accountants: Statement of Position 96-1 "Environmental Remediation
Liabilities". Environmental and other closed plant expenses in 1995 and
1994 were $76.3 million and $65.6 million, respectively. Reserves for
closed plants and environmental matters totaled $124.5 million at March 31,
1997. The Company anticipates that expenditures relating to these reserves
will be made over the next several years. Net cash expenditures charged to
reserves were $54.1 million in 1996 and $95.8 million in 1995. Net cash
expenditures charged to these reserves for the three months ended March 31,
1997 and 1996 were $8.3 million and $13.2 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 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 recovery when it is not deemed probable.
H. In February 1997, the Accounting Standards Board issued Statement of
Financial Accounting Standards 128, "Earnings Per Share" (the "Statement").
The Statement specifies the computation, presentation and disclosure
requirements for earnings per share ("EPS"). It will require the Company to
present both basic and diluted EPS amounts from income for continuing
operations and net income on the face of the income statement. The Company
does not expect the impact of this statement to have a material effect on
its calculation of EPS. The statement will be effective for financial
statements issued for periods ending after December 15, 1997, including
interim periods.
- 9 -
<PAGE>
Part I Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company reported net earnings of $40.6 million, or $0.95 per share, for the
first quarter ended March 31, 1997, compared with net earnings of $35.7 million,
or $.84 per share, for the first quarter of 1996. Results for the three month
period ended March 31, 1996 include an after-tax gain of $7.2 million, or $0.17
per share, on the sale of a 25% interest in the Company's Silver Bell project.
The increase in earnings in 1997 is a result of lower costs at the Company's
domestic copper operations, gains recorded from the Company's price protection
program, adjustments to provisionally priced sales, reduced interest expense and
a reduction in the Company's effective tax rate.
Pre-tax gains of $16.0 million ($10.4 million after-tax) recorded from the
Company's price protection program are a result of the sale of put options in
1996 covering copper sold in the first quarter of 1997, gains from the sale or
exercise of call options in the first quarter of 1997 and adjustments to the
carrying value of call options which were marked to market at the end of the
first quarter.
Final price adjustments made to sales recorded in the fourth quarter of 1996 at
provisional prices, principally by SPCC, increased first quarter 1997 net
earnings by approximately $6.0 million.
In the first quarter of 1997, the Government of Peru approved a reinvestment
allowance for SPCC's program to expand the Cuajone mine. The reinvestment
allowance provides SPCC with tax incentives in Peru and, as a result, certain
U.S. tax credit carryforwards, for which no benefit has previously been
recorded, are expected to be realized. The Company's beneficial interest in the
estimated net earnings impact of the reduction in the effective tax rate,
principally as a result of the reinvestment allowance, for the first quarter of
1997 is approximately $2.5 million. Pursuant to the reinvestment allowance SPCC
will receive tax deductions in Peru in amounts equal to the cost of the
qualifying property (approximately $245 million). As qualifying property is
acquired, the book carrying value of the qualifying property will be reduced to
reflect the tax benefit associated with the reinvestment allowance
(approximately $73 million). As a result, book depreciation expense related to
the qualifying property will be reduced over its useful life (approximately 15
years).
The Company's beneficial interest in mined copper production in the first
quarter of 1997 was 233.5 million pounds, a 7% decrease from the same period in
1996. The decrease was attributable to the partial curtailment of the Hayden
concentrator at the Company's Ray mine. Mined copper production at SPCC
increased 2% in the first of quarter of 1997 to 164.5 million pounds, of which
the Company has a 52.7% beneficial interest.
The Company's specialty chemicals and aggregates businesses both recorded
earnings improvements in the first quarter of 1997. Specialty chemicals pre-tax
earnings increased 11% despite a small decline in sales. The relatively mild
winter in the southeast in U.S. benefited the aggregates business which recorded
pre-tax profits of $1.0 million in the historically slow winter season compared
with a loss in the first quarter of 1996.
