1998
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, 1998 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, 1998 there were outstanding 39,660,682 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)
Condensed Consolidated Statement of Earnings
Three Months Ended March 31, 1998 and 1997 2
Condensed Consolidated Balance Sheet
March 31, 1998 and December 31, 1997 3
Condensed Consolidated Statement of Cash Flows
Three Months Ended March 31, 1998 and 1997 4
Notes to Condensed Consolidated Financial Statements 5-10
Item 2. Management's Discussion and Analysis of 11-15
Financial Condition and Results of
Operations
Report of Independent Accountants 16
Part II. Other Information:
Item 1. Legal Proceedings 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
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(unaudited)
<TABLE>
<CAPTION>
3 Months Ended
March 31,
<S> <C> <C>
1998 1997
---- ----
(in thousands)
Sales of products and services $633,463 $715,599
Operating costs and expenses:
Cost of products and services 556,983 531,848
Selling, administrative and other 37,448 33,369
Depreciation and depletion 36,272 30,231
Research and exploration 8,200 9,804
Environmental and other closed plant
charges, net of recoveries 4,307 4,364
Provision for asset impairment 20,000 -
------- -------
Total operating costs and expenses 663,210 609,616
Operating income (loss) (29,747) 105,983
Interest expense (17,460) (16,545)
Other income 7,117 4,966
-------- --------
Earnings (loss) before taxes on income and minority interests (40,090) 94,404
Taxes on income (benefit) (14,494) 26,622
--------- --------
Earnings (loss) before minority interests (25,596) 67,782
Minority interests in net earnings of consolidated subsidiaries (6,210) (27,202)
--------- ---------
Net earnings (loss) $ (31,806) $ 40,580
========== =========
Per share amounts:
Net earnings (loss):
Basic $ (0.80) $ 0.95
========= =========
Diluted $ (0.80) $ 0.94
========= =========
Cash dividends $ 0.20 $ 0.20
Weighted average number of shares outstanding:
Basic 39,648 42,881
Diluted 39,677 42,951
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE>
ASARCO Incorporated
and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 177,633 $ 210,559
Marketable securities 118,411 205,317
Accounts and notes receivable, net 479,076 446,966
Inventories 332,554 362,119
Other assets 93,726 74,967
------------ -----------
Total current assets 1,201,400 1,299,928
Investments:
Available-for-sale and other cost 127,640 126,843
Equity 62,932 61,337
Net property 2,445,690 2,418,810
Other assets including intangibles, net 204,700 203,484
----------- -----------
Total Assets $ 4,042,362 $ 4,110,402
=========== ===========
LIABILITIES
Current liabilities:
Bank loans $ 9,273 $ 204
Current portion of long-term debt 29,202 28,712
Accounts payable 328,307 352,839
Salaries and wages 31,951 35,788
Taxes on income 84,969 62,565
Reserve for closed plant and environmental matters 43,419 43,238
Other current liabilities 48,245 50,131
----------- -----------
Total current liabilities 575,366 573,477
----------- -----------
Long-term debt 879,036 849,991
Deferred income taxes 95,587 118,289
Reserve for closed plant and environmental matters 68,492 78,827
Postretirement benefit obligations other than pensions 105,497 104,491
Other liabilities and reserves 139,830 157,543
----------- -----------
Total non-current liabilities 1,288,442 1,309,141
----------- -----------
MINORITY INTERESTS 528,701 533,911
----------- -----------
COMMON STOCKHOLDERS' EQUITY
Common stock (a) 522,010 522,420
Accumulated other comprehensive income, net of tax (9) 3,389
Retained earnings 1,127,852 1,168,064
----------- -----------
Total Common Stockholders' Equity 1,649,853 1,693,873
----------- -----------
Total Liabilities, Minority Interests and Common
Stockholders' Equity $ 4,042,362 $ 4,110,402
=========== ===========
(a) Common shares: authorized 80,000 outstanding: 39,646 39,663
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE>
ASARCO Incorporated
and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
3 Months Ended
March 31,
1998 1997
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) $ (31,806) $ 40,580
Adjustments to reconcile net earnings (loss) to net cash provided from (used for)
operating activities:
Depreciation and depletion 36,272 30,231
Provision (benefit) for deferred income taxes (19,122) 4,095
Treasury stock used for employee benefits 1,037 2,139
Undistributed equity earnings (1,938) (1,836)
Net (gain) loss on sale of investments and property 177 (234)
Provision for asset impairment 20,000 -
Decrease in reserves for closed plant
and environmental matters (10,154) (3,802)
Minority interests 6,210 27,202
Cash provided from (used for) operating assets and liabilities:
Accounts receivable (32,671) (19,086)
Inventories 29,504 6,410
Accounts payable and accrued liabilities (8,120) (78,845)
Other operating assets and liabilities (28,232) 6,741
