ITEM 1. BUSINESS.
GENERAL
Lukens Inc. is a holding company incorporated in Delaware. Subsidiaries of Lukens Inc. manufacture carbon, alloy and clad steel plates, and stainless steel sheet, strip, plate, hot band and slabs. In 1992, Lukens expanded into stainless steel product lines with the acquisition of Washington Steel Corporation for $273.7 million. Production facilities and markets are located primarily in the United States.
As part of a program adopted in 1993 to focus Lukens' resources on its steel businesses, the subsidiaries previously reported in the Corrosion Protection Group, Safety Products Group and most subsidiaries in the Diversified Group were classified as discontinued operations. In 1994, all of these subsidiaries were sold except for our pipe-coating subsidiary, which is actively being marketed.
BUSINESS GROUPS
Lukens has two business groups, the Lukens Steel Group and the Washington Stainless Group. Financial information for these business groups is incorporated herein by reference to Note 3 to the financial statements included in Part II, Item 8 of this Form 10-K. The chart below outlines the business group composition of consolidated net sales for each of the last three years. The Washington Stainless Group 1992 percent represents sales from the acquisition date on April 24, 1992.
Composition of Consolidated Net Sales by Business Group
LUKENS STEEL GROUP
The Lukens Steel Group specializes in the production of carbon, alloy and clad steel plate. Lukens Steel Company ranks as one of the three largest domestic plate steel producers and is the largest domestic producer in the alloy plate market. There are several domestic and foreign competitors. Major competitors are United States Steel, a subsidiary of the USX Corporation, and Bethlehem Steel Corporation.
Lukens Steel's competitive position is enhanced by a concentration on plate with a product line that includes a wide range of plate sizes and grades. In addition to price and quality, customer satisfaction, measured by shipped-on- time performance and production lead times, has become increasingly important in the competitive environment. Price competition has been and is expected to remain intense.
Products are sold primarily by an in-house sales force. Steel service centers are the largest market for the group, accounting for approximately 40 percent of annual shipments in the last three years. The Lukens Steel Group supplies a wide range of markets in the capital-goods sector of the economy, including markets for:
. Machinery and Industrial Equipment . Infrastructure . Environmental and Energy . Transportation . Military and Defense.
Some sales involve government contracts which, under certain circumstances, are subject to termination or renegotiation. Terminations for convenience of the government generally provide for payments to a contractor for its costs and a portion of its profit. Lukens does not expect any material portion of its business to be terminated or renegotiated.
Raw materials used in the production of carbon and alloy steel plate include carbon scrap, alloy scrap and alloy additives. Generally, these materials are purchased in the open market and are available from several sources. Prices and availability are affected by the operating level of the domestic steel industry, the quantity of scrap exported, and world political and economic conditions. Scrap costs increased significantly in 1993 and remained at relatively high levels in 1994. Increasing selling prices during 1994 began to offset these higher scrap costs. Scrap remains readily available.
Principal energy sources used in production include electricity and natural gas. Propane gas back-up systems are available at the Coatesville, Pennsylvania, manufacturing facility in the event of natural gas supply restrictions. Forward exchange or hedge contracts for the purchase of natural gas are used to manage the group's exposure to price volatility.
WASHINGTON STAINLESS GROUP
Washington Steel Corporation is the largest subsidiary in the group, representing 69 percent of the group's sales in 1994. This subsidiary specializes in the manufacture and marketing of stainless steel sheet, strip, plate, hot band and slabs. Primary competitors include Allegheny Ludlum Corporation, J&L Specialty Products Corporation, North American Stainless and Armco Inc. Washington Steel's competitive position is built on the ability to serve niche markets by providing a wide range of quality products.
Similar to the competitive environment in the Lukens Steel Group, customer satisfaction, measured by shipped-on-time performance and production lead times, has become increasingly important. Price and quality are also significant factors in the competitive environment. Since 1993, increased competition has put pressure on selling prices; however, strong demand for stainless steel products has resulted in recent improvements in price.
Washington Specialty Metals Corporation is a service and distribution center that specializes in stainless steel. There are numerous competitors on both a national and a regional scale. Washington Specialty Metals is a leading distributor of flat-rolled stainless steel.
Products are sold primarily by the group's own sales organizations. The primary market of the group is service centers, which represented approximately 37 percent of shipments in 1994. The Washington Stainless Group ultimately supplies diverse markets, including:
. Process Industries . Food Service Equipment . Architecture and Construction . Transportation . Consumer Durables.
Raw materials used in production include stainless scrap, chrome, nickel and molybdenum. Generally, these materials are purchased in the open market and are available from several sources. Prices and availability are affected by the operating level of the domestic steel industry, the quantity of scrap exported, and world political and economic conditions. Nickel costs remain highly volatile. Forward exchange or hedge contracts for nickel are used to manage the group's exposure to market price volatility. Due to recent significant increases in costs for nickel and molybdenum, Washington Steel Corporation has been able to institute price increases. Principal energy sources used in production include electricity and natural gas.
SALES ORDER BACKLOG (Dollars in thousands)
Listed below is the backlog from continuing operations at the end of 1994 and 1993. The backlog at year-end 1994 is anticipated to be shipped in 1995.
ENVIRONMENT
Lukens is subject to Federal, state, and local environmental laws and regulations. An environmental committee meets quarterly to review environmental and remediation issues. Also, outside consultants are used on technical issues. The trend for tighter environmental standards is expected to result in higher waste disposal costs and additional capital expenditures in the long term.
In 1994, capital expenditures for environmental compliance projects were $3.9 million. In 1995 and 1996, capital expenditures are anticipated to be approximately $16.3 million and $4.6 million, respectively. Projected 1995 capital expenditures are primarily for expanded pollution control equipment at the melting facilities of Washington Steel Corporation.
Lukens is a potentially responsible party under Superfund law at certain waste disposal sites. The company's exposure to remediation costs at these sites depends upon several factors, including changing laws and regulations and the allocation of costs among all potentially responsible parties. Our exposure is expected to be limited based on the volumes of waste which might be attributable to Lukens and the number and financial strength of other potentially responsible parties. Based on information currently available, management believes that any future costs in excess of amounts already accrued will not have a material adverse effect on the company's financial condition, results of operations or competitive position.
EMPLOYEES
The average number of employees during 1994 was 4,060.
ITEM 2.
ITEM 2. PROPERTIES.
CAPITAL EXPENDITURE PROGRAM
Capital expenditures in 1994 of $120.3 million were part of a five-year, $400 million program that began in 1993. The program is aimed at promoting synergies between the Lukens Steel Group and the Washington Stainless Group, and expanding our product lines to take advantage of anticipated long-term growth in stainless steel markets. The centerpiece of the program is the installation of a plate and sheet processing system at our facility in Conshohocken, Pennsylvania. The new system utilizes Steckel rolling technology and is designed to lower production costs, improve quality and expand the product range of both the Lukens Steel Group and the Washington Stainless Group. Start-up of this system is expected to begin at the end of the first quarter of 1995. Benefits from this system will not begin to be realized until late in 1995. Other expenditures in the program include an increase in stainless melting capacity and upgrades to stainless finishing facilities.
LUKENS STEEL GROUP
Raw steel is produced by an electric arc furnace at the Coatesville, Pennsylvania, plant. Approximately 70 percent of 1994 production was continuously cast into slabs at this facility. Rolling and fabrication facilities are located in Coatesville and Conshohocken, Pennsylvania. Other relatively small properties include a fabrication facility, located in Newton, North Carolina, and a real estate development and management company in New Castle, Delaware. The group operated near capacity in 1994. In 1995, steel slabs are anticipated to be purchased to supplement melting capacity. Capacity of other facilities is considered adequate to support projected sales.
