1998
Third Quarter
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 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 October 31, 1998 there were outstanding 39,651,106 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)
Condensed Consolidated Statement of Earnings
Three Months and Nine Months Ended
September 30, 1998 and 1997 2
Condensed Consolidated Balance Sheet
September 30, 1998 and December 31, 1997 3
Condensed Consolidated Statement of Cash Flows
Three Months and Nine Months Ended
September 30, 1998 and 1997 4
Notes to Condensed Consolidated Financial Statements 5-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12-19
Report of Independent Accountants 20
Part II. Other Information:
Item 1. Legal Proceedings 21
Item 6(a) Exhibits on Form 10Q 22
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 23
Exhibit I - Independent Accountants' Awareness Letter
</TABLE>
-1-
<PAGE>
ASARCO Incorporated
and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(unaudited)
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended
September 30, September 30,
1998 1997 1998 1997
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Sales of products and services $545,600 $661,294 $1,781,333 $2,117,861
Operating costs and expenses:
Cost of products and services 460,904 525,418 1,545,496 1,615,382
Selling, administrative and other 34,530 32,670 105,814 102,366
Depreciation and depletion 36,107 34,804 108,065 96,962
Research and exploration 6,669 11,090 21,710 30,910
Environmental and other closed plant
Charges, net of recoveries 1,027 3,724 6,462 16,126
Provision for asset impairment - - 20,000 -
-------- -------- --------- ---------
Total operating costs and expenses 539,237 607,706 1,807,547 1,861,746
--------- --------- ---------- ---------
Operating income (loss) 6,363 53,588 (26,214) 256,115
Interest expense (17,665) (20,482) (51,523) (56,414)
Other income 4,683 5,933 24,030 23,824
Gain on sale of Grupo Mexico S.A. de C.V. - 52,616 - 73,281
---------- --------- -------- ------
Earnings (loss) before taxes on income and
minority interests (6,619) 91,655 (53,707) 296,806
Taxes on income (benefit) (943) 26,582 (16,918) 82,806
------ -------- -------- ------
Earnings (loss) before minority interests (5,676) 65,073 (36,789) 214,000
Minority interests in net earnings of
consolidated subsidiaries (9,921) (19,270) (25,157) (75,743)
-------- -------- -------- -------
Net earnings (loss) $ (15,597) $ 45,803 $ (61,946) $ 138,257
========= ======== ======== ========
Per share amounts:
Net earnings (loss)
Basic $ (0.39) $ 1.10 $ (1.56) $ 3.26
========= ========== ========= =========
Diluted $ (0.39) $ 1.09 $ (1.56) $ 3.24
========= ========== ========= =========
Cash dividends $ 0.20 $ 0.20 $ 0.60 $ 0.60
========= ======== ========= =========
Weighted average number of shares outstanding:
Basic 39,661 41,804 39,656 42,464
Diluted 39,661 41,970 39,656 42,630
</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>
September 30, December 31,
1998 1997
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 191,430 $ 210,559
Marketable securities 64,949 205,317
Accounts and notes receivable, net 428,675 446,966
Inventories 350,714 362,119
Other assets 83,510 74,967
---------- ----------
Total current assets 1,119,278 1,299,928
Investments:
Available-for-sale and other at cost 119,120 126,843
Equity method 56,867 61,337
Net property 2,469,992 2,418,810
Other assets including intangibles, net 221,762 203,484
---------- ----------
Total Assets $3,987,019 $4,110,402
========== ==========
LIABILITIES
Current liabilities:
Bank loans $ 43,937 $ 204
Current portion of long-term debt 36,083 28,712
Accounts payable 353,473 352,839
Salaries and wages 30,716 35,788
Taxes on income 89,433 62,565
Reserve for closed plant and environmental matters 47,601 43,238
Other current liabilities 45,719 50,131
---------- ----------
Total current liabilities 646,962 573,477
---------- ----------
Long-term debt 873,507 849,991
Deferred income taxes 79,748 118,289
Reserve for closed plant and environmental matters 27,219 78,827
Postretirement benefit obligations 108,160 104,491
Other liabilities and reserves 127,225 157,543
--------- ---------
Total non-current liabilities 1,215,859 1,309,141
--------- ---------
MINORITY INTERESTS 537,466 533,911
--------- ---------
COMMON STOCKHOLDERS' EQUITY
Common stock (a) 522,379 522,420
Accumulated other comprehensive income, net of tax (15,962) 3,389
Retained earnings 1,080,315 1,168,064
--------- ---------
Total Common Stockholders' Equity 1,586,732 1,693,873
--------- ---------
Total Liabilities, Minority Interests and Common
Stockholders' Equity $3,987,019 $4,110,402
========== ==========
(a) Common shares: authorized 80,000; outstanding: 39,661 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 9 Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) $(15,597) $45,803 $(61,946) $138,257
Adjustments to reconcile net earnings (loss)
to net cash provided from (used for) operating
activities:
Depreciation and depletion 36,107 34,804 108,065 96,962
Provision for (benefit from) deferred income taxes
(11,721) (28,916) (36,686) (24,558)
Treasury stock used for employee benefits 9 294 1,109 3,261
Undistributed equity (earnings) losses 995 107 1,187 (2,941)
Net (gain) loss on sale of investments and property
1,564 (52,616) 1,839 (73,335)
Provision for asset impairment - - 20,000 -
Increase (decrease) in reserves for closed
plant and environmental matters (13,274) 19,519 (47,245) 4,925