Foreign currency transaction gains (610) (90)
-------- -------
Net cash (used for) provided from operating activities (39,453) 13,505
-------- --------
INVESTING ACTIVITIES
Capital expenditures (99,497) (62,780)
Sale of property 1,960 54
Purchase of investments (592) (1,515)
Sale of available-for-sale securities 32,193 31,519
Purchase of available-for-sale securities (34,680) (30,833)
Proceeds from held-to-maturity investments 87,910 1,004
Purchase of held-to-maturity investments (1,004) -
--------- --------
Net cash used for investing activities (13,710) (62,551)
--------- --------
FINANCING ACTIVITIES
Debt incurred 223,435 82,770
Debt repaid (184,793) (14,623)
Escrow deposits on long-term loans 1,615 439
Net treasury stock transactions (1,919) (203)
Purchase of minority interests (3,658) (1,753)
Distributions to minority interests (7,708) (11,793)
Contributions from minority interests - 750
Dividends paid to common stockholders (7,929) (8,579)
-------- --------
Net cash provided from financing activities 19,043 47,008
Effect of exchange rate changes on cash 1,194 (117)
-------- --------
Decrease in cash and cash equivalents (32,926) (2,155)
Cash and cash equivalents at beginning of period 210,559 192,408
-------- --------
Cash and cash equivalents at end of period $177,633 $190,253
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
ASARCO Incorporated
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to
present fairly the Company's financial position as of March 31, 1998 and
the results of operations and cash flows for the three months ended March
31, 1998 and 1997. Certain reclassifications have been made in the
financial statements from amounts previously reported. This financial data
has been subjected to a 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 condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements
and notes thereto included in the Company's 1997 annual report on Form
10-K.
B. In accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, the Company's first quarter 1998 results include
a $20.0 million pre-tax charge ($13.0 million after-tax) as a result of
the pending sale of its Missouri lead business to The Doe Run Company, a
subsidiary of The Renco Group, Inc. The sale is subject to negotiation of
definitive agreements, regulatory approval and approval by each company's
board of directors. In addition, during the first quarter of 1998, the
Company recorded a $9.1 million pre-tax charge ($3.0 million after-tax)
for severance costs associated with the Southern Peru Copper Corporation
(SPCC) cost reduction program.
C. Inventories were as follows:
(in millions)
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, December 31,
1998 1997
---- ----
Inventories of smelters and refineries at lower of
LIFO cost or market $ 10.9 $ 7.4
Provisional cost of metals received from suppliers
for which prices have not yet been fixed 14.7 51.5
Mine inventories at lower of FIFO cost or market 85.7 88.9
Metal inventory at lower of average cost or market 47.0 45.6
Materials and supplies at lower of average cost or
market 143.5 138.2
Other 30.8 30.5
------- -------
Total $ 332.6 $ 362.1
======= =======
</TABLE>
At March 31, 1998, replacement cost exceeded inventories carried at LIFO
cost by approximately $88.9 million (December 31, 1997 - $86.4 million).
D. The consolidated effective tax rate increased in the first quarter of 1998
as compared to the first quarter of 1997 primarily because in 1997 SPCC
realized a reduction in its effective tax rate as a result of a
reinvestment allowance to expand the Cuajone Mine approved by the
Government of Peru.
-5-
<PAGE>
E. Financial Instruments:
Hedging: The Company may use derivative instruments to manage its exposure
to market risk from changes in commodity prices, interest rates or the
value of its assets and liabilities. Derivative instruments which are
designated as hedges must be deemed effective at reducing the risk
associated with the exposure being hedged and must be designated as a hedge
at the inception of the contract.
Depending on the market fundamentals of a metal and other conditions, the
Company may purchase put options or create 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. The cost of the options is amortized on a
straight-line basis during the period in which the options are exercisable.
Depending upon market conditions, the Company may either sell options it
holds or exercise the options at maturity. Gains or losses from the sale or
exercise of options, 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 futures contracts are reported as
a component of the underlying transaction.
Earnings include pre-tax gains from option sales and exercises related to
copper sold in the first quarter of 1998 of $11.0 million ($7.2 million
after-tax), including its beneficial interest in SPCC's price protection
program, compared with pre-tax gains of $11.2 million ($7.3 million
after-tax) in the first quarter of 1997.