WASHINGTON STAINLESS GROUP
Washington Steel Corporation has melting, continuous casting and rolling facilities in Houston, Pennsylvania. Both the Washington, Pennsylvania, and Massillon, Ohio, facilities have rolling and finishing facilities. Utilization of these facilities ranged between 85 and 100 percent in 1994. Our stainless melting facilities operated at full capacity through most of 1994. Capacity of facilities is considered adequate to support projected sales.
Washington Specialty Metals Corporation has fabrication and distribution facilities in Wheeling, Illinois, and Lawrenceville, Georgia. Additional distribution centers are located in:
. Carrollton, Texas . Youngsville, North Carolina . Tampa, Florida . Brampton, Ontario, Canada . Vaudreuil, Quebec, Canada.
PLANT AND EQUIPMENT PLEDGED AS COLLATERAL
Plant and equipment with a net depreciated cost of $47.3 million are pledged as collateral, primarily for industrial revenue bonds.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
Approximately 350 workers' compensation claims alleging hearing loss have been asserted against Lukens Steel Company, a wholly-owned subsidiary, by current and former employees before the Pennsylvania Workers' Compensation Board. A $5.6 million reserve has been established to cover potential awards and defense costs resulting from these claims. As of year-end 1994, an aggregate of 249 workers' compensation claimants released their claims and received negotiated payments which were, in the aggregate, within the amount of the established reserve.
In 1994, approximately 22 workers' compensation claims alleging hearing loss were asserted against Washington Steel Corporation, a wholly-owned subsidiary. Management does not have sufficient information at this time to assess the impact, if any, of these claims on the financial condition or results of operations of Lukens Inc.
Lukens is involved in litigation and administrative proceedings which seek the recovery of response costs with respect to certain waste disposal sites. Lukens' potential exposure in these actions will vary according to the amount of responsibility attributed to Lukens, the allocation of responsibility among and financial viability of other responsible parties, and the method and duration of remedial action. In the opinion of management, any liabilities arising from these sites in excess of amounts already accrued will not have a materially adverse effect on the company's financial position.
The company is party to various claims, disputes, legal actions and other proceedings involving product liability, contracts, equal employment opportunity, occupational safety and various other matters. In the opinion of management, the outcome of these matters should not have a material adverse effect on the consolidated financial condition or results of operations of the company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were voted upon during the fourth quarter of 1994.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following executive officers were elected by the Board of Directors until their respective successors are elected:
Executive Officer Executive Officer/Title Age Since - ----------------------- --- ----------------- R. W. Van Sant 56 October 1991 Chairman and Chief Executive Officer
John H. Bucher 55 April 1993 Vice President-Technology
Robert E. Heaton 65 April 1992 Senior Vice President- Vice Chairman-Stainless Group
C. B. Houghton, Jr. 54 November 1994 Vice President and Controller
T. Grant John 56 February 1993 Vice President-President and Chief Operating Officer-Washington Steel
Richard D. Luzzi 43 February 1993 Vice President-Human Resources
James J. Norton 38 April 1992 Vice President-President and Chief Operating Officer-Washington Specialty Metals
Dennis M. Oates 42 February 1987 Senior Vice President-President and Chief Operating Officer-Carbon and Alloy Group
Frederick J. Smith 51 April 1993 Vice President-Manufacturing Services
William D. Sprague 53 October 1988 Vice President, General Counsel and Secretary
John C. van Roden, Jr. 46 February 1987 Vice President and Treasurer
Listed below are executive officers that have not been employed by Lukens in an executive or managerial capacity during the last five years.
R. W. VAN SANT was previously the president and chief executive officer and a director of Blount, Inc. Prior to his association with Blount in 1987, he served as president and chief operating officer and a director of the Cessna Aircraft Company. He had earlier served as vice president of manufacturing and engineering at Deere and Company where he was employed for 26 years.
ROBERT E. HEATON, prior to the acquisition of Washington Steel Corporation by Lukens in 1992, was president and chief operating officer of Washington Steel since 1989, and served as president and chief executive officer from 1981.
T. GRANT JOHN was previously with the Axel Johnson Group, a privately-owned Swedish company with extensive holdings of stainless steel businesses. During his 14 years with Axel Johnson, Mr. John held operating and management positions in the corporation's United States operations. Since 1985, Mr. John was a corporate vice president of Axel Johnson, Inc.
RICHARD D. LUZZI joined Rockwell International Corporation in 1980 and became vice president-human resources at Rockwell Graphic Systems, Inc. in 1988. In 1991, he assumed the additional responsibility of vice president- international human resources for Rockwell International.
JAMES J. NORTON, prior to the acquisition of Washington Steel Corporation by Lukens in 1992, was president of the service center group. Previously, he was the chief financial officer of Mercury Stainless Corporation, including Washington Steel, from 1986 to 1991.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information contained in the section entitled "Dividends" in Part II, Item 7 of this Form 10-K and in the section entitled "Quarterly Financial Data" in Part II, Item 8 of this Form 10-K is incorporated herein by reference in response to this item.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
Lukens Inc. -- Financial Information
SELECTED FINANCIAL HIGHLIGHTS FOR ELEVEN YEARS
a. Includes results from the Washington Steel Corporation acquisition on April 24, 1992.
Dollars and shares in thousands except per share amounts
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Lukens Inc. -- Management's Discussion and Analysis Dollars in thousands except per share amounts
THE YEAR IN REVIEW
The following discussion focuses on the results of operations and on the financial condition of Lukens Inc. In addition to the consolidated results analysis, the results of our two business groups, Lukens Steel Group and Washington Stainless Group, are discussed. The Washington Stainless Group resulted from the acquisition of Washington Steel Corporation in April 1992. This acquisition had a significant impact on Lukens' results of operations and financial condition.
This section should be read in conjunction with the consolidated financial statements and notes.
SUMMARY OF RESULTS
CONSOLIDATED RESULTS FROM CONTINUING OPERATIONS
Net Sales. Sales were up 10 percent in 1994 with both business groups contributing to the increase. The Washington Stainless Group benefited from higher shipments and strong service center market conditions. Higher selling prices and shipments resulted in the Lukens Steel Group improvement.
1993 sales were up 24 percent compared to 1992. The increase primarily reflected the comparison of Washington Stainless Group 1993 sales to 1992, which was for a partial year from the April 1992 acquisition to year-end. The Lukens Steel Group recorded a sales increase, primarily from higher shipments.
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Lukens Inc. -- Management's Discussion and Analysis
Operating Earnings. Operating earnings were up 35 percent in 1994. Included in 1993 earnings was a $14,921 fourth quarter provision recorded in the Lukens Steel Group that was primarily for a work force reduction program. Excluding the 1993 provision for comparison purposes, 1994 operating earnings were down 4 percent. The decline reflected Lukens Steel Group results that were impacted by increased scrap costs, costs associated with severe winter weather, and costs and disruptions related to the capital expenditure program. Sales improvements at the Washington Stainless Group translated to higher earnings in 1994.
Operating earnings in 1993 were down 29 percent compared to 1992. The decrease was attributable to the Lukens Steel Group, which experienced a less profitable shipment mix, higher scrap costs and recorded a fourth quarter provision discussed previously. Selling and administrative expenses increased 43 percent in 1993 compared to 1992. The increase reflected the comparison of Washington Stainless Group 1993 expenses to a partial year in 1992. Higher expenses were also attributable to increased retiree benefit costs associated with the adoption of a new accounting standard, discussed in Note 1, and increased pension expense and consulting fees.
Interest Income. Since the acquisition of Washington Steel in April 1992, short- term investment levels and related interest income have remained at relatively low levels.
Interest Expense. Interest expense in 1994 decreased 19 percent with most of the decline attributable to higher amounts of capitalized interest associated with capital expenditures. Lower interest rate swap expense also contributed to the decline.