Minority interests 9,921 19,270 25,157 75,743
Cashprovided from (used for) operating assets and liabilities, net of
acquisitions:
Accounts receivable 25,129 59,242 18,775 26,315
Inventories (35,109) 7,944 11,993 32,258
Accounts payable and accrued liabilities 1,181 42,936 26,854 (14,514)
Other operating assets and liabilities 15,784 (12,654) 10,175 (197)
Foreign currency transaction (gains) losses
1,153 (723) 1,910 (1,798)
------- -------- -------- -------
Net cash provided from (used for) operating activities
16,142 135,010 81,187 260,378
-------- -------- ------- --------
INVESTING ACTIVITIES
Capital expenditures (84,834) (74,736) (255,961) (198,485)
Sale of property 47,079 3,155 49,447 43,871
Purchase of investments and business (1,663) (9,726) (39,607) (11,834)
Sale of available-for-sale securities 6,595 216,363 58,632 389,123
Purchase of available-for-sale securities (8,455) (17,588) (70,306) (67,706)
Purchase of held-to-maturity investments (13,294) (102,758) (40,486) (311,585)
Proceeds from held-to-maturity investments 862 15 180,854 1,033
-------- --------- --------- ---------
Net cash provided from (used for) investing
activities (53,710) 14,725 (117,427) (155,583)
-------- --------- --------- --------
FINANCING ACTIVITIES
Debt incurred 69,148 50 360,056 282,854
Debt repaid (50,361) (107,136) (294,203) (208,016)
Escrow deposits (withdrawals) on long-term loans (5,016) (2,963) 1,984 (14,841)
Treasury stock used for corporate purposes - 500 414 1,787
Treasury stock purchased (4) (67,358) (2,046) (70,568)
Purchase of minority interests (340) (1,965) (5,423) (4,646)
Distributions to minority interests (5,192) (14,376) (16,201) (40,091)
Contributions from minority interests - 812 - 2,363
Dividends paid to common stockholders (7,932) (8,377) (23,793) (25,547)
-------- -------- -------- -------
Net cash provided from (used for) financing
activities 303 (200,813) 20,788 (76,705)
Effect of exchange rate changes on cash (3,628) 2,502 (3,677) 3,042
-------- -------- -------- -------
Increase (decrease) in cash and cash equivalents (40,893) (48,576) (19,129) 31,132
Cash and cash equivalents at beginning of period 232,323 272,116 210,559 192,408
-------- -------- ------- -------
Cash and cash equivalents at end of period $191,430 $223,540 $191,430 $223,540
======== ======== ======== ========
</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 (consisting
only of normal recurring adjustments) necessary to present fairly the
Company's financial position as of September 30, 1998 and the results of
operations and cash flows for the three and nine month periods ended
September 30, 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 PricewaterhouseCoopers
LLP, the Company's independent accountants. The results of operations for
the three month and nine month periods are not necessarily indicative of
the results to be expected for the full year. The accompanying 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. On September 1, 1998 the Company completed the sale of its Missouri Lead
business, which had been announced on April 22, 1998, to The Doe Run
Company, a subsidiary of The Renco Group Inc. The Company realized
approximately $55.0 million in cash as a result of the sale, and retains a
royalty interest in the property. In the first quarter the Company
recorded an after-tax charge of $13.0 million ($20.0 million pre-tax) to
write down the book value of the assets in accordance with the provisions
of Statement of Financial Accounting Standards (SFAS) No.
121.
In addition, during the first quarter of 1998, the Company recorded
after-tax charges of $3.0 million ($9.1 million pre-tax and pre-minority
interest) 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>
September 30, December 31,
1998 1997
---- ----
Inventories of smelters and refineries at lower of
LIFO cost or market $ 6.2 $ 2.2
Provisional cost of metals received from suppliers
for which prices have not yet been fixed 50.7 56.7
Mine inventories at lower of FIFO cost or market 84.2 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 129.6 138.2
Other 33.0 30.5
------ ----
Total $ 350.7 $ 362.1
======= =======
</TABLE>
At September 30, 1998, replacement cost exceeded inventories carried at
LIFO cost by approximately $78.2 million (December 31, 1997 - $86.4
million).
Liquidation of LIFO inventories resulted in pre-tax earnings of $1.5
million in the three and nine month periods ended September 30, 1998.
-5-
<PAGE>
D. For purposes of computing earnings per share, basic and diluted, the
dilutive effect of stock options on common shares outstanding was as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(in millions) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding:
Basic 39.7 41.8 39.7 42.5
Dilutive effect of stock options - .2 - .1
---- ---- ---- ----
Diluted 39.7 42.0 39.7 42.6
==== ==== ==== ====
</TABLE>
E. The decrease in the consolidated effective tax rate in the third quarter
1998 as compared to the third quarter of 1997 is attributable to domestic
operating losses primarily as a result of low copper prices. The
consolidated effective tax rate increased in the nine month period ended
September 30, 1998 as compared to the corresponding period of 1997
primarily because in 1997 SPCC realized a reduction in its effective tax
rate as a result of a reinvestment incentive approved by the Government of
Peru in connection with the expansion of the Cuajone mine.