Trading: As part of its price protection program, the Company may use
synthetic put options which consist of a call option and a forward sale on
the same quantity of metal. Price protection programs utilizing synthetic
puts may be implemented in steps. In cases where the step approach is used,
the Company's objective is to take advantage of current market conditions
to minimize its cost while at the same time limiting the Company's exposure
should market conditions change before the synthetic put is completed.
Until a synthetic put is completed, any calls not matched with a forward
sale are marked to market with the gain or loss, if any, recorded in
earnings. Earnings for the first quarter of 1998 include losses of $0.1
million from unrealized mark to market adjustments. 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 and $4.4 million ($2.9 million
after-tax) of unrealized mark to market gains.
As of March 31, 1998, the Company held call options covering 96.3 million
pounds of copper exercisable in the remaining three quarters of 1998 at an
average strike price of 99 cents. The carrying value of the call options
was $.2 million.
The recognized pre-tax gains of the Company's metal hedging and trading
activities, were as follows:
<TABLE>
<CAPTION>
(in thousands) Three Months Ended
March 31,
<S> <C> <C>
Metal 1998 1997
----- ---- ----
Copper $10,925 $15,071
Zinc - 900
------- -------
Total Gain $10,925 $15,971
======= =======
</TABLE>
-6-
<PAGE>
F. Business Segments:
(in millions)
<TABLE>
<CAPTION>
Segment Sales: Three Months Ended
March 31,
<S> <C> <C>
1998 1997
---- ----
Copper $ 435.0 $ 541.6
Lead, Zinc & Precious Metals 102.8 82.7
Specialty Chemicals 83.0 77.5
Aggregates 9.8 9.5
Exploration - -
All other 2.9 4.3
------- -------
Total $ 633.5 $ 715.6
======= =======
Segment Operating Earnings
(including equity earnings)
Copper $ 1.7 $ 118.6
Lead, Zinc & Precious Metals (27.0) (5.7)
Specialty Chemicals 7.7 6.4
Aggregates 1.2 1.0
Exploration (6.1) (7.0)
All other (5.3) (5.4)
------- -------
Total $ (27.8) $ 107.9
Interest and other (10.3) (11.6)
Less: Equity earnings (2.0) (1.9)
------- -------
Earnings (loss) before taxes on income
and minority interests $ (40.1) $ 94.4
======== =======
</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 alleged
contamination of ground water. The lawsuits could 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 four purported class
actions 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 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, as of March 31, 1998, are defendants in
665 lawsuits brought by 12,164 primary and 3,193 secondary plaintiffs
seeking substantial actual and punitive damages for personal injury or
death allegedly caused by exposure to asbestos. Two 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. In April 1998, the
Company and one subsidiary were named, among numerous defendants including
several tobacco companies, in a purported class action involving persons
claiming damages for personal injury or death arising from exposures to
asbestos and cigarette smoke. In addition, the Company and certain
subsidiaries are defendants in product liability lawsuits involving various
other products, including metals.
-7-
<PAGE>
In September and October 1997, separate purported class actions were
commenced against the Company in Omaha, Nebraska and in Denver, Colorado,
seeking compensatory and punitive damages for alleged contamination of
properties by emissions from the Company's former Omaha plant and the Globe
plant in Denver.
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. In 1996, the
court granted a motion to consolidate this case with a prior, similar
lawsuit filed by the Coeur d'Alene Tribe.
The Company and certain of its subsidiaries have received notices from the
United States Environmental Protection Agency (EPA) and the United States
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
that seek substantial damages and remediation. Remedial action is being
undertaken by the Company at some of the sites.
On January 23, 1998, the Company, the United States Department of Justice
and EPA announced the signing of a multi-region voluntary agreement
covering a broad range of environmental issues affecting the Company's
United States operations. The agreement is embodied in two consent decrees
filed in federal courts in Helena, Montana and Phoenix, Arizona. The Helena
consent decree was approved by the Court on May 5, 1998. The other consent
decree is still subject to court approval.
In connection with the matters referred to above, as well as at other
closed plants and sites where the Company is working with federal 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 insurance carriers and other parties are recorded as
assets when the recoveries are deemed probable.
Reserves for closed plants and environmental matters totaled $111.9 million
at March 31, 1998. The Company anticipates that expenditures relating to
these reserves will be made over the next several years. Net cash
expenditures against these reserves for the three months ended March 31,
1998 and 1997 were $14.7 million and $8.3 million, respectively.