Acquisition-related interest for a full year in 1993 compared to a partial year in 1992 resulted in a 21 percent increase. The increase also reflected higher interest rates on the $150,000 of long-term notes, 7.625 percent coupon rate, issued in the third quarter of 1992, compared to lower short-term interest rates incurred prior to the issuance of the notes.
Income Tax Expense. The effective tax rate was 39.0 percent in 1994, 35.3 percent in 1993 and 39.1 percent in 1992. Included in the 1994 rate was .7 percent from the revaluation of net deferred tax assets following changes to Pennsylvania corporate income tax rates and net operating loss deduction rules. The 1993 rate included a favorable adjustment of 3.6 percent from the revaluation of net deferred tax assets following a 1 percent increase in the Federal corporate tax rate to 35 percent.
The effective tax rate for 1994 and 1993 was based on a new accounting standard for income taxes discussed in Note 1. The deferred tax assets recognized in the adoption of the standard were based on the combination of future reversals of existing taxable temporary differences, carryback availability, tax planning strategies and future taxable income.
Earnings From Continuing Operations. In 1994, higher operating earnings combined with lower interest expense generated a 69 percent increase in earnings from continuing operations compared to 1993.
In 1993, lower operating earnings and higher interest expense translated into a 45 percent drop in earnings from continuing operations compared to 1992.
Earnings From Discontinued Operations. 1993 earnings from discontinued operations, net of taxes, were down 40 percent compared to 1992 earnings. Lower activity for large pipe-coating orders at our ENCOAT subsidiary and weaker market conditions experienced by the other subsidiaries resulted in the decline. During the fourth quarter of 1993, a $4,500 provision, $2,772 after tax, was recorded to recognize a change in the estimated realizable value of discontinued operations. In 1994, results and divestiture gains and losses were charged against this reserve.
Earnings Before Cumulative Effect of 1993 Accounting Changes. As a result of the factors discussed above, 1994 earnings were up 39 percent over 1993 earnings before the cumulative effect of accounting changes. 1993 earnings were down 52 percent compared to 1992.
Dollars in thousands except per share amounts
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Net Earnings (Loss). During 1993, Lukens adopted new accounting standards for retiree medical and life insurance benefits and for income taxes, discussed in Note 1. The cumulative effect of adopting these accounting standards was a net expense of $65,901. As a result, a net loss of $49,999 was recorded in 1993.
BUSINESS GROUPS
Lukens Steel. The 7 percent sales increase in 1994 reflected higher selling prices and increased shipments. Shipped tons of 725,900 in 1994 were up slightly from 1993 shipments of 711,800 tons. Operating earnings were up 51 percent compared to 1993. Earnings in 1993 included a $14,921 fourth quarter provision. The provision included $9,660 for a work force reduction program, and other charges for environmental remediation and workers' compensation claims.
Excluding the 1993 provision for comparison purposes, operating earnings were down 19 percent in 1994. The decline reflected higher scrap costs, costs associated with severe weather conditions during the first quarter, and production disruptions and related costs from the capital expenditure program.
Strong shipment levels partially offset by a lower-value shipment mix resulted in a 7 percent increase in 1993 sales from 1992. Shipments for the year were up 10 percent from 1992 shipped tons of 646,100.
Operating earnings in 1993 were down 59 percent compared to 1992, largely the result of the fourth quarter charge discussed previously. Additionally, the impact of a less profitable shipment mix and higher scrap costs squeezed profit margins. Increased employee benefit costs were also incurred from the recognition of accrual expense for retiree medical and life insurance benefits resulting from the adoption of a new accounting standard, discussed in Note 1, and from higher pension expense.
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Lukens Inc. -- Management's Discussion and Analysis
Washington Stainless. The 16 percent increase in 1994 sales reflected improved service center sales and increased shipments of sheet, strip and plate products. Lower selling prices on certain products, especially during the first half of the year, partially offset sales gains. Shipped tons of 259,500 in 1994 were 24 percent higher than 1993 shipments of 208,800. Sales improvements translated to a 7 percent increase in earnings with the increase limited by the impact of lower selling prices and a less profitable shipment mix.
Sales for 1993 were up 50 percent and operating earnings were up 64 percent compared to 1992 results. The increases partially reflected the comparison of 1993 to 1992 results that were from the acquisition of the group in late April 1992. 1993 results benefited from production efficiencies, lower nickel costs and improved earnings from the service center operations. On the negative side, increased imports put pressure on 1993 selling prices. Shipped tons in 1992 were 147,500.
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BUSINESS OUTLOOK
1995 will be a pivotal year for Lukens with major capital expenditure projects scheduled to come on-line. These projects represent key elements of our five- year, $400,000 capital expenditure program that began in 1993.
By the end of the first quarter, the plate and sheet processing system that utilizes Steckel rolling technology is scheduled to start up at our Conshohocken, Pennsylvania, facility. Anticipated benefits from this project include lower production costs, improved quality and an expanded product range. The start-up will require several months and the benefits will not begin to be realized until late in 1995. Also in 1995, projects to increase stainless melting capacity will be completed.
Earnings in 1995 will be limited by start-up expenses and production disruptions from these projects, particularly during the first half of the year. The plate and sheet processing system is a complex project, and our ability to implement the start-up as planned will be a significant factor in 1995.
Dollars in thousands except per share amounts
Business conditions in 1995 are expected to remain strong for both business groups. In the Lukens Steel Group, higher selling prices are anticipated. Although scrap prices remain high, continued selling price improvements should improve margins. The Washington Stainless Group is expected to benefit from higher selling prices to help offset rising nickel and other raw material costs. Overall, the successful start-up of our capital expenditure projects combined with anticipated strong market conditions should result in an earnings improvement over 1994.
FINANCIAL CONDITION
Capital Structure. At the end of 1994, cash and cash equivalents totaled $9,806, a decrease of $1,677 from the end of 1993. Working capital of $106,480 was down $39,554. The divestitures of discontinued operations caused a decrease in working capital of $31,925. The current ratio was 1.6 compared to 1.9 at year-end 1993.
Debt at the end of 1994 was $208,485, a decrease of $18,104, or 8 percent from year-end 1993. The decrease was caused primarily by the net repayment of short- term notes under our revolving credit agreements and by the repayment of a $3,000 industrial revenue bond. Proceeds from discontinued operations divestitures contributed to reduced debt levels.
The $150,000 of long-term notes at year-end were rated Baa2 by Moody's and BBB+ by Standard and Poor's. Included in year-end debt was $22,767 of ESOP debt, which is guaranteed by Lukens. The ratio of long-term debt to total capital (long-term debt plus stockholders' investment) was 42.1 percent at the end of 1994, which compared to 45.3 percent at year-end 1993.
During June 1994, a shelf registration for $100,000 of Lukens Inc. notes was completed. Although there are no immediate plans to issue the notes, they are available as a financing option for our capital expenditure program and other long-term liquidity needs. The notes are structured to provide Lukens with flexibility in maturities, from nine months to 30 years, and flexibility in interest rate structures.
Effective January 15, 1995, our revolving credit agreements were amended. The amendments increased our committed line of credit by $25,000 to $150,000 and reduced our rate structures. The term of the agreements was also extended until January 15, 2000.
Lukens enters forward exchange contracts (derivatives) with the objective to manage or hedge our exposure to market price changes of certain commodities used in manufacturing. We do not speculate or trade in these agreements for profit. These contracts generally provide for the exchange of a market price for a fixed price based on a notional quantity. Contracts are executed under the guidelines of a corporate policy. The policy specifies members of management with the authority to execute agreements and establishes limits on the amount of contracts outstanding. As of year-end 1994, we were party to several agreements for 1995, which are discussed in Note 9.