- 10 -
<PAGE>
Sales: Sales in the first quarter of 1997 were $715.6 million, compared with
$735.0 million in the first quarter of 1996. Adjustments for provisionally
priced sales of copper, principally related to SPCC, increased sales by $11.6
million in the first quarter of 1997 and reduced sales by $13.6 million in the
first quarter of 1996. Sales of refined copper purchased by the Company
increased sales $23.0 million and $39.8 million in 1997 and 1996 respectively.
Metal sales volumes and prices for the quarter were as follows:
Metal Sales Volume:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
---- ----
<S> <C> <C>
Copper (000s pounds)
Asarco 276,900 284,000
SPCC 172,000 169,000
------- -------
Consolidated 448,900 453,000
Asarco Beneficial Interest (2) 367,500 372,400
Lead (000s pounds)
Asarco 57,000 83,000
Silver (000s ounces)
Asarco 6,439 7,952
SPCC 679 819
------ ------
Consolidated 7,118 8,771
Asarco Beneficial Interest (2) 6,797 8,380
Zinc (000s pounds) (1)
Asarco 33,800 57,900
Molybdenum (000s pounds) (1)
Asarco 1,474 1,542
SPCC 2,234 1,867
------- -------
Consolidated 3,708 3,409
Asarco Beneficial Interest (2) 2,650 2,518
</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) At March 31, 1996, Asarco's equity ownership was 54.0% and its
beneficial interest in SPCC was 52.3%. At March 31, 1997, Asarco's
equity ownership was 54.1% and its beneficial interest in SPCC was
52.7%.
- 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
March 31,
1997 1996
---- ----
<S> <C> <C>
Copper (per pound - COMEX) $ 1.11 $ 1.18
Copper (per pound - LME) 1.10 1.17
Lead (per pound - LME) 0.31 0.35
Silver (per ounce - Handy & Harman) 5.02 5.54
Zinc (per pound - LME) 0.53 0.47
Molybdenum (per pound - Metals Week Dealer Oxide) 4.38 4.07
</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 establish synthetic put options to
reduce or eliminate the risk of metal price declines 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 purchasing a call option and entering into a
forward sale for the same quantity of metal at approximately the same price and
for the same time period as the call option. The cost of options is amortized on
a straight-line basis during the period in which the options are exercisable.
Depending upon market conditions the Company may sell 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
production is sold. The Company also uses futures contracts to hedge the effect
of price changes on a portion of the metals it sells. Gains and losses on hedge
contracts are reported as a component of the underlying transaction.
First quarter 1997 earnings include pre-tax gains of $11.2 million ($7.3 million
after-tax), including the Company's proportionate interest in the pre-tax gains
of SPCC, from the sale of put options in 1996 covering copper sold in the first
quarter of 1997. A pre-tax gain of $6.1 million ($4.0 million after-tax) from
the sale of put options in 1996 remains to be recognized in 1997 when the
underlying production is sold.
As of March 31, 1997, the Company held synthetic puts covering 42.6 million
pounds of copper at an average strike price of $1.05 per pound covering a
portion of production to be sold primarily in the second quarter of 1997.
- 12 -
<PAGE>
Trading: As part of its price protection program, the Company may establish
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 offset, 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. First quarter 1997
earnings include pre-tax gains of $0.4 million ($0.3 million after-tax) from the
sale or exercise of call options in the first quarter of 1997 and $4.4 million
($2.9 million after-tax) of unrealized marked to market gains.
As of March 31, 1997, the Company held call options covering 88.1 million pounds
of copper exercisable in the remaining three quarters of 1997 at a strike price
of $1.04. The carrying value of the call options was $4.4 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
March 31,
Metal 1997 1996
- ----- ---- ----
<S> <C> <C>
Copper $15,071 $(1,304)
Zinc 900 -
------- -------
Total Gain (Loss) $15,971 $(1,304)
======= ========
</TABLE>
Cost of Products & Services: Cost of products and services were $531.8 million
in the first quarter of 1997, compared to $566.5 million in the first quarter of
1996. The decrease in costs reflected the lower volume of outside refined copper
purchases. The Company purchased 12.9 million pounds less refined copper to meet
customer commitments in the first quarter of 1997 than for the same period in
1996. In addition, SPCC's cost of sales were 14% higher in the first quarter of
1997 than the same period in 1996. The increase is principally attributable to
the increase in sales volume of copper produced from purchased concentrates.
