- ---------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 19961997
Commission file number 1-9447
KAISER ALUMINUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-3030279
(State of incorporation) (I.R.S. Employer Identification
No.)
5847 SAN FELIPE, SUITE 2600, HOUSTON, TEXAS 77057-3010
(Address of principal executive offices) (Zip Code)
(713) 267-3777
(Registrant's telephone number, including area code)
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
----- ------
At October 31, 1996,1997, the registrant had 71,646,38978,980,881 shares of common
stockCommon
Stock outstanding.
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
September 30, December 31,
1997 1996
1995
--------------------------------
ASSETS (Unaudited)------------------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 21.626.3 $ 21.981.3
Receivables 261.6 308.6305.0 252.4
Inventories 545.5 525.7553.3 562.2
Prepaid expenses and other current assets 111.7 76.6125.1 127.8
------------------------------
Total current assets 940.4 932.81,009.7 1,023.7
Investments in and advances to unconsolidated affiliates 174.6 178.2158.1 168.4
Property, plant, and equipment - net 1,126.4 1,109.61,162.9 1,168.7
Deferred income taxes 284.7 269.1298.0 264.5
Other assets 343.1 323.5335.6 308.7
------------------------------
Total $ 2,869.22,964.3 $ 2,813.22,934.0
==============================
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 160.5161.1 $ 184.5189.7
Accrued interest 13.6 32.024.8 35.6
Accrued salaries, wages, and related expenses 64.9 105.376.7 95.4
Accrued postretirement medical benefit obligation -
current portion 46.8 46.850.1 50.1
Other accrued liabilities 151.7 129.4121.4 132.7
Payable to affiliates 95.6 94.2103.1 97.0
Long-term debt - current portion 8.92.7 8.9
------------------------------
Total current liabilities 542.0 601.1539.9 609.4
Long-term liabilities 558.3 548.5515.8 458.1
Accrued postretirement medical benefit obligation 727.7 734.0714.6 722.5
Long-term debt 858.4 749.2969.3 953.0
Minority interests 119.4 122.7124.7 121.7
Commitments and contingencies
Stockholders' equity:
Preferred stock .4
.4
Common stock .7.8 .7
Additional capital 530.8 530.3534.0 531.1
Accumulated deficit (454.7) (459.9)(432.0) (460.1)
Additional minimum pension liability (13.8) (13.8)(2.8) (2.8)
------------------------------
Total stockholders' equity 63.4 57.7100.0 69.3
------------------------------
Total $ 2,869.22,964.3 $ 2,813.22,934.0
==============================
The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED INCOME (LOSS)
(Unaudited)
(In millions of dollars, except per share amounts)
Quarter Ended Nine Months Ended
September 30, September 30,
----------------------------- ------------------------------ ------------------------------
1997 1996 19951997 1996 1995
------------------------------ ------------------------------
Net sales $ 634.1 $ 553.4 $ 550.31,778.6 $ 1,652.1 $ 1,646.7
------------------------------ ------------------------------
Costs and expenses:
Cost of products sold 523.7 485.0 439.31,473.7 1,394.8
1,329.8
Depreciation 22.9 24.3 23.768.8 72.5 71.1
Selling, administrative, research and development, and
general 33.0 33.6 34.195.3 97.4
96.4Restructuring of operations 19.7
------------------------------ ------------------------------
Total costs and expenses 579.6 542.9 497.11,657.5 1,564.7 1,497.3
------------------------------ ------------------------------
Operating income 54.5 10.5 53.2121.1 87.4 149.4
Other income (expense):
Interest expense (27.5) (22.6) (23.9)(83.3) (68.3) (71.3)
Other - net 2.1 (7.7)2.1 1.7 3.0 (9.8)
------------------------------ ------------------------------
Income (loss) before income taxes and minority interests 29.1 (10.0) 21.639.5 22.1
68.3
Credit (provision)(Provision) benefit for income taxes (11.0) 3.8 (7.8)(2.4) (8.4) (24.6)
Minority interests (.6) (.4) (1.3)(3.3) (2.2) (4.4)
------------------------------ ------------------------------
Net income (loss) 17.5 (6.6) 12.533.8 11.5 39.3
Dividends on preferred stock (1.3) (2.1) (4.9)(5.5) (6.3) (15.5)
------------------------------ ------------------------------
Net income (loss) available to common shareholders $ 16.2 $ (8.7) $ 7.628.3 $ 5.2 $ 23.8
============================== ==============================
Earnings (loss) per common and common equivalent share:
Primary $ .22 $ (.12) $ .13.39 $ .07 $ .40
============================== ==============================
Fully diluted $ .14.22 $ .46.43
============== ==============
Weighted average common and common equivalent shares
outstanding (000):
Primary 74,663 71,646 60,22572,775 71,843 59,015
Fully diluted 71,782 71,61379,193 79,164
The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(In millions of dollars)
Nine Months Ended
September 30,
------------------------------
1997 1996 1995
------------------------------
Cash flows from operating activities:
Net income $ 11.533.8 $ 39.311.5
Adjustments to reconcile net income to net cash provided (used)
by (used for) operating activities:
Depreciation 68.8 72.5
71.1Restructuring of operations 19.7
Non-cash benefit for income taxes (12.5)
Amortization of excess investment over equity in net assets of
unconsolidated affiliates 8.7 8.7
Amortization of deferred financing costs and net
discount on long-term debt 4.5 4.1
4.1
EquityUndistributed equity in income(income) loss of unconsolidated
affiliates, net of distributions 16.7 (7.5) (17.2)
Minority interests 3.3 2.2
4.4
Decrease (increase)(Increase) decrease in receivables (59.5) 41.0
(86.6)
Increase(Increase) decrease in inventories 5.7 (19.8) (62.6)
(Increase) decrease in prepaid expenses and other assets 1.1 (38.1) 70.5
Decrease in accounts payable (28.6) (24.1) (5.2)
Decrease in accrued interest (10.8) (18.4)
(18.0)
(Decrease) increaseDecrease in payable to affiliates and accrued liabilities (29.8) (23.1) 12.3
Decrease in accrued and deferred income taxes (2.1) (18.6)
(8.5)
Other 3.6 4.6 7.8
------------------------------
Net cash (used for) provided (used) by operating activities 22.6 (5.0) 20.1
------------------------------
Cash flows from investing activities:
Net proceeds from disposition of property and investments 22.2 1.6
6.9
Expenditures for property, plant, and
equipment (90.8) (44.2)
Investments in unconsolidated affiliates (.3) (9.0)
Redemption fund for minority interests'
preference stockCapital expenditures (94.7) (91.1)
Other (2.6) (1.3) (.2)
------------------------------
Net cash used forby investing activities (75.1) (90.8) (46.5)
------------------------------
Cash flows from financing activities:
Borrowings (repayments) under revolving credit facility, net 118.1
55.6Borrowings of long-term debt 19.0
Repayments of long-term debt (8.6) (9.0)
(8.5)Increase in restricted cash, net (6.5)
Incurrence of financing costs (.8)(0.6)
Dividends paid (4.2) (8.4) (18.7)
Capital stock issued 1.2.4
Redemption of minority interests' preference stock (2.0) (5.2) (8.8)
------------------------------
Net cash provided (used) by financing activities (2.5) 95.5 20.0
------------------------------
Net decrease in cash and cash equivalents during the period (55.0) (.3) (6.4)
Cash and cash equivalents at beginning of period 81.3 21.9 17.6
------------------------------
Cash and cash equivalents at end of period $ 21.626.3 $ 11.221.6
==============================
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest $ 82.789.5 $ 85.282.7
Income taxes paid 14.8 22.4 26.6
Tax allocation payments to MAXXAM Inc. 1.1
The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except prices and per share amounts)
1. GENERAL
Kaiser Aluminum Corporation (the "Company") is a subsidiary of MAXXAM
Inc. ("MAXXAM"). MAXXAM ownsand one of its wholly owned subsidiaries together
own approximately 62%63% of the Company's common
stock, assuming the conversion of each outstanding share of 8.255% PRIDES,
Convertible PreferredCommon Stock (the "PRIDES"), into one share of the Company's
common stock, with the remaining
approximately 38%37% publicly held. The Company operates through its
subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC").