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Lukens Inc. -- Management's Discussion and Analysis
Liquidity -- Short Term. Cash flow from operating activity was $79,180 in 1994 compared to $72,290 in 1993. Financing activity required $31,397 with dividend payments of $17,140 and net debt repayments of $14,726. Investing activity required $49,460 with capital spending of $120,342 partially offset by proceeds from the sale of assets and subsidiaries of $70,433.
Based on our business outlook, we do not anticipate any significant increases to our cash flow from operating activity in the short term. As discussed previously, the key to 1995 results and cash flow will be our ability to implement the start-up of major capital expenditure projects as planned. Consolidated backlog at year-end 1994 was $168,500, up 66 percent from the beginning of the year.
Capital expenditure projections for 1995 are relatively high at approximately $110,000. We anticipate funding these expenditures primarily through the combination of cash flow from operations and debt under our existing committed line of credit.
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Liquidity -- Long Term. In the long term, Lukens relies on the ability to generate sufficient cash flows from operating activity to fund investing and financing requirements and to maintain a target long-term debt-to-capital ratio of 35 percent. As the chart below indicates, Lukens has consistently generated cash from operations totaling $210,654 over the past three years. Because of our five-year, $400,000 capital expenditure program that began in 1993, we continue to exceed our target long-term debt-to-capital ratio. The projected benefits of the program should improve cash flow from operations and enable us to reach our target in the long term.
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Environmental Compliance. We are projecting capital expenditures of approximately $16,308 in 1995 and $4,577 in 1996 for environmental compliance. The trend for tighter environmental standards is expected to result in higher waste disposal costs and additional capital expenditures in the long term.
Lukens is a potentially responsible party under Superfund law at certain waste disposal sites. As discussed in Note 11, our exposure to remediation costs at these sites depends on several factors. Based on information currently available, we believe that any future costs in excess of amounts already accrued will not have a material adverse effect on our financial condition, results of operations or competitive position.
Dollars in thousands except per share amounts
Debt Financing. Lukens' long-term notes outstanding of $150,000 are due in 2004. Supporting both our short- and long-term liquidity needs are agreements for a committed line of credit and a shelf registration for $100,000 of Lukens Inc. notes, discussed in the Capital Structure section.
Other Commitments. A contract for the supply of oxygen and related products to a Lukens Steel Group manufacturing facility runs until 2007 and includes take- or-pay provisions totaling $30,838 at the end of 1994. Washington Steel Corporation has contracts for the supply of nickel. The contracts include minimum quantities and market-based pricing. Based on year-end 1994 market conditions, the value of these contracts totaled $83,981.
Inflation. On average, inflation rates for the domestic economy have not been severe over the past few years. Although long-term inflation rates are difficult to predict, Lukens believes it has the flexibility in operations and capital structure to maintain a competitive position.
Dividends. Lukens paid $1.00 per share in common stock dividends in 1994. A quarterly common dividend of $.25 per share was paid on February 17, 1995. It is our objective to pay common dividends approximating 35 percent of net earnings over the long term. As of February 13, 1995, there were approximately 5,900 common stockholders of record.
The Series B Convertible Preferred Stock held by the ESOP carries a cumulative annual dividend of $4.80 per share.
Lukens' common stock is listed and traded on the New York Stock Exchange, ticker symbol "LUC." Dividends and stock market price ranges for the last two years are included in the section entitled "Quarterly Financial Data" in Part II, Item 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Lukens Inc. -- Consolidated Financial Statements Dollars and shares in thousands except per shares amounts
Consolidated Financial Statements
Consolidated Statements of Earnings (Note 2) for the 53 weeks ended December 31, 1994, and the 52 weeks ended December 25, 1993, and December 26, 1992
The accompanying notes are an integral part of these statements.
Dollars in thousands
Consolidated Balance Sheets as of December 31, 1994, and December 25, 1993
The accompanying notes are an integral part of these statements.
Lukens Inc. -- Consolidated Financial Statements Dollars in thousands except per share amounts
Consolidated Statements of Stockholders' Investment for the 53 weeks ended December 31, 1994, and the 52 weeks ended December 25, 1993, and December 26, 1992
The accompanying notes are an integral part of these statements.
Dollars in thousands
Consolidated Statements of Cash Flows for the 53 weeks ended December 31, 1994, and the 52 weeks ended December 25, 1993, and December 26, 1992
The accompanying notes are an integral part of these statements.
Lukens Inc. -- Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Consolidation and Fiscal Year. The consolidated financial statements include the accounts of Lukens Inc. and all majority-owned subsidiaries. Our fiscal year is the 52- or 53-week period that ends on the last Saturday of December. Certain subsidiaries are consolidated on a calendar year basis.
Cash and Cash Equivalents. Highly liquid investments with maturities of three months or less when purchased are recognized as cash equivalents.
Inventories. Inventories are recorded at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method for most product and raw material inventories. The service center operations of the Washington Stainless Group determine cost by the first-in, first-out (FIFO) method. Supplies are valued at the lower of average cost or market. Additional inventory disclosures are included in Note 8.
Plant and Equipment. Plant and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful life. The useful life ranges from 20 to 40 years for buildings and from 10 to 18 years for most production machinery and equipment. The cost of plant and equipment retired in the normal course of business is generally charged against accumulated depreciation. Gains and losses on other retirements are reflected in earnings.
Intangible Assets. Intangible assets consist primarily of goodwill resulting from the Washington Steel Corporation acquisition, discussed in Note 2. Goodwill from the acquisition is amortized on a straight-line basis over 25 years. Also included in intangible assets are pension-related assets, discussed in Note 5.
Derivative Financial Instruments. Derivative financial instruments, such as forward exchange contracts, are used to manage exposure to changes in market conditions for certain raw material purchases and debt transactions. Gains or losses on these contracts are recognized as a component of the related transaction over the life of the contract. Additional disclosures are included in Note 9.
Environmental Liabilities. Environmental liabilities recognized represent our best estimate of remediation expenditures that are probable and that can be reasonably estimated. Environmental costs are expensed unless they increase the value of the related asset and/or prevent or mitigate future contamination. Additional disclosures are included in Note 11.
Earnings Per Share. Primary earnings per common share are calculated by dividing net earnings applicable to common stock by the average number of common shares outstanding and common stock equivalents. On a fully-diluted basis, both net earnings and shares outstanding are adjusted to assume the conversion of convertible preferred stock.
During 1992, Lukens issued long-term notes and common stock (Notes 9 and 10) to refinance the Washington Steel acquisition (Note 2). If the long-term notes and common stock had been issued on the acquisition date, primary earnings per common share reported for 1992 would not have been significantly different.
1993 Accounting Changes -- Income Taxes. In the first quarter of 1993, Lukens adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." The statement requires an asset and liability approach to determine the tax provision and related deferred tax assets and liabilities. We elected to record the cumulative effect of this accounting change by the recognition of a $1,321 gain, or $.09 per common share.
As a result of adopting SFAS No. 109, the tax benefit on the Lukens preferred stock dividends for the shares allocated to employee stock ownership plan (ESOP) participants is recognized as a reduction to the income tax provision. In prior years, this amount was recognized as a direct increase to retained earnings.
Results for years prior to 1993 have not been restated. See Note 6 for additional income tax disclosures.
Dollars in thousands except per share amounts
1993 Accounting Changes -- Retiree Medical & Life Insurance Benefits. In the first quarter of 1993, Lukens adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." The statement requires the liability and expense to be actuarially determined in a framework similar to the one used to measure defined benefit pension plans. We elected to record the cumulative effect of this accounting change by the recognition of a $108,000 expense, which represented the accumulated postretirement benefit obligation for current and future retirees at the beginning of 1993. On an after-tax basis, the expense was $67,222, or $4.55 per common share.
The recognition of retiree medical and life insurance benefits in years prior to 1993 was on a cash basis. Results for these years have not been restated. See Note 5 for additional disclosures.