F. 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.
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.
-6-
<PAGE>
The recognized pre-tax gains (losses) of the Company's metal hedging and
trading activities, were as follows:
<TABLE>
<CAPTION>
(in millions) Three Months Ended Nine Months Ended
September 30, September 30,
Hedging: 1998 1997 1998 1997
------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Copper (1) $ - $1.3 $11.0 $14.0
Zinc - 0.5 - 1.2
---- ---- ----- -----
Total gains (losses) $ - $1.8 $11.0 $15.2
---- ---- ----- -----
Trading:
Realized gains (losses) $ - $ - $(0.2) $ 0.5
Unrealized mark to market gains (losses) (0.2) - (1.9) 5.5
----- ---- ------ -----
Total gains (losses) $(0.2) $ - $(2.1) $ 6.0
------ ---- ----- -----
Total hedging and trading gains (losses) $(0.2) $1.8 $ 8.9 $21.2
====== ==== ===== =====
</TABLE>
(1) Includes the Company's beneficial interest in SPCC'S price protection
program.
G. Business Segments:
(in millions)
Segment Sales:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Copper $ 395.7 $ 494.9 $1,220.4 $1,585.1
Lead, Zinc & Precious Metals 43.2 67.2 250.4 235.7
Specialty Chemicals 86.6 77.5 259.6 241.0
Aggregates 16.8 16.3 41.4 40.5
Exploration - - - -
All other 3.3 5.4 9.5 15.6
------- ------ ----- --------
Total Segment Sales $ 545.6 $ 661.3 $1,781.3 $2,117.9
======== ======= ======== ========
Segment Operating Earnings
(including equity earnings)
Copper $ 10.9 $ 59.4 $ 11.1 $287.2
Lead, Zinc & Precious Metals (9.2) (1.0) (43.1) (12.0)
Specialty Chemicals 6.9 7.4 22.8 21.7
Aggregates 4.9 4.7 10.5 10.2
Exploration (3.9) (8.1) (14.1) (22.1)
All other (2.4) (6.6) (10.6) (21.9)
----- ----- ------ ------
Total Segment Operating Earnings $ 7.2 $ 55.8 $ (23.4) $263.1
Interest and other (13.0) 38.1 (27.5) 40.7
Less: Equity earnings 0.8 2.2 2.8 7.0
----- ----- ------ -------
Earnings before taxes on income and minority
interests $ (6.6) $ 91.7 $ (53.7) $296.8
======= ====== ========= ======
</TABLE>
-7-
<PAGE>
H. Contingencies and Litigation:
The Company is a defendant in lawsuits in Arizona, the earliest of which
commenced in 1975, 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 thirteen 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 September 30, 1998, are defendants
in 943 lawsuits brought by 7,089 primary and 4,196 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 class actions, two of which are allegedly brought on behalf of
persons who are not known to have asbestos-related injury. The third is
purportedly brought on behalf of persons suing both tobacco-related and
asbestos-related entities claiming damages for personal injury or death
arising from exposure to asbestos and cigarette smoke. In addition, the
Company and certain subsidiaries are defendants in product liability
lawsuits involving various other products, including metals.
In 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 damage 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
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. In the first quarter 1998, the United States
Environmental Protection Agency (EPA) announced that it would conduct a
remedial investigation and feasibility study of the Coeur d'Alene River
Basin. In the second quarter 1998, the court rejected the government's
position that its evaluation of injury and restoration plan for the Coeur
d'Alene Basin must be upheld unless the administrative record shows it to
be arbitrary and capricious or otherwise not in accordance with law.
The Company and certain of its subsidiaries have received notices from 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
-8-
<PAGE>
laws that seek substantial damages and remediation. Remedial action is
being undertaken by the Company at some of the sites.
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 $74.8 million
at September 30, 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 September
30, 1998 and 1997 were $15.4 million and $14.2 million, respectively, and
for the nine months ended September 30, 1998 and 1997 were $55.4 million
and $41.2 million, respectively.
The effect on pre-tax earnings of environmental and other closed plant
charges was $6.5 million for the nine month period ended September 30, 1998
compared with $16.1 million for the nine month period ended September 30,
1997.
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.
I. Impact of new Accounting Standard:
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income".
This statement establishes standards for reporting and presentation of
comprehensive income and its components. For the three and nine month
periods ended September 30, 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.
-9-
<PAGE>
Comprehensive income for the three and nine month periods ended
September 30, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $(15,597) $45,803 $(61,946) $138,257
Other comprehensive income:
Foreign currency translation adjustments (4,800) (2,543) (8,022) (7,341)
Unrealized gains (losses) on securities:
Unrealized gains (losses) during the period, net of tax
(a) (3,149) 4,736 (4,682) 2,229
Less: Reclassifications of gains included in income, net
of tax (b) 2,991 34,604 6,647 48,373
-------- -------- ------ ------
Comprehensive income (loss) $(26,537) $13,392 $(81,297) $84,772
========= ======= ========= =======
</TABLE>
(a) Includes income tax expense (benefit) of $(1,695) and $2,551 for the
three month period ended September 30, 1998 and 1997, respectively,
and $(2,521) and $1,199 for the nine month period ended September 30,
1998 and 1997, respectively.