The foregoing unaudited interim consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X as promulgated by the Securities and
Exchange Commission. Accordingly, these financial statements do not
include all of the disclosures required by generally accepted accounting
principles for complete financial statements. These unaudited interim
consolidated financial statements should be read in conjunction with the
audited consolidated financial statements for the year ended December 31,
1995.1996. In the opinion of management, the unaudited interim consolidated
financial statements furnished herein include all adjustments, all of which
are of a normal recurring nature, necessary for a fair statement of the
results for the interim periods presented.
The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities known to exist as of the
date the financial statements are published, and the reported amounts of
revenues and expenses during the reporting period. Uncertainties with
respect to such estimates and assumptions are inherent in the preparation
of the Company's consolidated financial statements; accordingly, it is
possible that the actual results could differ from these estimates and
assumptions, which could have a material effect on the reported amounts of
the Company's consolidated financial position and results of operations.
Operating results for the quarter and the nine month period ended September 30, 1996,1997, are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1996.1997.
2. INVENTORIES
The classification of inventories is as follows:
September 30, December 31,
1997 1996
1995
-----------------------------------------------------------
Finished fabricated aluminum products $ 108.495.4 $ 91.5113.5
Primary aluminum and work in process 190.0 195.9220.7 200.3
Bauxite and alumina 122.5 119.6110.5 110.2
Operating supplies and repair and maintenance parts 124.6 118.7
-----------------------------126.7 138.2
------------------------------
Total $ 545.5553.3 $ 525.7
=============================562.2
==============================
Substantially all product inventories are stated at last-in, first-out
(LIFO) cost, not in excess of market. Replacement cost is not in excess of
LIFO cost.
3. SOLID WASTE DISPOSAL REVENUE BONDS
In March 1997, KACC entered into an agreement (the "Loan Agreement")
with the Industrial Development Corporation of Spokane County, Washington
(the "IDC") in connection with which the IDC issued $19.0 of 7.6% Solid
Waste Disposal Revenue Bonds due 2027 (the "Bonds") and loaned the proceeds
to KACC to finance the construction of certain qualifying expenditures at
its Mead smelter, which are part of the previously announced modernization
and expansion of Mead's carbon baking furnace. The net proceeds from the
sale of the Bonds of approximately $18.6 were deposited into a restricted
construction account (the balance of which is included in Other assets) and
may be withdrawn from time to time by KACC, pursuant to the Loan Agreement
and Bond indenture. The Loan Agreement requires KACC to make payments on
the dates and in the amounts required to permit the IDC to satisfy all of
its payment obligations under the Bonds and related indenture.
4. EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Primary -PRIMARY
Earnings (loss) per common and common equivalent share are computed by
deducting preferred stock dividends on the 8.255% PRIDES, Convertible Preferred Stock (the
"PRIDES") from net income (loss) in order to determine net income (loss) available to
common shareholders. This amount is then divided by the weighted average
number of common and common equivalent shares outstanding during the
period. The weighted
average number of common and common equivalent shares for the quarter ended
September 30, 1996, excludes the impact of outstanding stock options since
they were antidilutive. The impactthe number of outstanding stock options on the
weighted average number of common and common equivalent shares for the
quarters and nine month periods ended September 30, 1997, and 1996, was
immaterial.
FULLY DILUTED
For the quarter and nine months ended September 30, 1995,1997, fully
diluted earnings per share are presented even though the results are
antidilutive as a result of the August 1997 conversion of the PRIDES. The
fully diluted computations for these periods assume that the conversion of
the PRIDES had occurred at the beginning of each period. Accordingly, the
dividend amounts for the quarter and the nine monthsnine-month period ended September 30,
1996, was immaterial.
Fully Diluted -1997, of $1.3 and $5.5, respectively, have not been deducted from net
income and the weighted average number of common and common equivalent
shares has been adjusted to reflect the 7,227,848 shares of the Company's
Common Stock issued upon conversion of the PRIDES in August 1997 as if they
had been outstanding from the beginning of each period.
The PRIDES were excluded from the calculation of the weighted average
number of common and common equivalent shares outstanding for all periods presentedthe quarter
and nine-months ended September 30, 1996, because they were antidilutive.
ForNEW ACCOUNTING PRONOUNCEMENT
In February 1997, the quarterFinancial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128"). Under SFAS No. 128, primary earnings per share ("Primary
EPS") will be replaced by basic earnings per share ("Basic EPS"), and nine months ended September 30, 1995, dividends of $2.8 and $9.1,
respectively, attributable to the Company's Mandatory Conversion Premium
Dividend Preferred Stock (the "Series A Shares") which were exchanged for
approximately 13.1 million shares of the Company's common stock and certain
cash payments on September 19, 1995, have not been deducted from net income
and the weighted average number of common and common equivalent shares
outstanding have been adjusted to reflect the shares of common stock issued
in the exchange as if they had been outstanding for the entire periods. As
a result of the conversion of the Series A Shares, fully
diluted earnings per share for("Fully Diluted EPS") will be replaced with
diluted earnings per share ("Diluted EPS"). Basic EPS differs from Primary
EPS in that it only includes the 1995 periods are presented even thoughweighted average impact of outstanding
shares of the results are
antidilutive.
4.Company's Common Stock (i.e., it excludes common stock
equivalents and the dilutive effect of options, etc.) Diluted EPS is
substantially similar to Fully Diluted EPS as previously reported. The
provisions of SFAS No. 128 will result in the retroactive restatement of
previously reported Primary EPS and Fully Diluted EPS figures, but SFAS No.
128 prohibits such restatement prior to December 31, 1997. Based on the
Company's computations, the adoption of SFAS No. 128 is not expected to
impact earnings per share amounts reported during the current quarter or
any recent prior period.
5. CONTINGENCIES
Environmental Contingencies -ENVIRONMENTAL CONTINGENCIES
The Company and KACC are subject to a number of environmental laws, to
fines or penalties assessed for alleged breaches of thesuch environmental
laws, and to claims and litigation based upon such laws. KACC currently is
subject to a number of lawsuits under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended by the
Superfund Amendments Reauthorization Act of 1986 ("CERCLA"), and, along
with certain other entities, has been named as a potentially responsible
party for remedial costs at certain third-party sites listed on the
National Priorities List under CERCLA.
Based uponon the Company's evaluation of these and other environmental
matters, the Company has established environmental accruals primarily
related to potential solid waste disposal and soil and groundwater
remediation matters. At September 30, 1996,1997, the balance of such accruals,
which isare primarily included in Long-term liabilities, was $32.9.$30.8. These
environmental accruals represent the Company's estimate of costs reasonably
expected to be incurred based on presently enacted laws and regulations,
currently available facts, existing technology, and the Company's
assessment of the likely remediation actionactions to be taken. The Company
expects that these remediation actions will be taken over the next several
years and estimates that annual expenditures to be charged to these
environmental accruals will be approximately $2.0$3.0 to $10.0$8.0 for the years
19961997 through 20002001 and an aggregate of approximately $7.0 thereafter.
As additional facts are developed and definitive remediation plans and
necessary regulatory approvals for implementation of remediation are
established or alternative technologies are developed, changes in these and
other factors may result in actual costs exceeding the current
environmental accruals. The Company believes that it is reasonably
possible that costs associated with these environmental matters may exceed
current accruals by amounts that could range, in the aggregate, up to an
estimated $26.5$19.0. As the resolution of these matters is subject to further
regulatory review and thatapproval, no specific assurance can be given as to
when the factors upon which a substantial portion of this estimate is based
arecan be expected to be resolved in early 1997.resolved. However, the Company is currently working
to resolve certain of these matters. While uncertainties are inherent
in the final outcome of these environmental matters, and it is presently
impossible to determine the actual costs that ultimately may be incurred,
management currently believes that the resolution of such uncertainties
should not have a material adverse effect on the Company's consolidated
financial position, results of operations, or liquidity.