The effect on pre-tax earnings of environmental and other closed plant
charges was $20.2 million in 1997 ($50.4 million in charges offset by $30.2
million in anticipated insurance and other recoveries), and $15.0 million
in 1996 ($67.7 million in charges offset by $52.7 million in insurance and
other recoveries) 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".
-8-
<PAGE>
Future environmental related expenditures cannot be reliably determined in
many circumstances due to the early stages of investigation, the
uncertainties relating to specific remediation methods and costs, the
possible participation of other potentially responsible parties and
changing environmental laws and interpretations. 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 not deemed probable.
H. Impact of new Accounting Standard:
The Company adopted SFAS No. 130, "Reporting Comprehensive Income". This
statement establishes standards for reporting and display of comprehensive
income and its components. For the quarters ended March 31, 1998 and 1997
comprehensive income consisted of net income, changes in unrealized gains
or losses on securities reported at fair value and foreign currency
translation adjustments.
Comprehensive income for the first quarter of 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---- ----
(in thousands)
Net income (loss) $(31,806) $ 40,580
Other comprehensive income:
Foreign currency translation adjustments (539) (6,631)
Unrealized gains (losses) on securities:
Unrealized gains (losses) during the period
(net of tax (benefit) of $(343) - 1998 and $9,222 - 1997) (636) 17,127
Less: reclassifications of gains included in income
(net of tax of $1,197 - 1998 and $10 - 1997) (2,223) (19)
--------- ---------
Comprehensive income (loss) (35,204) 51,057
========= ========
</TABLE>
-9-
<PAGE>
Accumulated other comprehensive income balances as of March 31, 1998 and
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Foreign currency Accumulated other
Unrealized gain on translation comprehensive
securities adjustments income (loss)
(in thousands)
March 31, 1998
Beginning balance $ 11,654 $ (8,265) $ 3,389
Current period change (2,859) (539) (3,398)
--------- --------- ---------
Ending balance $ 8,795 $ (8,804) $ (9)
======== ========= ==========
December 31, 1997
Beginning balance $ 56,311 $ 3,649 $ 59,960
Current period change (44,657) (11,914) (56,571)
--------- --------- ----------
Ending balance $ 11,654 $ (8,265) $ 3,389
========= ========= =========
</TABLE>
In March 1998, the Financial Accounting Standards Board issued SFAS No. 132
"Employers Disclosure about Pensions and other Postretirement Benefits".
This statement which is effective for fiscal years beginning after December
15, 1997, revises employers' disclosures about pensions and other
postretirement benefit plans but does not change the measurement or
recognition of those plans.
-10-
<PAGE>
Part I Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company reported a net loss of $31.8 million, or $.80 per share on a
diluted basis, for the first quarter ended March 31, 1998, compared with net
earnings of $40.6 million, or diluted earnings per share of $0.94, for the
first quarter of 1997. Results for the first quarter of 1998 include
non-recurring after-tax charges of $16.0 million, or $0.40 per share related to
a pending sale of the Company's Missouri lead business and for severance costs
associated with a cost reduction program. Results for the quarter ended March
31, 1997 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 net loss reported in 1998 is principally a result of low copper prices
which were lower by more than 30% from a year ago and the writedown of assets
associated with the pending sale of the Missouri lead business.
The Company announced in January 1998 a comprehensive cost reduction program
designed to produce pre-tax annual savings of $50 million. The program includes
operational improvements, and reductions in general and administrative expenses
and purchased services. This program is estimated to have produced a pre-tax
benefit of approximately $9.0 million in the first quarter of 1998. The Company
expects larger benefits in succeeding quarters as the full impact of the
program is realized.
On April 22, 1998 the Company announced an agreement to sell its Missouri lead
assets to The Doe Run Company, a subsidiary of The Renco Group Inc. The Company
expects to realize in excess of $55 million in cash on the sale and expects to
retain a royalty interest in the property. First quarter results include an
after-tax charge of $13.0 million ($20.0 million pre-tax) to write down the
book value of the assets.
Results for the three month period ended March 31, 1998 also include
non-recurring after-tax charges of $3.0 million ($9.1 million pre-tax) for
severance costs associated with a recently announced $30 million cost reduction
program by Southern Peru Copper Corporation (SPCC), a 54.3% owned subsidiary.