(b) Includes income taxes of $1,611 and $18,633 for the three month period
ended September 30, 1998 and 1997, respectively, and $3,579 and
$26,047 for the nine month period ended September 30, 1998 and 1997,
respectively.
Accumulated other comprehensive income balances as of September 30, 1998
and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Foreign currency Accumulated other
Unrealized gain on translation adjustments comprehensive income (loss)
securities
(in thousands)
<S> <C> <C> <C>
September 30, 1998
Beginning balance $11,654 $ (8,265) $3,389
Current period change (11,329) (8,022) (19,351)
------- -------- -------
Ending balance $ 325 $(16,287) $(15,962)
======= ======== ========
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
-10-
<PAGE>
statement which is effective for fiscal years beginning after December 15,
1997, will have no effect on the Company's financial statements but will
modify the disclosures about pensions and other postretirement benefit
plans.
In March 1998, the American Institute of Certified Public Accountants
Accounting Standards Executive Committee issued Statement of Position No.
98-1 "Accounting for the Costs for Computer Software Developed or Obtained
for Internal Use." This statement which is effective for fiscal years
beginning after December 15, 1998, provides guidance on accounting for the
costs of computer software developed or obtained for internal use. This
statement will not have a material impact on the Company's financial
statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". This
statement which is effective for fiscal quarters of fiscal years beginning
after June 15, 1999, establishes accounting and reporting standards for
derivative instruments and hedging activities.
The Company is currently assessing the impact of this statement.
-11-
<PAGE>
Part I Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company reported a net loss of $15.6 million, or $0.39 per share, for the
third quarter ended September 30, 1998, compared with net earnings of $45.8
million, or $1.09 per common share on a diluted basis, for the third quarter
ended September 30, 1997. The loss for the third quarter of 1998 was principally
the result of lower copper prices. Results for the third quarter ended September
30, 1997 include an after-tax gain of $31.7 million, or $0.76 per share, from
the sale of a portion of the Company's interest in Grupo Mexico, S.A. de C.V.
(Grupo Mexico), Mexico's largest mining company.
For the nine month period ended September 30, 1998, the Company reported a net
loss of $61.9 million, or $1.56 per share, compared with net earnings of $138.3
million, or $3.24 per diluted share, for the comparable 1997 period. Results for
the nine month period ended September 30, 1998, include non-recurring after-tax
charges of $16.0 million , or $0.40 per share related to the sale of the
Company's Missouri lead business and for severance costs associated with a cost
reduction program. Results for the nine month period ended September 30, 1997
include pre-tax gains of $73.3 million ($47.6 million after-tax) from the sale
of shares of Grupo Mexico.
The Company's third quarter 1998 results reflect the sharp decline in metal
prices in 1998 compared with the previous year. The average price of copper
declined 27 cents per pound on the New York Commodity Exchange and 29 cents per
pound on the London Metal Exchange. Much of the impact of the price declines was
offset by higher production and lower costs from the Company's North American
copper operations as a result of operating efficiencies and the effect of a cost
reduction program instituted earlier this year.
Results for the nine month period ended September 30, 1998 also reflect low
copper prices, down 30% from a year ago, the write down of assets associated
with the sale of the Missouri Lead business and charges for severance costs
associated with a cost reduction program.
A $50.0 million cost reduction program was initiated by the Company early this
year in response to the decline in the copper price. The program is estimated to
have produced a pre-tax improvement of $16.0 million ($10.4 million after-tax)
in the third quarter of 1998, and $42.0 million ($27.3 million after-tax) for
the nine months ended September 30, 1998. A similar program was initiated early
in the second quarter by Southern Peru Copper Corporation (SPCC), a 54.3% owned
subsidiary of the Company. SPCC's cost reduction program is designed to improve
its pre-tax earnings by $30.0 million annually. The Company's beneficial
interest in SPCC's pre-tax cost savings during the third quarter of 1998 was an
additional $6.0 million ($3.7 million after-tax), making the total impact of the
cost reduction programs in the third quarter of 1998 approximately $22.0 million
($14.1 million after-tax). For the nine month period ended September 30, 1998
the total impact of the cost reduction programs was approximately $52.0 million
pre-tax ($34.1 million after-tax), including the Company's beneficial interest
in SPCC's cost savings.
In the first quarter 1998 the Company recorded after-tax charges of $3.0 million
($9.1 million pre-tax and pre-minority interest) for severance costs associated
with SPCC's cost reduction program. In the case of both cost reduction programs,
-12-
<PAGE>
improvements have come from reductions in
operating expenses, purchased services, exploration and general and
administrative expenses.