Asbestos Contingencies -ASBESTOS CONTINGENCIES
KACC is a defendant in a number of lawsuits, some of which involve
claims of multiple persons, in which the plaintiffs allege that certain of
their injuries were caused by, among other things, exposure to asbestos
during, and as a result of, their employment or association with KACC or
exposure to products containing asbestos produced or sold by KACC. The
lawsuits generally relate to products KACC has not manufactured for at
least 1520 years. At September 30, 1996,1997, the number of such lawsuitsclaims pending
was approximately 75,900,71,200, as compared to 59,700with 71,100 at December 31, 1995. During the year 1995,1996. In
1996, approximately 41,70021,100 of such claims were received and 7,2009,700 were
settled or dismissed. During the quarter and nine months ended September
30, 1996,1997, approximately 4,6003,400 and 20,0009,000 of such claims were received and
6006,500 and 3,8008,900 of such claims were settled or dismissed, respectively.
Based on past experience and reasonably anticipated future activity,
the Company has established an accrual for estimated asbestos-related costs
for claims filed and estimated to be filed and settled through 2008. There are
inherent uncertainties involved in estimating asbestos-related costs, and
the Company's actual costs could exceed or be less than these estimates.
The Company's accrual was calculated based on the current and anticipated
number of asbestos-related claims, the prior timing and amounts of
asbestos-related payments, and the advice of Wharton Levin Ehrmantraut
Klein & Nash, P.A. with respect to the current state of the law related to
asbestos claims. Accordingly, an estimated asbestos-related cost accrual
of $160.0,$156.8, before consideration of insurance recoveries, is included
primarily in Long-term liabilities at September 30, 1996. The Company estimates that annual
future cash payments in connection with such litigation will be
approximately $13.0 to $20.0 for each of the years 1996 through 2000, and
an aggregate of approximately $78.0 thereafter through 2008.1997. While the
Company does not presently believe there is a reasonable basis for
estimating such costs beyond 2008 and, accordingly, no accrual has been
recorded for such costs which may be incurred beyond 2008, there is a
reasonable possibility that such costs may continue beyond 2008, and such
costs may be substantial. A substantial portionThe Company estimates that annual future cash
payments in connection with such litigation will be approximately $13.0 to
$20.0 for each of the asbestos-related claims that were filedyears 1997 through 2001, and served on KACC during 1995 and 1996 were filed in Texas. KACC has been
advised by its counsel that, although there can be no assurance, the
increase in pending claims may have been attributable in part to tort
reform legislation in Texas. Although asbestos-related claims are
currently exempt from certain aspectsan aggregate of
the Texas tort reform legislation,
management has been advised that efforts to remove the asbestos-related
exemption in the tort reform legislation, relating to the doctrine of forum
non conveniens, as well as other developments in the legislative and legal
environment in Texas, may be responsible for the accelerated pace of new
claims experienced in late 1995 and its continuance in 1996, albeit at a
somewhat reduced rate.approximately $86.0 thereafter.
The Company believes that KACC has insurance coverage available to
recover a substantial portion of its asbestos-related costs. Claims for
recovery from some of KACC's insurance carriers are currently subject to
pending litigation and other carriers have raised certain defenses, which
have resulted in delays in recovering costs from the insurance carriers.
The timing and amount of ultimate recoveries from these insurance carriers
are dependent upon the resolution of these disputes. The Company believes,
based on prior insurance-related recoveries in respect of asbestos-related
claims, existing insurance policies, and the advice of Thelen, Marrin,
Johnson & Bridges LLP with respect to applicable insurance coverage law
relating to the terms and conditions of those policies, that substantial
recoveries from the insurance carriers are probable. Accordingly, an
estimated aggregate insurance recovery of $142.3,$127.9, determined on the same
basis as the asbestos-related cost accrual, is recorded primarily in Other
assets at September 30, 1996.1997.
Management continues to monitor claims activity, the status of the
lawsuits (including settlement initiatives), legislative progress, and
costs incurred in order to ascertain whether an adjustment to the existing
accruals should be made to the extent that historical experience may differ
significantly from the Company's underlying assumptions. While
uncertainties are inherent in the final outcome of these asbestos matters
and it is presently impossible to determine the actual costs that
ultimately may be incurred and insurance recoveries that will be received,
management currently believes that, based on the factors discussed in the
preceding paragraphs, the resolution of the asbestos-related uncertainties and
the incurrence of asbestos-related costs net of related insurance
recoveries should not have a material adverse effect on the Company's
consolidated financial position, results of operations, or liquidity.
Other Contingencies -OTHER CONTINGENCIES
The Company and KACC are involved in various other claims, lawsuits,
and other proceedings relating to a wide variety of matters. While
uncertainties are inherent in the final outcome of such matters, and it is
presently impossible to determine the actual costs that ultimately may be
incurred, management currently believes that the resolution of such
uncertainties and the incurrence of such costs should not have a material
adverse effect on the Company's consolidated financial position, results of
operations, or liquidity.
5.See Note 8 of the Notes to Consolidated Financial Statements for the
year ended December 31, 1996.
6. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS
At September 30, 1997, the net unrealized loss, including unamortized
net option premiums, on KACC's position in aluminum forward sales and
option contracts, (based on an average price of $1,647 per ton* ($.75 per
pound) of primary aluminum), natural gas and fuel oil forward purchase and
option contracts, and forward foreign exchange contracts, was approximately
$11.6.
ALUMINA AND ALUMINUM
The Company's earnings are sensitive to changes in the prices of
alumina, primary aluminum and fabricated aluminum products, and also depend
to a significant degree upon the volume and mix of all products sold.
KACC
enters intoPrimary aluminum prices have historically been subject to significant
cyclical fluctuations. During the period from January 1, 1993, through
- ------------
*All references to tons in this report refer to metric tons of 2,204.6
pounds.
September 30, 1997, the Average Midwest United States transaction price for
primary aluminum hedging transactionshas ranged from approximately $.50 to $1.00 per pound.
Alumina prices as well as fabricated aluminum product prices (which vary
considerably among products) are significantly influenced by changes in the
price of primary aluminum but generally lag behind primary aluminum price
changes by up to three months.
From time to time in the normalordinary course of business. Primary aluminumbusiness, KACC enters into
hedging transactions are
designed to mitigateprovide price risk management in respect of the Company'snet
exposure to declines inof earnings resulting from (i) anticipated sales of alumina,
primary aluminum and fabricated aluminum products, less (ii) expected
purchases of certain items, such as aluminum scrap, rolling ingot, and
bauxite, whose prices fluctuate with the market price of primary aluminum, while retainingaluminum.
Forward sales contracts are used by KACC to effectively lock-in or fix the
abilityprice that KACC will receive for its shipments. KACC also uses option
contracts (i) to participate in
favorable environments that may materialize.establish a minimum price for its product shipments, (ii)
to establish a "collar" or range of prices for KACC's anticipated sales,
and/or (iii) to permit KACC has employed strategies
which include forward sales and purchasesto realize possible upside price movements. As
of primary aluminum at fixed
prices and the purchase or sale of options for primary aluminum. At September 30, 1996,1997, KACC had sold forward, at fixed prices,
approximately 69,00017,300, 93,600 and 93,600 tons*24,000 tons of primary aluminum in excesswith
respect to 1997, 1998 and 1999, respectively. As of its projected
internal fabrication requirements forSeptember 30, 1997,
and 1998, respectively, andKACC had also purchased put options to establish a minimum price for
66,000approximately 42,100 and 45,000
tons of such 1997 and 1998 surplus, respectively. During October 1996,
KACC purchased put options to establish a minimum price for an additional
126,00052,000 tons of primary aluminum in excess of its projectedwith respect to
1997 internal
fabrication requirements and 1998, respectively, and had entered into optionsoption contracts that
established a price range for an additional 48,00051,000, 231,600 and 124,500
tons of the Company'sfor 1997, 1998 surplus.