In the first quarter of 1998 the Company recognized pre-tax gains of $10.9
million ($7.1 million after-tax) as a result of its price protection program,
including its beneficial interest in SPCC's price protection program, compared
with pre-tax gains of $16.0 million ($10.4 million after-tax) in the first
quarter of 1997.
The Company's beneficial interest in mined copper production in the first
quarter of 1998 was 237.6 million pounds, a 1.6% increase from the same period
in 1997. The increase was attributable to an 8% increase in production at the
Company's North American copper operations, largely due to increased production
of low cost solvent extraction/ electrowinning (SX/EW) copper which grew by
12.5 million pounds. The gain in North American copper production was partially
offset by a 7% decrease in mined copper production at SPCC to 153.1 million
pounds. The increased production of low cost SX/EW copper was due to increased
production at the Company's Ray mine and the Silver Bell SX/EW facility which
started up in July 1997.
-11-
<PAGE>
The Company's specialty chemicals business recorded an increase of 20% in
pre-tax profits in the first quarter of 1998. Pre-tax earnings increased in the
first quarter of 1998 to $7.7 million from $6.4 million in the first quarter of
1997. The increase is largely a result of higher sales in Europe, particularly
Germany. As part of the Company's strategy for continued growth of the specialty
chemicals business, the previously announced acquisition of all the outstanding
shares of Deutsche Oberflachentechnik GmbH (DOT), a German specialty chemical
company, was completed in April 1998.
Improved market conditions for aggregates in the southeastern U.S. benefited the
aggregates business which recorded pre-tax profits of $1.2 million in the first
quarter of 1998, an increase of 20% compared with the prior year.
Sales: Sales in the first quarter of 1998 were $633.5 million, compared with
$715.6 million in the first quarter of 1997. The decrease in sales is a result
of lower copper prices as compared to the year ago quarter partially offset by
higher copper and silver sales volume.
Metal sales volumes and prices for the quarter were as follows:
Metal Sales Volume:
<TABLE>
Three Months Ended
March 31,
<S> <C> <C>
1998 1997
---- ----
Copper (000s pounds)
Asarco 335,000 277,800
SPCC 170,000 172,000
------- -------
Consolidated 505,000 449,800
Asarco Beneficial Interest (1) 423,000 368,400
Lead (000s pounds)
Asarco 57,800 57,000
Silver (000s ounces)
Asarco 8,822 6,485
SPCC 753 679
------ ------
Consolidated 9,575 7,164
Asarco Beneficial Interest (1) 9,222 6,843
Zinc (000s pounds) (2)
Asarco 37,000 33,800
Molybdenum (000s pounds) (2)
Asarco 1,465 1,474
SPCC 2,851 2,234
------ -------
Consolidated 4,316 3,708
Asarco Beneficial Interest (1) 2,980 2,650
</TABLE>
(1) At March 31, 1997, Asarco's equity ownership was 54.1% and its
beneficial interest in SPCC was 52.7%. At March 31, 1998, Asarco's
equity ownership was 54.3% and its beneficial interest in SPCC was
53.1%.
(2) 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.
-12-
<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,
<S> <C> <C>
1998 1997
---- ----
Copper (per pound - COMEX) $ 0.77 $ 1.11
Copper (per pound - LME) 0.77 1.10
Lead (per pound - LME) 0.24 0.31
Silver (per ounce - Handy & Harman) 6.25 5.02
Zinc (per pound - LME) 0.48 0.53
Molybdenum (per pound - Metals Week Dealer Oxide) 3.85 4.38
</TABLE>
Financial Instruments:
Hedging: The Company may use derivative instruments to manage its exposure to
market risk from changes in commodity prices, interest rates or the value of its
assets and liabilities. Derivative instruments which are designated as hedges
must be deemed effective at reducing the risk associated with the exposure being
hedged and must be designated as a hedge at the inception of the contract.
Depending on the market fundamentals of a metal and other conditions, the
Company may purchase put options or create 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. The cost of the options is amortized on a straight-line basis
during the period in which the options are exercisable. Depending upon market
conditions, the Company may either sell options it holds or exercise the options
at maturity. Gains or losses from the sale or exercise of options, 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 futures contracts are reported as a component of the underlying
transaction.
Earnings include pre-tax gains from option sales and exercises related to copper
sold in the first quarter of 1998 of $11.0 million ($7.2 million after-tax),
including its beneficial interest in SPCC's price protection program, compared
with pre-tax gains of $11.2 million ($7.3 million after-tax) in the first
quarter of 1997.