In the third quarter of 1998 the Company recognized pre-tax losses of $0.2
million as a result of its price protection program, compared with pre-tax gains
of $1.8 million ($1.2 million after-tax) in the third quarter of 1997. There
were no pre-tax gains or losses from SPCC price protection in the third quarter
of 1998 and 1997. For the nine month period ended September 30, 1998 the Company
recognized pre-tax gains of $8.9 million ($5.8 million after-tax) compared with
pre-tax gains of $21.2 million ($13.8 million after-tax) in the nine month
period ended September 30, 1997.
The Company's beneficial interest in mined copper production in the third
quarter of 1998 increased to 264.5 million pounds, a 4.5% increase from the same
period in 1997. For the first nine months of 1998, the Company's beneficial
mined copper production was 754.6 million pounds compared with 716.4 million
pounds in the first nine months of 1997. The increases in the third quarter and
in the first nine months of 1998 were attributable to increased production at
the Company's North American copper operations, largely due to increased
production of copper produced from the low cost solvent extraction/electrowining
(SX/EW) process at the Company's Ray mine and the Company's 75% owned Silver
Bell mine which started up in July of 1997. The gains in North American copper
production were partially offset by a decrease in mined production at SPCC.
In early June the Company announced that it curtailed production by 15% at its
copper refinery located in Amarillo, Texas. The curtailment which is expected to
reduce refined copper production by approximately 12 million pounds per month
was the result of shortages of raw materials including copper anodes, blister
and scrap. The curtailment will continue until adequate supplies of copper feed
become available.
Profits from the Company's specialty chemicals business were $6.9 million in the
third quarter of 1998 compared with $7.4 million in the year earlier period.
Weakness in the Asian economies resulted in lower demand in that sector and
North America for some of its products. In April the Company completed the
acquisition of Deutsche Oberflachtechnik GmbH (DOT), a German specialty
chemicals company which is expected to contribute to the growth of the Company's
Specialty Chemicals business in Europe.
Third quarter results from the Company's aggregates business were $4.9 million,
compared with $4.7 million in the third quarter of 1997. The increase reflects
good demand in the Southeast.
On September 1, 1998 the Company completed the sale of its Missouri Lead
business, announced on April 22, 1998, to The Doe Run Company, a subsidiary of
The Renco Group Inc. The Company realized approximately $55.0 million in cash as
a result of the sale, and retains a royalty interest in the property. In the
first quarter the Company recorded an after-tax charge of $13.0 million ($20.0
million pre-tax) to write down the book value of the assets.
Sales: Sales in the third quarter of 1998 were $545.6 million, compared with
$661.3 million in the third quarter of 1997. The decrease is due to lower copper
prices as compared to the year ago quarter and lower lead sales volume due to
the sale of the Missouri Lead business. Sales for the nine month period ended
September 30, 1998, were $1,781.3 million compared to $2,117.9 million for the
comparable 1997 period. The decrease in sales in the nine month period of 1998
compared with the same period of 1997 is a result of lower copper prices,
partially offset by higher copper sales volume primarily from the SX/EW
operations and higher silver sales volume.
-13-
<PAGE>
Metal sales volumes and prices for the three and nine month periods ended
September 30, 1998 and 1997 were as follows:
Metal Sales Volume:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
<S> <C> <C> <C> <C>
1998 1997 1998 1997
Copper (000s pounds)
Asarco 281,500 274,300 906,400 823,500
SPCC 215,900 199,600 553,100 555,600
------- ------- ------- -------
Consolidated 497,400 473,900 1,459,500 1,379,100
Asarco Beneficial Interest (1) 393,600 378,800 1,192,700 1,115,600
Lead (000s pounds)
Asarco 35,600 70,900 159,400 197,500
Silver (000s ounces)
Asarco 1,943 3,340 20,614 15,258
SPCC 910 818 2,428 2,313
------ ------ ------ -------
Consolidated 2,853 4,158 23,042 17,571
Asarco Beneficial Interest (1) 2,427 3,771 21,906 16,477
Zinc (000s pounds) (2)
Asarco 46,000 36,600 121,000 109,000
Molybdenum (000s pounds) (2)
Asarco 1,309 1,234 4,028 4,047
SPCC 2,449 1,924 8,030 6,412
----- ------- ------- ------
Consolidated 3,758 3,158 12,058 10,459
Asarco Beneficial Interest (1) 2,612 2,249 8,299 7,426
</TABLE>
(1) At September 30, 1998, Asarco's equity ownership was 54.3% and its
beneficial interest in SPCC was 53.2%. At September 30, 1997, Asarco's
equity ownership was 54.1% and its beneficial interest in SPCC was
52.7%.
(2) The Company's zinc and molybdenum production is sold in the form of
concentrates. Volume represents pounds of zinc and molybdenum metal
contained in concentrate.
-14-
<PAGE>
Average Metal Prices:
Prices for the Company's metals are established principally on the New York
Commodity Exchange (COMEX) or the London Metal Exchange (LME).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Copper (per pound - COMEX) $0.75 $1.02 $0.77 $1.09
Copper (per pound - LME) 0.74 1.03 0.77 1.09
Lead (per pound - LME) 0.24 .28 0.24 .29
Silver (per ounce - Handy & Harman) 5.22 4.53 5.73 4.77
Zinc (per pound - LME) 0.46 .73 0.48 .62
Molybdenum (per pound - Metals Week
Dealer Oxide) 3.20 4.27 3.65 4.35
</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.