2. ACQUISITIONS & DISCONTINUED OPERATIONS
Acquisitions. On April 24, 1992, Washington Steel Corporation was acquired for $273,718 in cash. Washington Steel is a stainless steel producer with two production facilities in Pennsylvania and one in Ohio. Also included in the acquisition were seven stainless service centers in the United States and Canada. The acquisition was accounted for as a purchase with the results of Washington Steel included from the acquisition date.
The pro forma consolidated results listed below are unaudited and reflect purchase accounting adjustments assuming the acquisition occurred at the beginning of 1992.
Discontinued Operations. As part of a program adopted in 1993 to focus Lukens' resources on its steel businesses, the subsidiaries previously reported in the Corrosion Protection Group, Safety Products Group and most subsidiaries in the Diversified Group were reported as discontinued operations. In the fourth quarter of 1993, a $4,500 provision was recognized to revise estimates of the realizable value of discontinued operations. On an after-tax basis, the provision was $2,772, or $.19 per common share.
During 1994, net proceeds from the divestiture of discontinued operations totaled $69,256. One subsidiary remains, our pipe-coating business, that is actively being marketed. In 1994, results and divestiture gains and losses were charged against the reserve established in the fourth quarter of 1993. Operating results for 1994 included net sales of $70,925 and a net loss of $1,067.
Net sales and income tax expense of the discontinued operations and an earnings per common share reconciliation for 1993 and 1992 are presented below.
Lukens Inc. -- Notes to Consolidated Financial Statements
3. BUSINESS GROUPS
Listed below is a description of our business groups, which operate primarily in the United States. Sales to foreign countries are not significant.
Lukens Steel Group -- specializes in the production of carbon, alloy and clad plate steels.
Washington Stainless Group -- specializes in the production of stainless steel sheet, strip, plate, hot band and slabs. The group also operates stainless service centers.
Summary business group information is included in the following chart.
a. Lukens Steel Group Operating Earnings: 1994 -- In the first quarter, the group recorded a loss of $1,339 caused primarily by production disruptions and maintenance costs associated with severe weather conditions. 1993 -- In the fourth quarter, charges of $14,921 were recognized that included $9,660 of expense for a work force reduction program (Note 4). The remaining charges included provisions for environmental remediation and workers' compensation claims. The adoption of an accounting standard for retiree medical and life insurance benefits (Note 1) resulted in additional expense of $4,610 over the cash claims. 1992 -- In the fourth quarter, a provision for workers' compensation claims alleging hearing loss reduced results by $3,500. Also in the fourth quarter of 1992, a favorable LIFO inventory accounting adjustment increased earnings by $2,719.
b. Washington Stainless Group Results: 1994 -- In the fourth quarter, charges of $1,069 were recognized, primarily for an early retirement program. 1992 -- Results are for a partial year, from the acquisition date on April 24, 1992, to year-end.
c. Corporate Expenses: 1993 -- Results included higher consulting fees and expenses from a work force reduction program.
d. Corporate Assets: Corporate assets consist primarily of cash and cash equivalents, refundable income taxes, office facilities and deferred income taxes.
Dollars in thousands except per share amounts
4. UNUSUAL ITEM
During the fourth quarter of 1993, $10,626 of expenses for a work force reduction program were recognized. The expenses were primarily for pension and medical benefits associated with an early retirement program. On an after-tax basis, the provision reduced net earnings before the cumulative effect of accounting changes by $6,247, or $.43 per common share.
5. RETIREE BENEFITS
Pensions. Lukens has several defined benefit plans that provide pension and survivor benefits for most employees. Benefits are primarily based on the combination of years of service and compensation. Plans are funded in accordance with applicable regulations.
The components of pension expense are listed below.
a. The increase in 1993 pension expense resulted primarily from plan improvements for Lukens Steel Group salary employees. The increase was also attributable to a full year of Washington Stainless Group expense compared to 1992, which was from the acquisition on April 24.
The following table reconciles the net funded status of our plans to amounts recognized in the Consolidated Balance Sheets.
a. The decrease in the 1994 benefit obligations primarily reflected a higher discount rate. b. Plan assets primarily consist of stocks, bonds and short-term investments. Included in plan assets is Lukens' common stock totaling $734 in 1994 and $10,585 in 1993.
Lukens Inc. -- Notes to Consolidated Financial Statements
The net pension liability was recognized in the following accounts in the Consolidated Balance Sheets.
Significant assumptions used in the calculation of pension expense and obligations are listed below.
Retiree Health & Life Insurance Benefits. Lukens provides retiree health and life insurance benefits for most employees if they continue to work for the company until they reach retirement age. These benefits are funded as the claims are submitted.
During 1993, Lukens adopted a new accounting standard, SFAS No. 106, for these retiree benefits. As discussed in Note 1, we elected to recognize the cumulative effect of adopting the standard in 1993. Accrual expense under the new standard is significantly higher than the expense recognized under the previous cash- basis method. Cash payments in 1992 were $6,514.
Components of retiree health and life insurance expense in 1994 and 1993 are listed below.
The table below reconciles the actuarial present value of our obligations to the liability recognized in the Consolidated Balance Sheets.
a. The decrease in the 1994 benefit obligations primarily reflected a higher discount rate. b. Obligations include life insurance benefits of $16,246 in 1994 and $14,430 in 1993.
Significant assumptions used in the calculation of expense and obligations are listed below.
a. Health-care cost increase assumptions are reduced to a rate of 5 percent beginning in 2003.
Dollars in thousands except per share amounts
A one-percentage point increase in the medical cost trend rate for each year would increase the accumulated postretirement benefit obligation by approximately $17,819 and would increase net postretirement benefit expense by approximately $2,544.
6. Income Taxes
During 1993, Lukens adopted a new income tax accounting standard, discussed in Note 1. Because we elected to recognize the cumulative effect of adopting the standard in 1993, prior years accounted for under the deferral method have not been restated.
The reconciliation between the federal statutory rate applicable to Lukens' earnings from continuing operations and our effective rate is listed below. Essentially all earnings are from United States sources.
a. Deferral method.
The components of the deferred income tax assets and liabilities are listed below.
The current and deferred components of the income tax provision are listed below.
a. Deferral method.
Lukens Inc. - Notes to Consolidated Financial Statements
Deferred income taxes recognized under the deferral method were the result of the timing differences between financial reporting and taxable earnings listed below.
On a cash basis, Lukens paid the following amounts of income taxes, including payments for discontinued operations.
1994 1993 1992 $4,040 $18,938 $10,960
7. Compensation Plans
Stock Options. The 1985 Stock Option and Appreciation Plan provides for the issuance of non-qualified stock options and incentive stock options (ISO's) to officers and other executives. A maximum of 1,837,500 options to purchase Lukens' common stock can be granted until February 26, 1998, at an exercise price not less than the fair market value on the grant date. Options granted vest after one year and expire in ten years.
The Lukens Inc. Stock Option Plan for Non-Employee Directors provides for the issuance of up to 75,000 non-qualified options to purchase Lukens Inc. common stock at an exercise price based on the fair market value on the grant date.
During 1991, 330,000 non-qualified stock options were granted to Mr. Van Sant as part of his employment agreement. These options become exercisable ratably over 11 years. The options carry an exercise price of $23.38 per share, which was 85 percent of the fair market value on the grant date. Compensation expense from this discount from fair market value is being recognized on a straight-line basis over his expected service period.
A summary of stock option activity is presented below.
Dollars in thousands except per share amounts
Incentive Compensation. Most Lukens' employees participate in incentive compensation plans that are based on the consolidated results of Lukens Inc. and on the results of various subsidiaries. Compensation expense under these plans is listed below.