In addition, atand 1999, respectively.
As of September 30, 1996,1997, KACC had sold forward approximately 73% and 85%virtually all of the
alumina available to it in excess of its projected internal smelting
requirements for 1997, 1998 and 1998, respectively.
Virtually all of such 1997 and 1998 sales were made1999 at prices indexed to future prices of
primary aluminum.
FromENERGY
KACC is exposed to energy price risk from fluctuating prices for fuel
oil and natural gas consumed in the production process. Accordingly, KACC
from time to time KACC alsoin the ordinary course of business enters into forward purchasehedging
transactions with major suppliers of energy and option
transactions to limit its exposure to increases in natural gas and fuel oil
costs.energy related financial
instruments. As of September 30, 1996,1997, KACC had option contracts for the
purchase of approximately 40,000 MMBtu of natural gas per day during the
first quarter of 1997, and a combination of fixed
price purchase and option contracts for 20,000the purchase of approximately
44,000 MMBtu of natural gas per day during the remainder of 1997, and for
41,000 MMBtu of natural gas per day for the period April 1997
to December 1998. AtAs of September 30, 1996,1997,
KACC also held a combination of fixed price purchase and option contracts
for 54,000an average of 228,000, 232,000 and 25,000 barrels of fuel oil per month
for the period January 1997, through December 1998.1998, and 1999, respectively.
FOREIGN CURRENCY
KACC also enters into hedging transactions in the normal course of
business that are designedforward exchange contracts to reduce its exposurehedge material cash
commitments to fluctuations in
foreign exchange rates.subsidiaries or affiliates. At September 30, 1996,1997,
KACC had net forward foreign exchange contracts totaling approximately
$81.6$135.0 for the purchase of 110.0175.5 Australian dollars from JanuaryOctober 1997
through JuneDecember 1998, in respect of its commitments for 1997 and 1998
expenditures denominated in Australian dollars. At September 30, 1996,1997,
KACC also held options to purchase approximately 10.0 Australian dollars
over the net unrealized gain on KACC's position in
aluminum forward sales and option contracts, based on an average pricelast three months of $1,481 per ton ($.67 per pound) of primary aluminum, natural gas and fuel
oil forward purchase and option contracts, and forward foreign exchange
contracts, was approximately $46.4.
- ------------------
*All references to tons in this report refer to metric tons of 2,204.6
pounds.1997.
See Note 9 of the Notes to Consolidated Financial Statements for the
year ended December 31, 1995.
6. SUBSEQUENT EVENTS
On October 23,1996.
7. RESTRUCTURING OF OPERATIONS
The Company has previously disclosed that it set a goal of achieving
significant cost reductions and other profit improvements, with the full
effect planned to be realized in 1998 and beyond, measured against 1996
(the "Issuance Date"),results. The initiative is based on the Company's conclusion that the
level of performance of its existing facilities and businesses would not
achieve the level of profits the Company considers satisfactory based upon
historic long-term average prices for primary aluminum and alumina. During
the second quarter of 1997, the Company recorded a $19.7 restructuring
charge to reflect actions taken and plans initiated to achieve the reduced
production costs, decreased corporate selling, general and administrative
expenses, and enhanced product mix intended to achieve this goal. The
significant components of the restructuring charge are enumerated below.
ERIE PLANT DISPOSITION
During the second quarter of 1997, the Company formed a joint venture
with a third party related to the assets and liabilities associated with
the wheel manufacturing operations at its Erie, Pennsylvania, fabrication
plant. Management subsequently decided to close the remainder of the Erie
plant in order to consolidate its aluminum forgings operations at two other
facilities for increased efficiency. As a result of the joint venture
formation and plant closure, the Company recognized a net pre-tax loss of
approximately $1.4.
OTHER ASSET DISPOSITIONS
As a part of the Company's profit enhancement and cost reduction
initiative, management made decisions regarding product rationalization and
geographical optimization, which led management to decide to dispose of
certain assets which had nominal operating contribution. These strategic
decisions resulted in the Company recognizing a pre-tax charge for
approximately $15.6 associated with such asset dispositions.
EMPLOYEE AND OTHER COSTS
As a part of the Company's profit enhancement and cost reduction
initiative, management concluded that certain corporate and other staff
functions could be consolidated or eliminated resulting in a second quarter
pre-tax charge of approximately $2.7 for benefit and other costs.
8. COMPLETED ACQUISITION
During June 1997, Kaiser Bellwood Corporation, a newly formed, wholly
owned subsidiary of KACC, completed an offering
(the "Offering")the acquisition of $175.0 principal amountReynolds Metals
Company's Bellwood, Virginia, extrusion plant and its existing inventories
for a total purchase price (after post-closing adjustments) of 10 7/8% Senior Notes due
2006 (the "10 7/8% Senior Notes") at 99.5%$41.6,
consisting of their principal amount to
yield 10.96% at maturity. The 10 7/8% Senior Notes were not registeredcash payments of $38.4 and the assumption of approximately
$3.2 of employee related and other liabilities. Upon completion of the
transaction, Kaiser Bellwood Corporation became a subsidiary guarantor
under the Securities Actindentures in respect of 1933, and may not be offered or sold in the
United States absent registration or an applicable exemption from
registration requirements. The 10 7/8% Senior Notes rank pari passu with
outstanding indebtedness under KACC's Credit Agreement dated as of February
15, 1994, as amended (the "Credit Agreement") and KACC's 9 7/9-7/8% Senior Notes due 2002,
(the 9-7/10-7/8% Series B and Series D Senior Notes) in rightNotes due 2006, and priority12-3/4% Senior
Subordinated Notes due 2003.
9. CONVERSION OF PRIDES TO COMMON STOCK
During August 1997, the 8,673,850 outstanding shares of payment
and are guaranteed on a senior, unsecured basis by certainPRIDES were
converted into 7,227,848 shares of Common Stock pursuant to the terms of
the Company's
subsidiaries (the "Subsidiary Guarantors"). Net proceeds from the Offering
on the Issuance Date, after estimated expenses, were approximately $168.9,PRIDES Certificate of which $91.7 were utilized to reduce the outstanding borrowings under the
revolving credit facility of the Credit Agreement to zero. The remaining
net proceeds (approximately $77.2) were investedDesignations. Further, in short-term investments
pending their application for working capital and general corporate
purposes, including capital projects. Pursuant to an agreementaccordance with the
initial purchasersPRIDES Certificate of Designations, no dividends were paid or payable for
the 10 7/8% Senior Notes, KACC andperiod June 30, 1997, to, but not including, the Subsidiary
Guarantors agreed to file a registration statement (the "Registration
Statement")date of conversion.
However, in accordance with generally accepted accounting principles, the
Securities & Exchange Commission within 30 days$1.3 of the
Issuance Date with respect to a registered offer to exchange the 10 7/8%
Senior Notes for new notes with substantially identical terms (the
"Exchange Offer"), and to use their reasonable best efforts to have the
Registration Statement declared effective within 90 days of the Issuance
Date and the Exchange Offer consummated within 130 days of the Issuance
Date. The Exchange Offer will be made only by means of a prospectus.
On a pro forma basis, at September 30, 1996, after giving effectaccrued dividends attributable to the Offeringperiod June 30, 1997, to, but
not including, the conversion date is treated as an increase in Additional
capital at the date of conversion and the applicationmust still be reflected as a
reduction of proceeds therefrom, the Company's total
consolidated indebtedness would have increased from $867.3Net income (loss) available to $910.2,
borrowing capacity of $273.1 would have been available for use under the
Credit Agreement and the Company would have had available additional cash
proceeds from the Offering of $37.7.