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.
-15-
<PAGE>
The recognized pre-tax gains (losses) of the Company's metal hedging and
trading activities, were as follows:
<TABLE>
<CAPTION>
(in millions) Three Months Ended Nine Months Ended
September 30, September 30,
Hedging: 1998 1997 1998 1997
------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Copper (1) $ - $1.3 $11.0 $14.0
Zinc - 0.5 - 1.2
----- ---- ----- -----
Total gains (losses) $ - $1.8 $11.0 $15.2
----- ---- ----- -----
Trading:
Realized gains (losses) $ - $ - $(0.2) $ 0.5
Unrealized mark to market gains (losses) (0.2) - (1.9) 5.5
----- ---- ----- -----
Total gains (losses) $(0.2) $ - $(2.1) $ 6.0
------ ---- ------ -----
Total hedging and trading gains (losses) $(0.2) $1.8 $ 8.9 $21.2
====== ==== ===== =====
</TABLE>
(1) Includes the Company's beneficial interest in SPCC'S price protection
program.
Cost of Products & Services: Cost of products and services were $460.9 million
in the third quarter of 1998 and $1,545.5 million for the nine month period
ended September 30, 1998 compared with $525.4 million and $1,615.4 million for
the respective periods in 1997. The decrease in costs for the three month period
reflects lower lead sales volume due to the sale of the Missouri Lead business,
and lower costs at Asarco and SPCC attributable to the effect of the cost
reduction programs. For the nine month period, lower costs were offset by higher
copper and silver sales volume and an accrual of severance costs associated with
SPCC's cost reduction program.
Environmental and Other Closed Plant Charges: Environmental and other closed
plant charges were $1.0 million in the third quarter of 1998 and $6.5 million
for the nine month period ended September 30, 1998, compared with $3.7 million
and $16.1 million for the respective periods in 1997. The decrease in expenses
in the third quarter and first nine months of 1998 compared with the prior year
periods is the result of lower spending in the 1998 periods, reflecting the
effect of the Company's cost reduction program on outside legal expenses, and
higher expenses incurred in 1997 in connection with a voluntary compliance
initiative with the EPA and a plant closure.
Nonoperating Items: Interest expense was $17.7 million in the third quarter of
1998 and $51.5 million for the nine month period ended September 30, 1998,
compared with $20.5 million and $56.4 million for the respective periods in
1997. The decreases are due to lower average interest rates for the three and
nine month periods ended September 30, 1998 over the comparable three and nine
month periods in 1997.
Taxes on Income: The decrease in the consolidated effective tax rate in the
third quarter of 1998 as compared to the third quarter of 1997 is attributable
to domestic operating losses as a result of low copper prices. The consolidated
effective tax rate increased in the nine month period ended September 30, 1998
as compared to the corresponding period of 1997 primarily because in 1997 SPCC
realized a reduction in its effective tax rate as a result of a reinvestment
incentive approved by the Government of Peru in connection with the expansion of
the Cuajone mine.
-16-
<PAGE>
Cash Flows:
Third quarter - Net cash provided from operating activities was $16.1 million in
the third quarter of 1998, compared with $135.0 million in the third quarter of
1997. The decrease is primarily the result of lower earnings resulting from
lower copper prices and an increase in inventory compared with the second
quarter of 1998.
Net cash used for investing activities was $53.7 million in the third quarter of
1998, compared with net cash provided of $14.7 million in the third quarter of
1997. Investing activities for the three month period ended September 30, 1998
include proceeds from the sale of the Company's Missouri Lead business offset by
purchases of held-to-maturity investments by SPCC and capital expenditures. The
increase in capital expenditures from the prior year reflects the expansion
project at the Cuajone mine. Investing activities for the three months ended
September 30, 1997 include proceeds from the sale of shares of Grupo Mexico
partially offset by purchases of held-to-maturity investments by SPCC.
Cash provided from financing activities in the third quarter of 1998 was $0.3
million as compared with cash used of $200.8 million in 1997. The change
reflects the use of the proceeds from the sale of shares in Grupo Mexico to
reduce debt and repurchase Company stock in the third quarter of 1997.
Nine months - Net cash provided from operating activities was $81.2 million for
the nine month period ended September 30, 1998, compared with $260.4 million in
the corresponding prior period. The decrease is the result of lower copper
prices partially offset by an increase in foreign income taxes.
Cash used for investing activities was $117.4 million for the nine month period
ended September 30, 1998, compared with $155.6 million in the corresponding
prior year period. Investing activities for the nine month period ending
September 30, 1998 include proceeds from held-to-maturity securities at SPCC,
proceeds from the sale of the Company's Missouri Lead business offset by the
acquisition of DOT in April 1998 and capital expenditures of $256.0 million,
principally related to the expansion project at the Cuajone mine. Investing
activities for the nine month period ended September 30, 1997 include proceeds
from the sale of shares of Grupo Mexico partially offset by the investment of
the proceeds from SPCC financing activities in held-to-maturity investments.