Trading: As part of its price protection program, the Company may use synthetic
put options which consist of a call option and a forward sale on the same
quantity of metal. Price protection programs utilizing synthetic puts may be
implemented in steps. In cases where the step approach is used, the Company's
objective is to take advantage of current market conditions to minimize its cost
while at the same time limiting the Company's exposure should market conditions
change before the synthetic put is completed. Until a synthetic put is
completed, any calls not matched with a forward sale are marked to market with
the gain or loss, if any, recorded in earnings. Earnings for the first quarter
of 1998 include losses of $0.1 million from unrealized mark to market
adjustments.
As of March 31, 1998, the Company held call options covering 96.3 million pounds
of copper exercisable in the remaining three quarters of 1998 at an average
strike price of 99 cents. The carrying value of the call options was $.2
million.
-13-
<PAGE>
The recognized pre-tax gains of the Company's metal hedging and trading
activities, were as follows:
<TABLE>
<CAPTION>
(in thousands) Three Months Ended
March 31,
<S> <C> <C>
Metal 1998 1997
- ----- ---- ----
Copper $10,925 $15,071
Zinc - 900
------- -------
Total Gain $10,925 $15,971
======= =======
</TABLE>
Cost of Products & Services: Cost of products and services were $557.0 million
in the first quarter of 1998, compared to $531.8 million in the first quarter of
1997. The increase in costs primarily reflected higher copper and silver sales
volume and an accrual of severance costs associated with SPCC's cost reduction
program. The cost reduction programs which are in place at Asarco and SPCC are
expected to improve pre-tax earnings at Asarco in 1998 by approximately $60
million, excluding the severance costs recorded in the first quarter. Costs were
partially offset by lower production costs at SPCC attributable to lower sales
volume of copper produced from purchased concentrates.
Nonoperating Items: Interest expense was $17.5 million in the first quarter of
1998, compared with $16.6 million in the comparable period of 1997. The increase
results from higher borrowings due to SPCC's expansion program at the Cuajone
mine. The increase in other income reflects higher interest income due to higher
cash balances at SPCC.
Taxes on Income: The consolidated effective tax rate increased in the first
quarter of 1998 as compared to the first quarter of 1997 primarily because in
1997 SPCC realized a reduction in its effective tax rate as a result of a
reinvestment allowance to expand the Cuajone Mine approved by the Government of
Peru.
Cash Flows:
First quarter - Net cash used for operating activities was $39.5 million in the
first quarter of 1998, compared with cash provided of $13.5 million in the first
quarter of 1997. The decrease is primarily the result of lower copper prices.
Net cash used for investing activities was $13.7 million in the first quarter of
1998, compared with cash used of $62.6 million in the first quarter of 1997. The
decrease in cash used for investing activities in the first quarter of 1998 is
due to higher proceeds from held-to-maturity investments at SPCC. The increase
in capital expenditures from the prior year reflects the expansion project at
the Cuajone mine.
Cash provided from financing activities in the first quarter of 1998 was $19.0
million as compared with $47.0 million in 1997. The change reflects a decreased
level of borrowing under the Company's revolving credit agreements.
Liquidity and Capital Resources: At March 31, 1998, the Company's debt as a
percentage of total capitalization (total debt, minority interests and
stockholders' equity) was 29.6%, compared with 28.3% at December 31, 1997.
Consolidated debt at the end of the first quarter 1998 was $917.5 million
compared with $878.9 million at the end of 1997. Additional indebtedness
permitted under the terms of the most restrictive of the Company's credit
agreements totaled $791.9 million at March 31, 1998.
-14-
<PAGE>
The Company expects that it will meet its cash requirements for 1998 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 $7.9 million or 20 cents
per share, in the first quarter of 1998 and $8.6 million or 20 cents per share
in the first quarter of 1997. In addition, SPCC paid dividends of $7.7 million
to minority interests in the first quarter of 1998. At the end of the first
quarter of 1998, the Company had 39,645,600 common shares issued and
outstanding, compared with 42,923,667 at the end of the first quarter of 1997
reflecting the repurchase of 3.3 million shares of the Company's outstanding
shares in 1997.
Impact of New Accounting Standard: In the first quarter of 1998, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income". This statement establishes standards for reporting and
display of comprehensive income and its components.
In March 1998, the Financial Accounting Standards Board issued SFAS No. 132
"Employers Disclosure about Pensions and other Postretirement Benefits". This
statement which is effective for fiscal years beginning after December 15,
1997, revises employers' disclosures about pensions and other postretirement
benefit plans but does not change the measurement or recognition of those
plans.