During October 1996, the Credit Agreement was amended to, among other
things, provide for the Offering of the 10 7/8% Senior Notes discussed
above and to modify certain of the financial covenants contained in the
Credit Agreement.common shareholders.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-------------------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The followingThis section should be read in conjunction with the response to Item
1, Part I, of this Report.
Management's Discussion & Analysis of Financial Condition and Results
of Operations, ("MD&A")This section contains statements which constitute forward
looking statements"forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. These statements appear in a number of places in this section
(see, for example, "Profit Enhancement and Cost Reduction Initiative,"
"Results of Operations," and "Liquidity and Capital Resources"). Such
statements can be identified by the MD&A and include statements regardinguse of forward-looking terminology such
as "believes," "expects," "may," "estimates," "will," "should," "plans" or
"anticipates" or the intent, beliefnegative thereof or current
expectationsother variations thereon or
comparable terminology, or by discussions of the Company, its directors or its officers primarily with
respect to the future operating performance of the Company.strategy. Readers are
cautioned that any such forward lookingforward-looking statements are not guarantees of
future performance and involve significant risks and uncertainties, and
that actual results may differvary materially from those in the forward lookingforward-looking
statements as a result of various factors. The accompanying MD&A identifies importantThese factors include the
effectiveness of management's strategies and decisions, general economic
and business conditions, developments in technology, new or modified
statutory or regulatory requirements, and changing prices and market
conditions. This section and the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, each identify other factors that could
cause such differences. RESULTS OF OPERATIONSNo assurance can be given that these are all of
the factors that could cause actual results to vary materially from the
forward-looking statements.
RECENT EVENTS AND DEVELOPMENTS
The Company has previously disclosed that it has a goal of achieving
significant cost reductions and other profit improvements, with the full
effect planned to be realized in 1998 and beyond, measured against 1996
results. The initiative is based on the Company's operating results are sensitive to changes inconclusion that the
level of performance of its existing facilities and businesses would not
achieve the level of profits the Company considers satisfactory based upon
historic long-term average prices of
alumina,for primary aluminum and fabricated aluminum products,alumina. During
the second quarter of 1997, the Company recorded a $19.7 million
restructuring charge to reflect actions taken and also
dependplans initiated to
a significant degree onachieve the volumereduced production costs, decreased corporate selling, general
and administrative expenses, and enhanced product mix of all products sold
and on KACC's hedging strategies.intended to achieve
this goal. See Note 57 of the Notes to Interim Consolidated Financial
StatementsStatements.
During June 1997, Kaiser Bellwood Corporation, a newly formed, wholly
owned subsidiary of the Company, completed the acquisition of Reynolds
Metals Company's Bellwood, Virginia, extrusion plant and its existing
inventories for an explanationa total purchase price of KACC's hedging
strategies.$41.6 million. See Note 8 of
Notes to Interim Consolidated Financial Statements.
During August 1997, the 8,673,850 outstanding shares of PRIDES were
converted into 7,227,848 shares of Common Stock pursuant to the terms of
the PRIDES Certificate of Designations.
The Company currently anticipates that the Volta River Authority may
partially reduce its electric power allocation to the Company's 90% owned
Volta Aluminium Company Limited ("Valco") smelter facility in Ghana in
1998. Informal discussions with local officials suggest that regional
rainfall has been insufficient to raise the level of the lake, from which
the facility receives its hydroelectric power, to maintain the current
level of power for the coming year. Formal notice of Valco's 1998 power
allocation is expected on or about November 15, 1997. Meetings are planned
with local officials for early November to discuss the situation.
RESULTS OF OPERATIONS
The table on the following page provides selected operational and
financial information on a consolidated basis with respect to the Company
for the quarters and nine month periods ended September 30, 19961997, and 1995.1996.
As an integrated aluminum producer, the Company uses a portion of its
bauxite, alumina, and primary aluminum production for additional processing
at certain of its other facilities. Intracompany shipments and sales are
excluded from the information set forth on the following page.
Interim results are not necessarily indicative of those for a full
year.
SELECTED OPERATIONAL AND FINANCIAL INFORMATION
(Unaudited)
(In millions of dollars, except shipments and prices)
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------------------- -------------------------------------------------------------- ------------------------------
1997 1996 19951997 1996
1995
-------------------------------- --------------------------------
(In millions of dollars, except shipments, prices, and per share amounts)------------------------------ ------------------------------
Shipments: (1)
Alumina 579.2 598.6 471.51,457.0 1,506.7 1,494.6
Aluminum products:
Primary aluminum 86.4 88.1 73.0246.9 262.9 184.5
Fabricated aluminum products 105.2 83.1 90.4299.5 245.4
284.3
-------------------------------- -------------------------------------------------------------- ------------------------------
Total aluminum products 191.6 171.2 163.4546.4 508.3
468.8
================================ ============================================================== ==============================
Average realized sales price:
Alumina (per ton) $ 200 $ 187 $ 206196 $ 199 $ 203
Primary aluminum (per pound) .76 .67 .83.75 .69 .82
Net sales:
Bauxite and alumina:
Alumina $ 115.9 $ 111.7 $ 97.2285.6 $ 300.2 $ 303.8
Other (2) (3) 27.1 25.8 22.380.2 77.2
65.3
-------------------------------- -------------------------------------------------------------- ------------------------------
Total bauxite and alumina 143.0 137.5 119.5365.8 377.4
369.1
-------------------------------- -------------------------------------------------------------- ------------------------------
Aluminum processing:
Primary aluminum 145.0 130.6 133.4409.5 402.8 335.0
Fabricated aluminum products 341.7 282.4 293.0990.6 861.4 929.0
Other (3) 4.4 2.9 4.412.7 10.5
13.6
-------------------------------- -------------------------------------------------------------- ------------------------------
Total aluminum processing 491.1 415.9 430.81,412.8 1,274.7
1,277.6
-------------------------------- -------------------------------------------------------------- ------------------------------
Total net sales $ 634.1 $ 553.4 $ 550.31,778.6 $ 1,652.1
$ 1,646.7
================================ ============================================================== ==============================
Operating income (loss):
Bauxite and alumina $ 8.8 $ (2.1) $ 14.8 $ 8.8
$ 36.4
Aluminum processing (4) 64.1 29.1 58.9161.6 127.8
170.9
Corporate (5) (18.4) (16.5) (20.5)(55.3) (49.2)
(57.9)
-------------------------------- -------------------------------------------------------------- ------------------------------
Total operating income $ 54.5 $ 10.5 $ 53.2121.1 $ 87.4
$ 149.4
================================ ============================================================== ==============================
Net income (loss) $ 17.5 $ (6.6) $ 12.533.8 $ 11.5
============================== ==============================
Capital expenditures $ 39.3
================================ ================================
Capital expenditures:
Property, plant, and equipment $ 39.1 $ 17.1 $ 90.8 $ 44.2
Investments in unconsolidated
affiliates .1 9.0 .3 9.0
-------------------------------- --------------------------------
Total capital
expenditures25.9 $ 39.2 $ 26.194.7 $ 91.1
$ 53.2
================================ ================================
____________________________________============================== ==============================
[FN]
- ---------------------------------
(1) In thousands of metric tons.
(2) Includes net sales of bauxite.
(3) Includes the portion of net sales attributable to minority interests
in consolidated subsidiaries.
Recent Trends(4) Operating income for the nine months ended September 30, 1997 includes
a pre-tax charge of $15.1 related to restructuring of operations
recorded in the quarter ended June 30, 1997.
(5) Operating income for the nine months ended September 30, 1997 includes
a pre-tax charge of $4.6 related to restructuring of operations
recorded in the quarter ended June 30, 1997.
OVERVIEW
The Company's operating results are sensitive to changes in prices of
alumina, primary aluminum, and Developmentsfabricated aluminum products, and also
depend to a significant degree on the volume and mix of all products sold
and on KACC's hedging strategies. Primary aluminum prices have
historically been subject to significant cyclical fluctuations. Alumina
prices as well as fabricated aluminum product prices (which vary
considerably among products) are significantly influenced by changes in the
price of primary aluminum but generally lag behind primary aluminum price
changes by up to three months.