Cash provided from financing activities for the nine months ended September 30,
1998 was $20.8 million compared with cash used of $76.7 million in the
corresponding prior period. The change reflects a decrease in distributions to
minority interests as a result of lower earnings at SPCC during the nine month
period ended September 30, 1998 and a decrease in treasury stock purchased. Debt
incurred during the nine month period ended September 30, 1998 reflects
financing of the DOT acquisition and the Company's partial usage of its
revolving credit line. During the nine month period ended September 30, 1997
proceeds from the sale of shares of Grupo Mexico were used to reduce debt and
purchase Company stock. Debt incurred for the nine month period ended September
1997 reflects the sale of $150.0 million of Secured Export Notes and $50.0
million of bonds due 2004 to partially finance the SPCC expansion project at the
Cuajone mine.
Liquidity and Capital Resources: At September 30, 1998, the Company's debt as a
percentage of total capitalization (total debt, minority interests and
stockholders' equity) was 31.0%, compared with 28.3% at December 31, 1997.
Consolidated debt at the end of the third quarter 1998 was $953.5 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 $663.7 million at September 30, 1998. Additional debt
-17-
<PAGE>
permitted under the terms of the most restrictive of SPCC's credit agreements
totaled $873.6 million at September 30, 1998.
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 third quarter of 1998 and $8.4 million or 20 cents per share
in the third quarter of 1997. In addition, SPCC paid dividends of $4.2 million
to minority interests in the third quarter of 1998 and $14.4 million in the
third quarter of 1997. At September 30, 1998, the Company had 39,660,802 common
shares issued and outstanding, compared with 40,806,000 at the end of the third
quarter of 1997 reflecting the program to repurchase shares of the Company's
outstanding shares in 1997.
On October 28, 1998, the Board of Directors declared a quarterly dividend of 10
cents per share payable December 2, 1998 to stockholders on record at the close
of business on November 11, 1998. The Board's decision to lower the dividend
from the previous rate of 20 cents per share per quarter was taken as a result
of lower copper prices and their impact on earnings.
Year 2000 The Company has implemented a three phase program to identify and
resolve Year 2000 (Y2K) issues related to the integrity and reliability of its
computerized information systems as well as computer systems embedded in its
production processes. Phase one of the Company's program which involved an
assessment of Y2K compliance of the Company's computerized information systems
and embedded computer systems has been completed. In phase two of the program
the Company is modifying or replacing all non-compliant systems. As of September
30, 1998, approximately 95% of the Company's systems are Y2K compliant and the
remainder are expected to be Y2K compliant by the second quarter of 1999.
As of September 30, 1998, the Company had spent approximately $1.3 million in
addition to its normal internal information technology costs in connection with
its Y2K program. The Company expects to incur additional costs of $1.8 million
including its beneficial interest in SPCC's Y2K costs to complete phases two and
three of the program.
Under the third phase of the program the Company has sent detailed information
requests to its principal customers, suppliers and service providers to
determine the status of their Y2K compliance. As of September 30, 1998, the
Company received confirmations from approximately 80% indicating that they are
or will be Y2K compliant. The Company expects to have further communications
with those who have not responded or have indicated further work was required to
achieve Y2K compliance. The third phase of the program is expected to be
completed in the first quarter of 1999. SPCC has sent surveys to its major
customers, suppliers and service providers and also expects to complete this
phase of its program in the first quarter of 1999.
Among other things, the Company's operations depend on the availability of
utility services, principally electricity, and reliable performance by domestic
and international transportation services. A substantial disruption in any of
these services due to providers of these services failing to achieve Y2K
compliance would have an adverse impact on the Company's financial results the
significance of which would depend on the length and severity of the disruption.
The Company is currently identifying alternatives and will complete a
contingency plan for each of its principal operations by March 1999. The purpose
of the contingency plan is to identify possible alternatives which could be used
in the event of a disruption in the delivery of essential goods or services and
to minimize the effect of such a disruption.
-18-
<PAGE>
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 presentation 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,
will have no effect on the Company's financial statements but will modify the
disclosures about pensions and other postretirement benefit plans.
In March 1998, the American Institute of Certified Public Accountants Accounting
Standards Executive Committee issued Statement of Position No. 98-1 "Accounting
for the Costs for Computer Software Developed or Obtained for Internal Use."
This statement which is effective for fiscal years beginning after December 15,
1998, provides guidance on accounting for the costs of computer software
developed or obtained for internal use. This statement will not have a material
impact on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". This statement
which is effective for fiscal quarters of fiscal years beginning after June 15,
1999, establishes accounting and reporting standards for derivative instruments
and hedging activities. The Company is currently assessing the impact of this
statement.
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.
-19-
<PAGE>
PricewaterhouseCoopers LLP
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 September 30, 1998 and the related condensed consolidated
statements of earnings and cash flows for the three month and nine month periods
ended September 30, 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.