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 condensed consolidated balance sheet of ASARCO Incorporated
and Subsidiaries as of March 31, 1998 and the related condensed consolidated
statements of earnings and cash flows for the three month periods ended March
31, 1998 and 1997. These 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 condensed consolidated financial statements, referred to above,
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1997 and the
related consolidated statements of income, retained earnings, and cash flows for
the year then ended (not presented herein); and in our report dated January 27,
1998, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1997, is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
Coopers & Lybrand L.L.P.
New York, New York
April 20, 1998
-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
1997 and prior years. As of March 31, 1998, there were pending against Asarco
and its subsidiaries 665 lawsuits brought by 12,164 primary and 3,193 secondary
plaintiffs in 31 states seeking substantial damages for personal injury or
death allegedly caused by exposure to asbestos. As of March 31, 1998, LAQ,
Asarco and Capco have settled or have been dismissed from a total of 7,385
asbestos personal injury lawsuits brought by approximately 87,507 primary and
53,653 secondary plaintiffs.
2. In April 1998, LAQ and ASARCO were named in a purported class action filed
in state court in Charleston, West Virginia against 69 asbestos and tobacco
entities. The complaint seeks compensatory and punitive damages and requests an
order certifying a class on behalf of persons having claims for personal injury
or death arising from exposure to asbestos fibers and cigarette smoke.
3. With respect to the actions relating to asbestos-containing products in
structures reported on Form 10-K for 1997 and prior years, the one remaining
such action against LAQ was settled in February 1998.
4. With respect to the purported class action filed in Cook County Circuit
Court, Illinois, that was allegedly brought on behalf of a nationwide class of
persons claiming to be at an increased risk of developing asbestos-related
diseases as a result of asbestos exposure and which was reported on Form 10-K
for 1997, the plaintiffs' motion to dismiss voluntarily each of the defendants,
including Capco, was granted in January 1998.
5. With respect to the state court actions filed in Alabama by former Capco
employees against LAQ and nine former managerial and supervisory employees of
Capco, as reported on Form 10-K for 1997, LAQ settled the claims of three of
the 61 primary plaintiffs during February and April 1998. In addition, five
more former Capco employees filed a new lawsuit in the same court in March 1998
involving the same defendants and allegations as the above actions.
6. The Company received a citation on May 4, 1998 from the Occupational Safety
and Health Administration alleging safety and health violations at its East
Helena, Montana plant. Total proposed penalties are $247,000. The Company may
contest all or some of the alleged violations.
7. With respect to the purported class action commenced against the Company in
Denver, Colorado, seeking compensatory and punitive damages for alleged
contamination of properties by emissions from the Company's Globe plant,
reported on Form 10-K for 1997, the action was remanded to state court in
Denver on February 20, 1998.
8. With respect to the action in state court in Salt Lake City, Utah filed in
June 1996 against the Company and numerous other companies alleged to have been
engaged in mining or smelting in the Bingham Canyon area of Utah, reported on
Form 10-K for 1997, the Company was dismissed from that action, without
prejudice, in April 1998.
-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 29, 1998,
stockholders were asked to elect seven directors (the remaining directors
continue to serve in accordance with their previous election) and to approve the
selection of auditors for 1998.
Votes cast in the election of Class I directors to serve until the 2001 Annual
Meeting of Stockholders were as follows:
<TABLE>
<CAPTION>
Names Number of Shares
<S> <C> <C>
For Withheld
Vincent A. Calarco 35,172,004 338,338
Francis R. McAllister 35,195,835 314,507
Michael T. Nelligan 35,178,359 331,983
John D. Ong 35,175,964 334,378
</TABLE>
Votes cast in the election of Class II directors to serve until the 1999 Annual
Meeting of Stockholders were as follows:
<TABLE>
<CAPTION>
Names Number of Shares
<S> <C> <C>
For Withheld
Manuel T. Pacheco 35,163,421 346,921
Kevin R. Morano 35,199,953 310,389
</TABLE>
Votes cast in the election of a Class III director to serve until the 2000
Annual Meeting of Stockholders were as follows:
<TABLE>
<CAPTION>
Name Number of Shares
<S> <C> <C>
For Withheld
James W. Kinnear 35,181,581 328,761
</TABLE>
Stockholders approved the selection of auditors as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
For Against Abstain
35,281,850 120,828 107,664
</TABLE>
-18-
<PAGE>
Item 6(a) - Exhibits on Form 10Q
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
Exhibit
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).