During 1995, the averagefirst nine months of 1997, the Average Midwest U.S.United
States transaction price (the "AMT("AMT Price") for primary aluminum was approximately $.86remained
relatively stable generally in the $.75 - $.80 per pound compared to
$.72 and $.54 per pound in 1994 and 1993, respectively. The significant
improvement in prices during 1994 and 1995 resulted from strong growth in
Western world consumption of aluminum and the curtailment of production in
response to lower prices in prior periods by many producers worldwide. In
1995, production of primary aluminum increased and consumption of aluminum
continued to grow, but at a much lower rate than in 1994. In general, the
overall aluminum market was strongest in the first half of 1995. By the
second half of 1995, orders and shipments for certain products had softened
and the rate of decline in London Metal Exchange ("LME") inventories had
leveled off. By the end of 1995, some small increases in LME inventories
occurred, and prices of aluminum weakened from first-half levels. This
trend has continued throughout the first ten months of 1996 as the supply
of primary aluminum exceeded demand during this period. Net reported
primary aluminum inventories have increased by approximately 230,000 tons
in 1996 based upon recent reports of the LME (through November 1, 1996) and
the International Primary Aluminum Institute (through August 31, 1996),
following substantial declines of 764,000 and 1,153,000 tons in 1994 and
1995, respectively.range. The AMT
Price for primary aluminum for the week ended November 1, 1996,October 31, 1997, was
approximately $.68$.77 per pound. Increased production of primary aluminum dueThis compares favorably to restarts of certain
previously idled capacity,1996 when the commissioning of a major new smelterAMT
Price remained fairly stable generally in South Africa,the $.70 - $.75 range through
June and then declined during the continued high level of exports from the Commonwealth
of Independent States have contributed to increased supplies of primary
aluminum to the Western world in 1996. While the economiessecond half of the major
aluminum consuming regions -year, reaching a low
of approximately $.65 per pound for October 1996, before recovering late in
the United States, Japan, Western Europe, and
Asia - are performing relatively well,year.
See Note 6 of the Company believes that the
reductionNotes to Interim Consolidated Financial Statements
for a discussion of aluminum inventories by consumers, as prices have continued to
decline, has suppressed the growth in primary aluminum demand that normally
accompanies growth in economic and industrial activity. In addition to
these supply/demand dynamics, the Company believes the recent decline in
primary aluminum prices may have been influenced by a recent major decline
in copper prices on the LME.
Fourth Quarter ResultsKACC's hedging activities.
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1997, COMPARED TO QUARTER AND
NINE MONTHS ENDED SEPTEMBER 30, 1996
SUMMARY
The Company expects to continue to sustainreported net losses in the fourth
quarterincome of 1996 due principally to lower average realized prices for
alumina$17.5 million, or $.22 per common
and primary aluminum, as compared to prices realized in the fourth
quarter of 1995, and due to increased raw material, energy, and operational
costs associated with the production of alumina at the Company's Gramercy
alumina refinery and 65% owned Alpart alumina refinery in Jamaica, as
compared to amounts incurred in the fourth quarter of 1995. Such losses
could substantially exceed the losscommon equivalent share, for the third quarter of 1996 if the
price of primary aluminum does not increase from current levels.
Profit Enhancement and Cost Cutting Initiative
The Company has set a goal of achieving significant cost reductions
and other profit improvements during 1997, with the full effect plannedcompared to
be realized in 1998. The initiative is based on the Company's conclusion
that the current level of performance of its existing facilities and
businesses will not achieve the level of profits the Company considers
satisfactory based upon historic long-term average prices for primary
aluminum and alumina. To achieve this goal, the Company plans reductions
in production costs, improvements in operating efficiencies, decreases in
corporate selling, general and administrative expenses, and enhancements to
product mix. There can be no assurance that the initiative will result in
the desired cost reductions and other profit improvements.
Quarter and Nine Months Ended September 30, 1996 Compared to Quarter and
Nine Months Ended September 30, 1995
Summary - The Company reported a
net loss of $6.6 million, or $.12 per common share, for the third quarter of 1996, compared to net income of
$12.5 million, or $.13 perand common equivalent share,
for the same period of 1995.1996. Net sales in the third quarter of 19961997 totaled
$553.4$634.1 million compared to $550.3$553.4 million in the third quarter of 1995.1996.
For the first nine months of
1996, the Company'snine-month period ended September 30, 1997, net income was
$11.5$33.8 million, or $.07$.39 per common and common equivalent share compared to
net income of $39.3$11.5 million, or $.40$.07 per common and common equivalent per
share infor the firstnine-month period ended September 30, 1996. Net sales for
the nine months of 1995. Net salesended September 30, 1997, were $1,778.6 million compared to
$1,652.1 million for the first nine months of 1996
were $1,652.1 million, compared to $1,646.7 million for the same period in
1995.1996.
Results for the third quarter and nine monthsnine-month period ended September 30, 1996,
reflect1997, include
the substantial reduction in market prices for primary aluminum
more fully discussed above. Alumina prices, which are significantly
influenced by changes in primary aluminum prices, also declined from periodeffect of certain non-recurring items including a $19.7 million
restructuring charge (discussed above), an approximate $12.5 million non-
cash tax benefit related to period. The decrease in product prices more than offset the positive
impactsettlement of increases in shipments in several segments of the Company's
business, as more fully discussed below.
Resultscertain matters and a $5.8
million charge related to additional litigation reserves. Excluding these
items, net income for the first nine months of 1995 includenine-month period ended September 30, 1997, would
have been approximately $17.0$37.1 million, of first-quarter 1995 pre-tax expenses associated with an eight-day
strike at five major U.S. locations, a six-day strike atand primary earnings per common and
common equivalent share for the Company's
Alpart alumina refinery, and a four-day disruptionperiod would have been $.43.
BAUXITE AND ALUMINA
Net sales of alumina production at
Alpart caused by a boiler failure.
Bauxite and Alumina - Net sales for this segment increased by 15%4% for the quarter ended September
30, 1996,1997, from the comparable period in the prior year, as increased shipmentsa result of alumina (27%) more than offset a 9% decline7%
increase in average realized prices realized from the sale of alumina. Net segment sales foralumina, offset by a
3% decline in alumina shipments. Shipment volumes were down as compared to
the nine monthsquarter ended September 30, 1996, were basically unchangedprimarily as a result of the timing
of shipments. For the nine-month period ended September 30, 1997, net
segment sales declined by 3% from the samecomparable period in 1995 as, onthe prior year.
This change was due to a year to date basis, nominal alumina price
declines were offset by2% decrease in average realized prices between
periods and a modest increase3% reduction in alumina shipments.
The
reductionSegment operating income improved substantially on a quarter to
quarter basis and, to a lesser extent, for the comparative nine month
periods as well. On a quarterly basis, the improvement resulted primarily
from improvements in average realized prices and operating efficiencies and
reduced raw material and energy prices. On a year-to-date basis, these
improvements were somewhat offset by the impact of reductions in both the
average realized particularlyalumina price and alumina shipments as discussed above.
ALUMINUM PROCESSING
Net sales of primary aluminum for the quarter ended September 30,
1997, increased by 11% from the comparable prior year period as a result of
a 13% increase in average realized prices offset by a 2% decrease in
shipments. Net sales of fabricated aluminum products for the quarter ended
September 30, 1997, were up 21% as compared to the prior year period as a
result of a 27% increase in shipments offset by a 4% decrease in average
realized prices. The increase in fabricated aluminum product shipments
over the third quarter of 1996 reflectswas the substantial declineresult of the Company's June 1997
acquisition of an extrusion facility in primary aluminum prices
experienced in 1996 discussed above,Bellwood, Virginia, as well as
the impact of certain short
termincreased international sales of previously uncommitted alumina production.