PricewaterhouseCoopers LLP
New York, New York
October 19, 1998
-20-
<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 Forms 10-K for 1997 and 10-Q for the first and second quarters
of 1998. As of September 30, 1998, there were pending against Asarco and
its subsidiaries 943 lawsuits brought by 7,089 primary and 4,196 secondary
plaintiffs in 29 states seeking substantial damages for personal injury or
death allegedly caused by exposure to asbestos. As of September 30, 1998,
LAQ, Asarco, and Capco have settled or have been dismissed from a total of
9,632 asbestos personal injury lawsuits brought by 97,063 primary and
58,894 secondary plaintiffs.
2. On or about October 21, 1998, the Company received a "60-day notice"
under the Clean Air Act on behalf of a Hayden, Arizona, resident and a
local environmental group. The notice states the senders' intent to
commence a civil action in U.S. District Court for the District of Arizona
sixty days after the notice is given for civil penalties for alleged
violations of the Act at the Company's Hayden Smelter.
-21-
<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>
-22-
<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 9 Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings (loss) applicable to common stock $(15,597) $45,803 $(61,946) $138,257
========= ======= ========= ========
Weighted average number of common shares outstanding
39,661 41,804 39,656 42,464
Shares issuable from assumed exercise of Stock Options
- 166 - 166
----- ------ ------- ------
Weighted average number of common shares outstanding, as adjusted
39,661 41,970 $39,656 $42,630
====== ====== ======= =======
Basic earnings (loss) per share:
Net earnings (loss) applicable to common stock $(0.39) $ 1.10 $(1.56) $ 3.26
======= ====== ======= =======
Diluted earnings (loss) per share:
Net earnings (loss) applicable to common stock $(0.39) $ 1.09 $(1.56) $ 3.24
======= ====== ======= =======
</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>
Nine months ended
September 30,
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
NET EARNINGS (LOSS) $(61,946) $138,257 $138,336 $169,153 $ 64,034 $ 15,619
Adjustments
Taxes (benefit) on Income (17,585) 81,076 99,924 122,465 9,375 (36,503)
Equity Earnings, Net of Taxes (2,138) (5,201) (3,837) (1,837) (47,653) (27,384)
Cumulative Effect of Change in
Accounting Principle - - - - - (86,295)
Dividends received from non-
consolidated associated
companies 3,992 4,159 4,047 1,828 14,301 1,676
Total Fixed Charges 65,595 62,496 83,553 99,516 66,377 64,359
Interest Capitalized (8,264) (3,518) (2,839) (3,256) (869) (4,010)
Capitalized Interest Amortized 1,189 1,928 2,274 2,949 1,727 1,629
Minority interest 25,157 75,743 88,331 129,543 809 693
--------- -------- ------- -------- -------- -------
EARNINGS (LOSS) $ 6,000 $354,940 $409,789 $520,361 $108,101 $(70,216)
======= ======== ======== ======== ======== ========
FIXED CHARGES
Interest Expense $51,523 $56,414 $ 76,442 $ 91,954 $ 62,529 $ 57,321
Interest Capitalized 8,264 3,518 2,839 3,256 869 4,010
Imputed Interest Expense 5,808 2,564 4,272 4,306 2,979 3,028
-------- -------- -------- -------- -------- --------
TOTAL FIXED CHARGES $65,595 $ 62,496 $ 83,553 $ 99,516 $ 66,377 $ 64,359
======= ======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges (a) 5.7 4.9 5.2 1.6 (b)
======= ======== ======== ======== ======== ========
</TABLE>
(a) For the nine months ended September 30, 1998 earnings were insufficient to
cover fixed charges by $59,595.
(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: November 12, 1998 /s/ Kevin R. Morano
-------------------
Kevin R. Morano
Executive Vice President and
Chief Financial Officer
Date: November 12, 1998 /s/ William Dowd
----------------
William Dowd
Controller
-23-
<PAGE>
Exhibit I
PricewaterhouseCoopers LLP
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
We are aware that our report dated October 19, 1998 on our review of the interim
financial information of ASARCO Incorporated and Subsidiaries as of September
30, 1998 and for the three month and nine month periods ended September 30, 1998
and 1997 and included in this Form 10-Q for the quarter ended September 30, 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.
PricewaterhouseCoopers LLP
New York, New York
November 12, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 191430
<SECURITIES> 64949
<RECEIVABLES> 439008
<ALLOWANCES> 10333
<INVENTORY> 350714
<CURRENT-ASSETS> 1119278
<PP&E> 4726277
<DEPRECIATION> 2256285
<TOTAL-ASSETS> 3987019
<CURRENT-LIABILITIES> 646962
<BONDS> 0
<COMMON> 522379
0
0
<OTHER-SE> 1064353
<TOTAL-LIABILITY-AND-EQUITY> 3987019
<SALES> 1781333
<TOTAL-REVENUES> 1781333
<CGS> 1545496
<TOTAL-COSTS> 1545496
<OTHER-EXPENSES> 262051
<LOSS-PROVISION> 945
<INTEREST-EXPENSE> 51523
<INCOME-PRETAX> (53707)
<INCOME-TAX> (16918)
<INCOME-CONTINUING> (61946)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (61946)
<EPS-PRIMARY> (1.56)
<EPS-DILUTED> (1.56)
</TABLE>