Nonoperating Items: Interest expense was $16.6 million in the first quarter of
1997, compared with $22.1 million in the comparable period of 1996. The decrease
results from lower borrowings due to the use of proceeds from the sale of the
Company's interest in MIM in the second quarter of 1996 to reduce debt. The
decrease in other income reflects lower interest income due to lower cash
balances at SPCC and a decrease in dividend income due to the sale of MIM.
Cash Flows:
First quarter - Net cash provided from operating activities was $13.9 million in
the first quarter of 1997, compared with $16.3 million in the first quarter of
1996.
- 13 -
<PAGE>
Net cash used for investing activities was $62.6 million in the first quarter of
1997, compared with cash provided of $5.0 million in the first quarter of 1996.
The increase in cash used for investing activities in the first quarter of 1997
is due to higher capital expenditures in 1997, primarily at SPCC, and cash
received in the first quarter of 1996 from the sale of a 25% interest in the
Company's Silver Bell project and the maturity of held-to-maturity securities at
SPCC.
Cash provided from financing activities in the first quarter of 1997 was $46.6
million as compared with $3.8 million in 1996. The change reflects an increased
level of borrowing under the Company's revolving credit agreements.
Liquidity and Capital Resources: At March 31, 1997, the Company's debt as a
percentage of total capitalization (total debt, minority interests and
stockholders' equity) was 27.8%, compared with 26.7% at December 31, 1996.
Consolidated debt at the end of the first quarter 1997 was $882.4 million
compared with $814.3 million at the end of 1996. Additional indebtedness
permitted under the terms of the most restrictive of the Company's credit
agreements totaled $744.3 million at March 31, 1997.
The Company expects that it will meet its cash requirements for 1997 and beyond
from internally generated funds, cash on hand and from borrowings under its
revolving credit agreements or from additional debt or equity financing.
The Company paid dividends to common stockholders of $8.6 million or 20 cents
per share, in the first quarter of 1997 and $8.5 million or 20 cents per share
in the first quarter of 1996. In addition, SPCC paid dividends of $11.8 million
to minority interests in the first quarter of 1997. At the end of the first
quarter of 1997, the Company had 42,924,000 common shares issued and
outstanding, compared with 42,824,000 at the end of the first quarter of 1996.
Impact of New Accounting Standards: In February 1997, the Accounting Standards
Board issued Statement of Financial Accounting Standards 128, "Earnings Per
Share" (the "Statement"). The Statement specifies the computation, presentation
and disclosure requirements for earnings per share ("EPS"). It will require the
Company to present both basic and diluted EPS amounts from income for continuing
operations and net income on the face of the income statement. The Company does
not expect the impact of this statement to have a material effect on its
calculation of EPS. The statement will be effective for financial statements
issued for periods ending after December 15, 1997, including interim periods.
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.
- 14 -
<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 March 31, 1997 and the related
interim condensed consolidated statements of earnings and cash flows for the
three month periods ended March 31, 1997 and 1996. 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.
New York, New York
April 24, 1997
- 15 -
<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 1996 and prior years. As of March 31, 1997, there were pending against
Asarco and its subsidiaries 599 lawsuits brought by 6,779 primary and 1,696
secondary plaintiffs in 28 states seeking substantial damages for personal
injury or death allegedly caused by exposure to asbestos. Three of these
lawsuits are purported statewide class actions brought on behalf of classes of
persons who are not yet known to have asbestos related injury, one of which has
been dismissed subject to appeal. As of March 31, 1997, LAQ, Asarco and Capco
have settled or been dismissed from a total of 6,963 asbestos personal injury
lawsuits brought by approximately 83,461 primary and 52,838 secondary
plaintiffs.