1994 1993 1992 $17,444 $19,419 $13,016
Employee Stock Ownership Plan (ESOP). In 1989, an ESOP within an existing 401(k) employee savings plan for most salaried employees was established. The ESOP was designed to provide 401(k) employer matching benefits in the form of convertible preferred stock that was acquired with the proceeds from a $33,075 term loan (Note 9). The stock is released for allocation to participants' accounts based on the relationship of debt and interest payments to the total of all scheduled debt and interest payments. Dividends on allocated stock are paid, in-kind, with preferred stock. The projected maturities of the ESOP loan over the remaining term are listed below.
1995 1996 1997 1998 $4,085 $6,232 $7,630 $4,820
The loan is guaranteed by Lukens, and the outstanding balance is recognized as debt in the Consolidated Balance Sheets. An offsetting amount, representing deferred compensation measured by the stated value of convertible preferred stock, is recognized in the stockholders' investment section. Debt service requirements of the ESOP are met by the combination of Lukens' cash contributions to the ESOP and dividends on the preferred stock.
Regarding expense recognition, cash contributions to the ESOP are recorded as compensation expense, and preferred stock dividends reduce retained earnings. This recognition results in interest expense incurred on the ESOP debt not being recognized as interest expense on Lukens' financial statements. Cash contributions are listed below.
1994 1993 1992 $2,551 $2,222 $1,597
8. Inventories
a. Approximately 75 percent of inventories were accounted for under the LIFO inventory valuation method.
The estimated cost to replace inventories at year-end is listed below.
1994 1993 1992 $178,000 $197,000 $180,000
In 1992, reductions in inventory quantities resulted in a liquidation of LIFO inventory carried at lower costs from prior years. The effect of this liquidation reduced cost of products sold by $3,234. The effects of LIFO liquidations in 1994 and 1993 were not significant.
Lukens Inc. - Notes to Consolidated Financial Statements
9. Financial Instruments
Long-term Debt. Listed below is a summary of long-term debt outstanding.
- ------------ a. The weighted-average interest rate was 6.3% at year-end 1994 and 3.7% at year-end 1993. Short-term notes are classified as long term because they are supported by the revolving credit agreements discussed below. b. The weighted-average interest rate was 5.4% at year-end 1994 and 4.8% at year-end 1993. c. The ESOP debt, guaranteed by Lukens, carries an 8.26% interest rate on $18,582 as of December 31, 1994. The remaining ESOP debt carries a variable rate of 80.5% of prime. For a discussion on ESOP accounting, see Note 7. d. Annual maturities of long-term debt, excluding the ESOP debt guarantee, over the next five years are listed below.
1995 1996 1997 1998 1999 $3,049 $5,600 $ 316 $ 318 $ 321
e. Plant and equipment with a net depreciated cost of $47,300 are pledged as collateral, primarily for industrial revenue bonds.
Notes Payable. Lukens has notes outstanding of $150,000 which are due in 2004. Interest is payable semi-annually. The notes are currently rated Baa2 by Moody's and BBB+ by Standard and Poor's.
During June 1994, a shelf registration for an additional $100,000 of Lukens Inc. notes was completed. Although there are no immediate plans to issue the notes, they are available as a financing option for our capital expenditure program discussed in Note 11 and other long-term liquidity needs. The notes are structured to provide Lukens with flexibility in maturities, from nine months to 30 years, and flexibility in interest rate structures.
Revolving Credit Agreements. Subsequent to year-end, Lukens amended its revolving credit agreements to provide for a $150,000 committed line of credit, an increase of $25,000. The amended agreements expire on January 15, 2000.
Interest is based on one of the following rates:
. The higher of the Prime Rate or the Federal Funds Rate plus .5%
. London Inter-Bank Offered Rate (LIBOR) adjusted for applicable reserves plus .225% to .5% depending on the Standard and Poor's or Moody's rating of the long-term notes of Lukens
. Competitively bid rates from lenders.
A facility fee is required on the total line of credit and ranges from .125% to .3% based on the lower of Standard and Poor's or Moody's rating of Lukens' long- term notes.
The agreements include covenants that require a maximum leverage ratio (defined in the agreement) of 55 percent and restrictions on additional debt and asset dispositions. At year-end, we were in compliance with these covenants. Additional borrowings of $128,150 were available under the amended agreements.
Dollars in thousands except per share amounts
Interest Expense. Interest costs include interest on obligations, amortization of debt set-up costs and interest rate swap expense. For a discussion of ESOP debt accounting, see Note 7. Interest components are listed below.
Derivative Financial Instruments - Commodity Hedges. As of year-end 1994, Lukens was party to several commodity hedge agreements for 1995. Based on year- end market conditions, the value of Lukens' contractual obligations for these commodity hedges is $45,891, and the obligation of the counterparties to the agreements is $59,536. Gains and losses on these contracts are recognized as a component of cost of products sold. Lukens is exposed to credit risk from nonperformance by the counterparties to these agreements.
Fair Value of Financial Instruments. The following table presents the fair value of certain financial instruments as of year-end 1994 and 1993.
- ------------ a. Fair value was estimated by discounting cash flows using year-end interest rates. b. Fair value was estimated by using quotes from brokers. c. Interest exchange agreements with a notional principal amount of $81,250 were outstanding at year-end 1993.
10. Stockholders' Investment
Common Stock. At the Annual Meeting of Stockholders on April 28, 1993, a 20,000,000 increase in the number of authorized common shares was approved. The increase, which was designed to provide greater flexibility in future capital structure requirements, brought the total number of shares authorized to 40,000,000. The par value remained at $.01 per share.
On July 28, 1992, Lukens issued 1,132,300 shares of common stock. The net proceeds of $58,529 were used to reduce the debt incurred to finance the Washington Steel acquisition. On September 28, 1992, a three-for-two common stock split was completed in the form of a 50 percent stock dividend. As a result of the split, $53, representing the par value of the additional shares, was transferred from capital in excess of par value to common stock. Common shares and equivalents outstanding and per share amounts in this Annual Report have been restated to reflect the stock split.
Under the stock option plans discussed in Note 7, 2,242,500 shares of common stock have been reserved.
Lukens Inc. - Notes to Consolidated Financial Statements
Preferred Stock. There are 1,000,000 shares of series preferred stock, par value $.01 per share, authorized. An ESOP was established in 1989 with the issuance of 551,250 shares of Series B Convertible Preferred Stock. The preferred stock is stated at its liquidation preference of $60 per share and carries an annual cumulative dividend of $4.80 per share. Each share may be converted into three shares of common stock within the guidelines of an employee 401(k) savings plan. The stock is currently redeemable in common stock, cash or a combination at the option of Lukens at a price of $63.60 per share. The redemption price declines gradually each year to $60 per share on or after July 2, 2000.
Holders of the Series B preferred stock are entitled to vote upon all matters submitted to the holders of common stock for a vote. The number of votes is equal to the number of common shares into which the preferred shares are convertible.
Shareholder Rights Plan. Lukens has a Shareholder Rights Plan designed to deter coercive or unfair takeover tactics and to prevent a buyer from gaining control of Lukens without offering a fair price to stockholders. The plan entitles each outstanding share of common stock to four-ninths (reflects adjustment for 1988 and 1992 common stock splits) of a right. Each right entitles stockholders to buy one one-hundredth of a share of Series A Junior Participating Preferred Stock at an exercise price of $110. The rights become exercisable if a person or group acquires or makes a tender or exchange offer for 20 percent or more of common stock outstanding. The rights can also become exercisable if the Board of Directors determines, with the concurrence of outside directors, that a person has certain interests adverse to Lukens and has acquired at least 10 percent of common stock outstanding.
If the company is then acquired in a merger or other business combination transaction, each right will entitle the holder to receive, upon exercise, common stock of either Lukens or the acquiring company having a value equal to two times the exercise price of a right.