Operating income (loss)can sheet and increased shipments of heat-
treated products.
For the nine-month period ended September 30, 1997, net sales for thisthe
aluminum processing segment ofincreased by approximately 11% from the
Company's business declined
significantly fromcomparable prior year periodsperiod primarily as a result of: (1) reduced gross
margins from aluminaof a 15% increase in
fabricated aluminum product net sales. The increase in fabricated product
net sales resultingresulted from the previouslysame shipment and price factors discussed price
declines; (2) high operating costs associated with disruptions in
the power
supply atpreceding paragraph. Net sales of primary aluminum for the Company's Alpart alumina refinery;nine-month
period ended September 30, 1997, were basically flat as compared to the
prior year as reduced shipments for the period were offset by an increase
in the average realized price.
In addition to being affected by the price and (3) increased natural
gas costs atvolume factors
discussed above, the Company's Gramercy, Louisiana alumina refinery. Operatingaluminum processing segment's operating income for the
nine months ended September 30, 1996, was1997, also unfavorably
impacted by a temporarybenefited from reduced power,
raw material quality problem experienced atand supply costs as well as improved operating efficiencies.
In addition, the Company's Gramercy facility during the second quarter of 1996.
Aluminum Processing - Net sales of primary aluminum declined by only 2% for
the quarter ended September 30, 1996, from the comparable prior year period
as a 19% reduction in prices realized was substantially offset by a 21%
increase in shipments. For the first nine months of 1996 increases in
shipments of 42.5% more than offset a 16% decline in product prices from
period to period. The increases in shipments during the quarter and the
nine months ended September 30, 1996, are the result of increased shipments
of primary aluminum to third parties as a result of a decline in
intracompany transfers.
Net sales of fabricated aluminum products were down 4%
and 7% for the quarter and the nine months ended September 30, 1996,
respectively, as compared to prior year periods as a result of a decrease
in shipments (primarily related to can sheet activities) resulting from
reduced growth in demand and the reduction of consumer inventories
The impact of reducedproduct shipments was to a limited degree offset by
5% and 7% increases in prices realized from the sale of fabricated aluminum
productssegment's operating income for the quarter and nine monthsmonth
period ended September 30, 1996,
respectively,1997, includes approximately $2.7 million and
$7.5 million of operating income realized during the periods, related to
the settlement of certain issues related to energy service contracts.
Operating income for the nine-month period ended September 30, 1997, also
includes a $15.1 million second quarter charge resulting from a shift in product mix (to higher-end value
added products), due to reduced can sheet shipments.
Corporate -the
restructuring of operations.
CORPORATE
Corporate operating expenses represent normal and recurring corporate general and
administrative expenses, which are not allocated to the Company's business
segments. Operating results for the nine-month period ended September 30,
1997, includes a pre-tax charge of approximately $4.6 million associated
with the Company's restructuring of operations.
LIQUIDITY AND CAPITAL RESOURCES
Capital Structure
In April 1996,CAPITAL STRUCTURE
MAXXAM Inc. ("MAXXAM") and MAXXAM Group Holdings Inc. ("MGHI"), a
wholly owned subsidiary of MAXXAM, collectively own approximately 63% of
the Company's Common Stock, par value $.01 per share. The remaining
approximately 37% of the Company's Common Stock is publicly held.
MGHI has pledged 27,938,250 shares of the Company's Common Stock
beneficially owned by it (the "Pledged Shares") as security for $225.7
million of debt securities of one of its wholly owned subsidiaries.
Additionally, MGHI has agreed to pledge up to 16,055,000 of such Pledged
Shares as security for $130.0 million of its debt securities should the
security pledge related to the $225.7 million of debt securities be
released due to an early retirement of the related debt (other than by a
refinancing).
The Company filed a shelf-registrationhas an effective "shelf" registration statement with
the Securities and Exchange Commission (the "SEC") covering
the sale by
MAXXAMoffering of up to 10 million10,000,000 shares of the Company's Common Stock that
are owned by MAXXAM. ThereAny such offering would only be made by means of a
prospectus. The Company will not receive any of the net proceeds from any
transaction initiated by MAXXAM pursuant to this registration statement.
The Company also has an effective "shelf" registration statement
covering the offering from time to time of up to $150.0 million of equity
securities. Any such offering will only be no proceeds tomade by means of a prospectus.
The Credit Agreement does not permit the Company fromor KACC to pay any
such
sale. The registration has been declared effective by the SEC.
The Company's Board of Directors had approved a proposed
recapitalization (the "Proposed Recapitalization") which would, among other
things, (i) provide for two classes ofdividends on their common stock: Class A Common Shares
with one vote per share ("Class A Common Shares") and a new, lesser-voting
class designated as Common Stock with 1/10 vote per share ("Recap Common
Stock"); (ii) redesignate as Class A Common Shares the 100 million
currently authorized shares of the Company's existing Common Stock and
authorize an additional 250 million shares of Recap Common Stock; and (iii)
reclassify each issued share of the Company's existing Common Stock into
(a) .33 of a Class A Common Share and (b) .67 of a share of Recap Common
Stock.
On May 1, 1996, the Company's stockholders approved the Proposed
Recapitalization, but it was not implemented at that time due to a
preliminary injunction issued by the Delaware Court of Chancery. The
preliminary injunction was upheld on appeal by the Delaware Supreme Court
on August 29, 1996. The Company's Board of Directors subsequently adopted
a resolution abandoning the Proposed Recapitalization. The Company has
filed a motion with the Delaware Court of Chancery to dismiss the
shareholder litigation relating to the Proposed Recapitalization on the
ground of mootness and has filed a response to plaintiffs' motion for entry
of a permanent injunction. The Court has not ruled on either motion. See
Part II, Item 1. "LEGAL PROCEEDINGS - Matheson et al v. Kaiser Aluminum
Corporation et al" for information regarding a pending lawsuit with respect
to the Proposed Recapitalization.
The decision to abandon the Proposed Recapitalization does not
preclude a recapitalization from being proposed to the Company's
stockholders in the future, including a substantially identical
recapitalization structure after the redemption or conversion of the
PRIDES. In the event that such a recapitalization were implemented in the
future, MAXXAM could retain a majority of the voting power of the Company
even if it substantially reduced its total holdings of the Company's equity
securities by more than two-thirds.
On October 23, 1996, KACC completed the Offering of $175.0 million
principal amount of the 10-7/8% Senior Notes at 99.5% of their principal
amount to yield 10.96% at maturity. The 10-7/8% Senior Notes rank pari
passu with outstanding indebtedness under the Credit Agreement and the
9-7/8% Senior Notes in right and priority of payment and are guaranteed on
a senior, unsecured basis by certain of the Company's subsidiaries. Net
proceeds from the Offering on the Issuance Date, after estimated expenses,
were approximately $168.9 million, of which $91.7 million were utilized to
reduce the outstanding borrowings under the revolving credit facility of
the Credit Agreement to zero. The remaining net proceeds (approximately
$77.2 million) were invested in short-term investments pending their
application for working capital and general corporate purposes, including
capital projects.
Operating Activitiesstock.
OPERATING ACTIVITIES
At September 30, 1996,1997, the Company had working capital of $398.4$469.8
million, compared with working capital of $331.7$414.3 million at December 31,
1995.1996. The increase in working capital was due primarily to an increase in
Inventories and Prepaid expenses and other current assetsReceivables and a decrease in Accounts payable and Accrued salaries, wages, and related expenses,
partially offset by a
decrease in ReceivablesCash and an increase in Other
accrued liabilities.
Investing Activitiescash equivalents.
INVESTING ACTIVITIES
Capital expenditures during the firstquarter and nine months of 1996ended
September 30, 1997, were $91.1$25.9 million whichand $94.7 million, respectively, and
were used primarily to acquire the Bellwood extrusion facility from
Reynolds, improve production efficiency, reduce operating costs, expand
capacity at existing facilities, and construct new facilities, including thefacilities. The
Company's first micromillMicromill(TM) facility, which is nearing
completionwas constructed in Nevada
during 1996 as a full-scale demonstration and production facility.facility, achieved
operational start-up by year-end 1996. The facility remained in a start-up
mode during the first nine months of 1997 as the Company continued its
efforts to implement the Micromill(TM) technology on a full scale basis.