Earnings per Common Share
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
3 Months Ended
March 31,
<S> <C> <C>
1998 1997
---- ----
Net earnings (loss) applicable to common stock $(31,806) $ 40,580
========= ========
Weighted average number of common shares outstanding 39,648 42,881
Shares issuable from assumed exercise of Stock Options 29 70
------- -------
Weighted average number of common shares outstanding,
as adjusted 39,677 42,951
======= =======
Diluted earnings (loss) per share:
Net earnings (loss) applicable to common stock $(0.80) $ 0.94
======= ======
Basic earnings (loss) per share:
Net earnings (loss) applicable to common stock $(0.80) $ 0.95
======= ======
</TABLE>
<PAGE>
Exhibit12 Statement re Computation of Consolidated Ratio of
------------------------------------------------------------
Earnings to Fixed Charges and Combined Fixed Charges and
----------------------------------------------------------
Preferred Share Dividend Requirements
------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Three months
Ended
March 31,
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
(Dollars in Thousands)
NET EARNINGS (LOSS) $(31,806) $143,392 $138,336 $169,153 $ 64,034 $ 15,619
Adjustments
Taxes on Income (14,579) 72,356 99,924 122,465 9,375 (36,503)
Equity Earnings, Net of Taxes (1,853) (7,706) (3,837) (1,837) (47,653) (27,384)
Cumulative Effect of Change
in Accounting Principle - - - - - (86,295)
Dividends received from non-
consolidated associated
companies - 5,209 4,047 1,828 14,301 1,676
Total Fixed Charges 21,632 84,972 83,553 99,516 66,377 64,359
Interest Capitalized (2,316) (5,515) (2,839) (3,256) (869) (4,010)
Capitalized Interest Amortized 830 2,113 2,274 2,949 1,727 1,629
Minority interest 6,210 90,605 88,331 129,543 809 693
-------- -------- -------- -------- -------- --------
EARNINGS (LOSS) $(21,882) $385,426 $409,789 $520,361 $108,101 $(70,216)
========= ======== ======== ======== ======== ========
FIXED CHARGES
Interest Expense $ 17,460 $ 74,247 $ 76,442 $ 91,954 $ 62,529 $ 57,321
Interest Capitalized 2,316 5,515 2,839 3,256 869 4,010
Imputed Interest Expense 1,856 5,210 4,272 4,306 2,979 3,028
-------- -------- -------- -------- -------- --------
TOTAL FIXED CHARGES $ 21,632 $ 84,972 $ 83,553 $ 99,516 $ 66,377 $ 64,359
======== ======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges (a) 4.5 4.9 5.2 1.6 (b)
======== ======== ======== ======== ======== ========
</TABLE>
(a) For the quarter ended March 31, 1998 earnings were insufficient to
cover fixed charges by $43,514.
(b) For the year ended December 31, 1993 earnings were insufficient to
cover fixed charges by $134,575.
<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 14, 1998 /s/ Kevin R. Morano
-------------------
Kevin R. Morano
Executive Vice President and
Chief Financial Officer
Date: May 14, 1998 /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 20, 1998 on our review of the interim
financial information of ASARCO Incorporated and Subsidiaries as of March 31,
1998 and for the three month periods ended March 31, 1998 and 1997 and included
in this Form 10-Q for the quarter ended March 31, 1998 is incorporated by
reference in the Company's Registration Statements on Form S-8 (File Nos.
2-67732, 2-83782, 33-34606, 333-16875, 333-18083 and 333-46181) 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 14, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 177633
<SECURITIES> 118411
<RECEIVABLES> 488425
<ALLOWANCES> 9349
<INVENTORY> 332554
<CURRENT-ASSETS> 1201400
<PP&E> 4747963
<DEPRECIATION> 2301273
<TOTAL-ASSETS> 4042362
<CURRENT-LIABILITIES> 575366
<BONDS> 0
<COMMON> 522010
0
0
<OTHER-SE> 1127843
<TOTAL-LIABILITY-AND-EQUITY> 4042362
<SALES> 633463
<TOTAL-REVENUES> 633463
<CGS> 556983
<TOTAL-COSTS> 556983
<OTHER-EXPENSES> 106227
<LOSS-PROVISION> 314062
<INTEREST-EXPENSE> 20482
<INCOME-PRETAX> (40090)
<INCOME-TAX> (14494)
<INCOME-CONTINUING> (31806)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (31806)
<EPS-PRIMARY> (0.80)
<EPS-DILUTED> (0.80)
</TABLE>