Lukens will generally be entitled to redeem the rights at $.05 per right at any time until the tenth day following public announcement that a 20 percent position has been acquired. The purchase rights will expire on August 10, 1997. Of the 1,000,000 shares of series preferred stock authorized, 75,000 have been reserved for the Series A preferred stock discussed above. As of December 31, 1994, there were 6,511,911 rights outstanding.
11. Commitments & Contingencies
Leases. Lukens has various operating leases primarily for real estate and production equipment. At year-end 1994, minimum rental payments under noncancelable leases totaled $24,440. Listed below are the scheduled payments over the next five years for these leases.
1995 1996 1997 1998 1999 $4,874 $4,530 $ 3,814 $ 2,948 $2,443
Rent expense for all operating leases is listed below.
1994 1993 1992 $7,459 $12,245 $10,100
Environmental Protection. Lukens is a potentially responsible party under Superfund law at certain waste disposal sites. The company's exposure to remediation costs at these sites depends upon several factors, including changing laws and regulations and the allocation of costs among all potentially responsible parties. Our exposure is expected to be limited based on the volumes of waste which might be attributable to Lukens and the number and financial strength of other potentially responsible parties. Based on information currently available, management believes that any future costs in excess of amounts already accrued will not have a material adverse effect on our consolidated financial condition, results of operations or competitive position.
Dollars in thousands except per share amounts
Litigation. During 1992, approximately 300 workers' compensation claims alleging hearing loss were filed against Lukens Steel Company, a wholly-owned subsidiary. A $3,500 reserve was established in the fourth quarter of 1992 to cover potential awards and defense costs resulting from these claims. In 1993, additional claims were filed bringing the total number of claims to approximately 350. Additional reserves totaling $2,100 were established in 1993. As of year-end 1994, 249 of the workers' compensation claimants had released their claims and received negotiated payments.
The company is party to various claims, disputes, legal actions and other proceedings involving product liability, contracts, equal employment opportunity, occupational safety and various other matters. In the opinion of management, the outcome of these matters should not have a material adverse effect on the consolidated financial condition or results of operations of the company.
Commitments. At year-end 1994, purchase commitments for capital expenditures were $33,773. Capital expenditures projected for 1995 are historically high at approximately $110,000. These expenditures are part of a five-year, $400,000 program that began in 1993.
Lukens Steel Company has a long-term contract for the supply of oxygen and related products to its facility in Coatesville, Pennsylvania. The contract runs until 2007 and has take-or-pay provisions totaling $30,838 for the remaining term. Annual minimum commitments are $2,517, which can be adjusted for inflation. Washington Steel Corporation has contracts for the supply of nickel. The contracts include minimum quantities and market-based pricing. Based on year-end 1994 market conditions, the value of these contracts totaled $83,981.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors, Lukens Inc.:
We have audited the accompanying consolidated balance sheets of Lukens Inc. (a Delaware Corporation) and subsidiaries as of December 31, 1994 and December 25, 1993 and the related consolidated statements of earnings, cash flows and stockholders' investment for each of the three fiscal years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lukens Inc. and subsidiaries as of December 31, 1994 and December 25, 1993, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended December 31, 1994 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective December 27, 1992, the Company changed its methods of accounting for postretirement benefits other than pensions and income taxes.
/s/ Arthur Andersen LLP
Arthur Andersen LLP, Philadelphia, Pennsylvania January 23, 1995
Lukens Inc. - Financial Information Dollars in thousands except per share amounts and market prices of common stock
Quarterly Financial Data (Unaudited)
- ------------- a. Earnings per share calculations were based on the weighted-average shares and equivalents outstanding during the period reported. No adjustments were made that would be antidilutive or reduce the loss per share. Consequently, the sum of the quarterly earnings per share amounts may not equal the annual per share amounts. b. In the first quarter of 1994, production disruptions and maintenance costs associated with severe weather conditions resulted in a net loss. c. During the fourth quarter of 1993, $10,626 of expenses from a work force reduction program were recognized. On an after-tax basis, the provision was $6,247, or $.43 per common share. Also during the fourth quarter, a $4,500 provision was recognized to revise estimates of the realizable value of discontinued operations. On an after-tax basis, the provision was $2,772, or $.19 per common share.
Lukens Inc. - Financial Information
Responsibilities for Financial Reporting To Our Stockholders:
Lukens has prepared and is responsible for the following financial statements. The financial statements were prepared in conformity with generally accepted accounting principles in the United States. Other financial information in this Annual Report is consistent with the financial statements.
Management maintains a system of internal accounting control that is designed to provide reasonable, but not absolute, assurance that we are meeting our responsibility for the integrity and objectivity of the financial statements. This control system includes:
. subsidiary reporting, including budget analysis, that provides reasonable assurance that errors or irregularities that could be material to the consolidated financial statements would be detected promptly
. a statement of Corporate Integrity Guidelines monitored regularly
. an Internal Audit Department
. continuing review and evaluation of the control environment.
The audit report of Arthur Andersen LLP, independent public accountants, is included in Part II, Item 8 of this Form 10-K.
The Board of Directors pursues its oversight role for these financial statements through its Audit Committee, composed solely of directors who are neither officers nor employees of Lukens. The Audit Committee meets periodically with the independent public accountants and internal auditors, with and without the presence of management, to review their activities and to discuss internal accounting control, auditing, and financial reporting matters.
/s/ R. W. Van Sant
R. W. Van Sant Chairman and Chief Executive Officer
/s/ C. B. Houghton, Jr.
C. B. Houghton, Jr. Vice President and Controller
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
a. Directors
The information contained in the section entitled "Election of Directors" in the Lukens Inc. 1995 Proxy Statement is incorporated herein by reference in response to this item.
b. Executive Officers of the Registrant
Information required by this item is contained in Part I of this Form 10-K in the section entitled "Executive Officers of the Registrant."
c. Compliance With Section 16(a)
Information contained in the section entitled "Section 16 Compliance" in the Lukens Inc. 1995 Proxy Statement is incorporated herein by reference in response to this item.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained in the sections entitled "Management" and "Report of Executive Development and Compensation Committee" in the Lukens Inc. 1995 Proxy Statement is incorporated herein by reference in response to this item.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained in the sections entitled "Principal Holders of Stock" and "Management" in the Lukens Inc. 1995 Proxy Statement is incorporated herein by reference in response to this item.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
a. Documents filed as a part of this report.
1. Financial Statements
No financial statements have been filed with this Form 10-K other than those included in Item 8.
2. Financial Statement Schedules
II Valuation and Qualifying Accounts
Schedules, other than Schedule II, have been omitted because they are not applicable.
3. Exhibits
See Index to Exhibits.
b. Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter of 1994 that ended on December 31, 1994.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
LUKENS INC. (Registrant)
Date: March 2, 1995 By /s/ R. W. Van Sant ----------------------- R. W. Van Sant Chairman and Chief Executive Officer
SIGNATURES (continued)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below, as of March 2, 1995, by the following persons on behalf of the registrant and in the capacities indicated.