With respect to the actions relating to asbestos-containing products in
structures reported on Form 10-K for 1996 and prior years, in the purported
statewide class action involving public buildings in cites from which LAQ and
all other defendants were dismissed in February 1997, plaintiffs filed an appeal
of the dismissal in March 1997.
2. With respect to the EPA order under the Clean Water Act alleging unauthorized
discharges by the Company's East Helena plant into a nearby creek, reported on
Form 10-K for 1996, the Company obtained a National Pollutant Discharge
Elimination System permit in November 1996. EPA is now seeking civil penalties
for the alleged unauthorized discharges, as well as for certain material
handling practices at the plant. The Company is negotiating with the EPA
concerning these matters.
3. In March 1997, the Company and one of its wholly owned subsidiaries,
Federated Metals Corporation, were added as defendants to a lawsuit in state
court in Cameron County, Texas against one other corporation brought by
plaintiffs purporting to act on behalf of eight children residing in Matamoros,
Mexico who allegedly were exposed to chemicals from defendants' facilities. The
complaint seeks compensatory and punitive damages for physical and emotional
harm, mental anguish and medical monitoring.
4. In February 1997, the Company was named as a third-party defendant in a
lawsuit filed in state court in King County, Washington asserting claims for
indemnity and contribution and under Washington's Model Toxic Control Act
premised on Asarco's alleged sales of slag to a cement kiln, dust from which was
allegedly used as fill material by the City of Seattle in a public park near
plaintiff's property. Plaintiff seeks compensatory damages for property damage
and remedial costs and a declaratory judgment that defendants are liable for
future remedial costs.
- 16 -
<PAGE>
5. With respect to the lawsuit reported on Form 10-K for 1996 and prior years,
filed by ARCO Incorporated against Montana Resources and its partners, including
Asarco and one of its subsidiaries, alleging breach of contract resulting from
defendants' alleged failure to reclaim contaminated water in an inactive mining
pit at partnership-owned property in Butte, Montana, the litigation was settled
in February 1997.
6. With respect to the lawsuit reported on Form 10-K for 1996 and prior years
filed by Montana Mining Properties ("MMP") for alleged tortious interference by
Asarco with MMP's alleged contract with Montana Resources, Inc. ("MRI") for the
sale of MRI's copper mining business, in 1994 the court granted summary judgment
in favor of defendants, including Asarco and its 49.9 percent-owned partnership,
Montana Resources. On appeal, summary judgment was reversed in 1995, and the
case was remanded for further proceedings against all defendants other than
Asarco. On March 29, 1997, the court dismissed the claim against Montana
Resources, although terms of the dismissal do not preclude the future liability
of Montana Resources.
- 17 -
<PAGE>
Item 4 - Submission of Matters to a Vote of Security Holders
At the annual meeting of stockholders of the Company held on April 30, 1997,
stockholders were asked to elect four directors (the remaining directors
continue to serve in accordance with their previous election) and to approve the
selection of auditors for 1997.
Votes cast in the election of directors were as follows:
<TABLE>
<CAPTION>
Names Number of Shares
<S> <C> <C>
For Withheld
James C. Cotting 35,381,900 1,368,741
David C. Garfield 35,371,033 1,379,608
E. Gordon Gee 35,349,451 1,401,190
James Wood 35,378,122 1,372,519
</TABLE>
Stockholders approved the selection of auditors as follows:
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
35,519,198 113,776 117,667
</TABLE>
- 18 -
<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>
- 19 -
<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
March 31,
1997 1996
---- ----
<S> <C> <C>
Net earnings applicable to common stock $40,580 $35,685
======= =======
Weighted average number of common shares outstanding 42,881 42,618
Shares issuable from assumed exercise of Stock Options 70 210
------- -------
Weighted average number of common shares outstanding,
as adjusted 42,951 42,828
======= =======
Fully diluted earnings per share:
Net earnings applicable to common stock $0.94 $0.83
===== =====
Primary earnings per share:
Net earnings applicable to common stock $0.95 $0.84
===== =====
</TABLE>
<PAGE>
Exhibit 12 Statement re Computation of Consolidated Ratio of Earnings to
Fixed Charges and Combined Fixed Charges and
Preferred Share Dividend Requirements
-------------------------------------
<TABLE>
<CAPTION>
Three months
Ended
March 31,
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
NET EARNINGS (LOSS) $ 40,580 $138,336 $169,153 $ 64,034 $ 15,619 $(83,091)
Adjustments
Taxes on Income 26,536 99,924 122,465 9,375 (36,503) (37,371)
Equity Earnings, Net of Taxes (1,749) (3,837) (1,837) (47,653) (27,384) (2,575)
Cumulative Effect of Change in
Accounting Principle - - - - (86,295) 53,964
Dividends received from non-
consolidated associated
companies - 4,047 1,828 14,301 1,676 803
Total Fixed Charges 18,630 83,553 99,516 66,377 64,359 62,200
Interest Capitalized (1,000) (2,839) (3,256) (869) (4,010) (7,433)
Capitalized Interest Amortized 661 2,274 2,949 1,727 1,629 1,825
Minority interest 27,202 88,331 129,543 809 693 615
-------- -------- -------- -------- -------- --------
EARNINGS (LOSS) $110,860 $409,789 $520,361 $108,101 $(70,216) $(11,063)
======== ======== ======== ======== ======== ========
FIXED CHARGES
Interest Expense $ 16,545 $ 76,442 $ 91,95 $ 62,529 $ 57,321 $ 51,230
Interest Capitalized 1,000 2,839 3,256 869 4,010 7,433
Imputed Interest Expense 1,085 4,272 4,306 2,979 3,028 3,537
-------- -------- -------- -------- -------- --------
TOTAL FIXED CHARGES $ 18,630 $ 83,553 $ 99,516 $ 66,377 $ 64,359 $ 62,200
======== ======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges 6.0 4.9 5.2 1.6 (1.1) (0.2)
======== ======== ======== ======== ======== ========
</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: May 9, 1997 /s/ Kevin R. Morano
-------------------
Kevin R. Morano
Vice President, Finance and
Chief Financial Officer
Date: May 9, 1997 /s/ William Dowd
-----------------
William Dowd Controller
- 20 -
<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 April 24, 1997 on our review of the interim
financial information of ASARCO Incorporated and Subsidiaries as of March 31,
1997 and for the three month periods ended March 31, 1997 and 1996 and included
in this Form 10-Q for the quarter ended March 31, 1997 is incorporated by
reference in the Company's Registration Statements on Form S-8 (File Nos.
2-67732, 2-83782, 33-34606, 333-16875 and 333-18083) 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
May 9, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 190253
<SECURITIES> 0
<RECEIVABLES> 565851
<ALLOWANCES> 8786
<INVENTORY> 376015
<CURRENT-ASSETS> 1243609
<PP&E> 4515358
<DEPRECIATION> 2212836
<TOTAL-ASSETS> 4231444
<CURRENT-LIABILITIES> 605895
<BONDS> 0
0
0
<COMMON> 620850
<OTHER-SE> 1160513
<TOTAL-LIABILITY-AND-EQUITY> 4231444
<SALES> 715599
<TOTAL-REVENUES> 715599
<CGS> 531848
<TOTAL-COSTS> 531848
<OTHER-EXPENSES> 77768
<LOSS-PROVISION> 227
<INTEREST-EXPENSE> 16545
<INCOME-PRETAX> 94404
<INCOME-TAX> 26622
<INCOME-CONTINUING> 40580
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40580
<EPS-PRIMARY> .95
<EPS-DILUTED> .94
</TABLE>