Signature and Title
/s/ Michael O. Alexander /s/ Stuart J. Northrop ------------------------ ---------------------- Michael O. Alexander Stuart J. Northrop Director Director
/s/ T. Kevin Dunnigan /s/ Robert L. Seaman --------------------- -------------------- T. Kevin Dunnigan Robert L. Seaman Director Director
/s/ Ronald M. Gross /s/ Joab L. Thomas ------------------- ------------------ Ronald M. Gross Joab L. Thomas Director Director
/s/ Nancy Huston Hansen /s/ W. Paul Tippett ----------------------- ------------------- Nancy Huston Hansen W. Paul Tippett Director Director
/s/ Sandra L. Helton /s/ R. W. Van Sant -------------------- ------------------ Sandra L. Helton R. W. Van Sant Director Chairman and Chief Executive Officer
/s/ William H. Nelson, III /s/ C. B. Houghton, Jr. -------------------------- ----------------------- William H. Nelson, III C. B. Houghton, Jr. Director Vice President and Controller
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements included in the Lukens Inc. 1994 Annual Report to stockholders, included or incorporated by reference in this Form 10-K, and have issued our report thereon dated January 23, 1995. Our report on the financial statements includes an explanatory paragraph with respect to the change in the method of accounting for income taxes in 1993 as discussed in Note 1 to the financial statements. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The financial statement schedule referred to in Item 14 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The financial statement schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Arthur Andersen LLP Philadelphia, Pennsylvania January 23, 1995
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our reports dated January 23, 1995 included or incorporated by reference in this annual report on Form 10-K, into the Company's previously filed: Form S-8 Registration Statements File Numbers 33-6673, 33-23405, 33-29105, 33-54269, 33- 54271, 33-54371 and 33-69780, and Form S-3 Registration Statements File Numbers 33-6792 and 33-53681.
/s/ Arthur Andersen LLP
Arthur Andersen LLP Philadelphia, Pennsylvania March 24, 1995
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (Dollars in Thousands)
Allowance for Doubtful Receivables and Customer Claims
(a) Balance assumed in the Washington Steel Corporation acquisition. (b) Amounts determined not to be collectible, net of recoveries. In 1994, amount also includes a reduction in the reserve of $1,159 from the divestiture of subsidiaries.
Deferred Income Tax Asset Valuation Allowance
(a) Included in cumulative effect of accounting changes from the adoption of SFAS No. 109.
INDEX TO EXHIBITS (Note 1)
( 3) Certificate of incorporation and by-laws (Note 2)
( 4) Lukens Inc. Indenture dated as of July 1, 1992 (Note 3)
(10) Material Contracts
(10.1) Lukens Inc. Supplemental Retirement Plan for Target Incentive Plan Participants, as amended, effective January 1, 1988 (Note 6)
(10.2) Lukens Inc. Supplemental Retirement Plan, as amended and restated, effective January 1, 1990 (Note 8)
(10.3) Lukens Inc. Supplemental Retirement Plan for Designated Executives, effective January 1, 1990 (Note 7)
(10.4) Lukens Inc. 1985 Stock Option and Appreciation Plan, as amended (Note 4)
(10.5) Lukens Inc. Stock Option Plan for Non-employee Directors (Note 4)
(10.6) Employment Agreement dated October 12, 1991, between R. William Van Sant and Lukens Inc. (Note 6)
(10.7) Severance Agreement dated October 12, 1991, between R. William Van Sant and Lukens Inc. (Note 6)
(10.8) Lukens Inc. Severance Plan for Participants in the Lukens Inc. 1983 Target Incentive Plan and the Lukens Inc. 1985 Division Incentive Compensation Plan (Note 6)
(10.9) Form of Severance Agreement between certain Executive Officers and Lukens Inc. (Note 7)
(10.10) Form of Indemnification Agreement between certain Executive Officers and Lukens Inc. (Note 8)
(10.11) Lukens Inc. 1983 Target Incentive Compensation Plan, as amended through January 1, 1993 (Note 5)
(10.12) Washington Steel Corporation 1994 Target Incentive Compensation Plan
(10.13) Lukens Inc. Directors' Deferred Payment Plan (Note 9)
(10.14) Guaranty Agreement dated as of June 28, 1989, between Lukens Inc. and The
Toronto-Dominion Bank & Trust Company as Agent for the Guaranteed Parties (Note 8)
(10.15) Retirement Plan for Non-Employee Directors of Lukens Inc., as amended through November 30, 1994.
(10.16) Form of Indemnification Agreement between Directors and Lukens Inc. (Note 8)
(10.17) Amended and Restated Credit Agreement, dated as of April 22, 1992, and Amended and Restated as of September 30, 1992 among Lukens Inc. and Lukens Steel Company, as the Borrowers, Certain Commercial Lending Institutions, the Toronto-Dominion Bank, and NBD Bank, N.A., as the Co-Agents, and Provident National Bank, as the Administrative Agent (Note 5)
(10.18) First Amendment, dated as of January 15, 1995, to Amended and Restated Credit Agreement
(10.19) Allied Corporation - Washington Steel Corporation Equipment Lease and Maintenance Agreement, dated September 22, 1986 (Note 5)
(10.20) Lease among PNC Leasing Corp., Blount, Inc., and Washington Steel Corporation, dated as of October 1, 1986 (Note 5)
(10.21) Lease Amendment No. 1, dated July 22, 1987, among PNC Leasing Corp., Blount, Inc. and Washington Steel Corporation (Note 5)
(10.22) Lease Amendment No. 2, Assumption and Consent among PNC Leasing Corp., Blount, Inc. and Washington Steel Corporation, dated as of October 18, 1988 (Note 5)
(10.23) Lease Amendment No. 3, Assumption and Consent among PNC Leasing Corp., Lukens Inc. and Washington Steel Corporation, dated as of July 21, 1992 (Note 5)
(10.24) Agreement, dated October 31, 1989, between Robert E. Heaton and Washington Steel Corp. (Note 5)
(10.25) Washington Steel Division Annual Bonus Plan for Elected Officers (Note 5)
(10.26) Agreement between James J. Norton and Mercury Stainless Corp., Mercury Stainless, Inc., Mercury Stainless Canada Inc., Washington Steel Corp. and Kramo Corp., dated October 31, 1989 (Note 5)
(10.27) Amended and Restated Employment Contract between James J. Norton and Mercury Stainless Corp., Mercury Stainless, Inc., Kramo Corp. and Washington Steel Corp., dated as of October 9, 1990 (Note 5)
(10.28) First Amendment to Amended and Restated Employment Contract between James J. Norton and Mercury Stainless Corp., Mercury Stainless, Inc., Kramo Corp. and Washington Steel Corp., dated as of January 3, 1991 (Note 5)
(10.29) Second Amendment to Amended and Restated Employment Contract between James J. Norton and Mercury Stainless Corp., Mercury Stainless, Inc., Kramo Corp. and Washington Steel Corp., dated as of July 3, 1991 (Note 5)
(11) Statement regarding Computation of Per Share Earnings
(21) Subsidiaries of the Registrant
(23) Consent of Arthur Andersen LLP (Note 10)
(27) Financial Data Schedule
Notes to Exhibits
1. Copies of exhibits will be supplied upon request. There is no charge for a copy of the Lukens Inc. 1994 Annual Report to stockholders. Other exhibits will be provided at $.25 per page requested.
2. Certificate of incorporation is incorporated by reference to exhibits included in the Lukens Inc. Post-Effective Amendment No. 1 to the Registration Statement on Form S-8, File No. 33-23405. By-laws as amended and restated June 26, 1991, are incorporated by reference to exhibits included in the Lukens Inc. Form 10-Q for the quarter ended June 29, 1991.
3. Incorporated by reference to exhibits included in the Lukens Inc. Registration Statement on Form S-3, File No. 33-49112.
4. Incorporated by reference to exhibits included in the Lukens Inc. Form 10-K for the fiscal year ended December 25, 1993.
5. Incorporated by reference to exhibits included in the Lukens Inc. Form 10-K for the fiscal year ended December 26, 1992.
6. Incorporated by reference to exhibits included in the Lukens Inc. Form 10-K for the fiscal year ended December 28, 1991.
7. Incorporated by reference to exhibits included in the Lukens Inc. Form 10-K for the fiscal year ended December 29, 1990.
8. Incorporated by reference to exhibits included in the Lukens Inc. Form 10-K for the fiscal year ended December 30, 1989.
9. Incorporated by reference to exhibits included in the Lukens Inc. Registration Statement on Form S-4, File No. 33-10935.
10. Incorporated by reference to the section entitled "Consent of Independent Public Accountants" in this Form 10-K.