While the Micromill(TM) technology has not yet been fully implemented or
commercialized, and no assurances can be given that the Company will
ultimately be successful in this regards, the Company currently expects to
commence limited product shipments to customers in the fourth quarter of
1997.
Total consolidated capital expenditures (of which approximately 6%7% is
expected to be funded by the Company's minority partners in certain foreign
joint ventures) are expected to be between $130.0$70.0 and $160.0$140.0 million per
annum in each of 19961997 through 1998.1999. Management continues to evaluate
numerous projects, all of which require substantial capital, including the
Company's micromillMicromill project, and other potential opportunities both in the
United States and overseas.
In responseSubsequent to lowerSeptember 30, 1997, a joint decision was made by a
KACC subsidiary and its joint venture partner to terminate and dissolve
the Sino-foreign aluminum and alumina
prices, management may consider deferring certain non-essential capital
expenditures and/or raising investment capital (including through joint ventures),venture in order to conserve a portionwhich the subsidiary had
invested approximately $9.0 million in 1995. Under the terms of the
Company's available cash
resourcesjoint venture agreement and Chinese law, a distribution of the joint
venture's net assets is to meet incremental capitalbe made to each of the parties in respect of
their individual ownership interests. The amount that will ultimately be
received upon dissolution and operating requirementsthe associated terms of any payments are the
subject of ongoing negotiations and is subject to take advantage of new investment opportunities.
During July 1996, the directors of Yellow River Aluminum Industry
Company Limited (the "Joint Venture"), a Sino-foreign joint equity
enterprise organized under the lawcertain governmental
approvals by officials of the People's Republic of China
between Kaiser Yellow River Investment Limited ("KYRIL"), a subsidiary of
KACC, and Lanzhou Aluminum Smelters ("LAS") of the China National
Nonferrous Metal Industry Corporation, KYRIL and LAS reached an agreement
(i) that extended until early 1997 the time for KYRIL to make a second
capital contribution to the Joint Venture, and (ii) that KYRIL would
continue to explore various methods of financing any future capital
contributions to the Joint Venture, including financing that could be
obtained from third-party investors.
Financing Activities and LiquidityChina.
FINANCING ACTIVITIES AND LIQUIDITY
At September 30, 1996,1997, the Company had long-term debt of $858.4$972.0
million, compared with $749.2$961.9 million at December 31, 1995.1996. The change in
long-term debt between periods is primarily the result of $19.0 million of
proceeds from the Spokane County, Washington, Solid Waste Disposal Revenue
Bonds, which were loaned to KACC to finance certain qualifying capital
expenditures at its Mead smelter, offset by scheduled payments of the
current portion of long-term debt.
At September 30, 1996, $141.91997, $273.8 million (of which $73.1$73.8 million could
have been used for letters of credit) was available to KACC under the
Credit Agreement. On a
pro forma basis, after giving effect to the Offering and the application of
proceeds therefrom, as of September 30, 1996, the Company would have had
long-term debt of $901.3 million, $273.1 million of borrowing capacity
would have been available for use under the Credit Agreement, and the
Company would have had additional available cash proceeds from the Offering
of $37.7 million.
During the nine months ended September 30, 1996, total borrowings and
repayments under the revolving credit facility of the Credit Agreement were
$468.7 million and $350.6 million, respectively. During the nine months
ended September 30, 1995, total borrowing and repayments under the
revolving credit facility of the Credit Agreement were $481.9 million and
$426.3 million, respectively.
Loans under the Credit Agreement bear interest at a
spread (which varies based on the results of a financial test) over either
a base rate or LIBOR at the Company's option. During the quarter and nine
month period ended September 30, 1997, the average per annum at
KACC's election, equal to a Reference Rate (as defined) plus a margin of 0%
to 1.50% or LIBO Rate (Reserve Adjusted) (as defined) plus a margin of
1.75% to 3.25%. The interest rate margins applicable to borrowingsrates
on loans outstanding under the Credit Agreement are based on a financial test, determined quarterly.
During the first two quarters of 1996, the Company paid interest at a rate
per annumwere approximately 9.0% and
9.5%, respectively. Upon completion of the Reference Rate plus 0% or LIBO Rate plus 1.75%. Duringacquisition of the third quarter of 1996, the per annum interest rates increased by .5% to
the Reference Rate plus .5% or LIBO Rate plus 2.25%. Effective October 1,
1996, the margin applicable to loansBellwood
facility, Kaiser Bellwood Corporation became a subsidiary guarantor under
the Credit Agreement increased
by an additional.5% per annum based on the financial test.indentures in respect of KACC's 9-7/8% Senior Notes due 2002, 10-7/8%
Series B and Series D Senior Notes due 2006, and 12-3/4% Senior
Subordinated Notes due 2003.
Management believes that the Company's existing cash resources,
together with cash flows from operations and borrowings under the Credit
Agreement, will be sufficient to meet its working capital and capital
expenditure requirements for the next year. Additionally, with respect to
long-term liquidity, management believes that operating cash flows,flow, together
with the ability to obtain both short and long-term financing, should
provide sufficient funds to meet the Company's working capital and capital
expenditure requirements.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Environmental Proceedings
Aberdeen Pesticide Dumps Site Matter
In May 1996, the Environmental Protection Agency (the "EPA") urged
KACC to rejoin the respondents who are parties to a PRP Participation
Agreement (the "Group") and indicated that it would consider seeking
penalties against KACC if it did not. On October 10, 1996, the EPA
notified KACC that it deems KACC to be in violation of Administrative
Orders issued by the EPA under Section 106(a) of CERCLA ordering the
respondents, including KACC, to perform the soil remedial design and
remedial action described in the Record of Decision for the Aberdeen
Pesticide Dumps Site (the "Sites"). KACC and certain members of the Group
have entered into an agreement with the United States Department of Justice
to engage in a mediation process regarding an appropriate allocation of
responsibility for response costs at the Sites. KACC has also agreed to
fund a portion of the costs associated with certain work at the Sites during
the mediation process. See Part I, Item 3. "LEGAL PROCEEDINGS -
Aberdeen Pesticide Dumps Site Matter" in the Company's Report on Form 10-K
for the year ended December 31, 1995 (the "Form 10-K").
Catellus Development Corporation v. Kaiser Aluminum & Chemical Corporation
and James L. Ferry & Son Inc.
On July 8, 1996, the United States District Court for the Northern
District of California issued an order awarding the City of Richmond, et
al. (the "Plaintiffs") nominal costs, which amount has been paid. The
order also awarded Catellus Development Corporation ("Catellus") de minimis
costs. Catellus has filed a notice of appeal. On August 12, 1996, the
Court issued an order granting the Catellus motion for attorneys' fees in
the amount of approximately $.9 million. KACC and Catellus have filed
notices of appeal with respect to the attorneys' fees award. Based on
KACC's estimate of future costs of cleanup, resolution of the Catellus
matter is not expected to have a material adverse effect on the Company's
consolidated financial condition, results of operations, or liquidity. See
Part I, Item 3. "LEGAL PROCEEDINGS - Catellus Development Corporation v.
Kaiser Aluminum & Chemical Corporation and James L. Ferry & Son Inc." in
the Company's Form 10-K and Part II, Item 1. "LEGAL PROCEEDINGS - Catellus
Development Corporation v. Kaiser Aluminum & Chemical Corporation and James
L. Ferry & Son Inc." in the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996 (the "First Quarter 10-Q").
Waste Inc. Superfund Site
KACC has now entered into a Participation Agreement with thirteen of
the respondents to perform the work required under the unilateral
Administrative Order for Remedial Design and Remedial Action issued by the
EPA under CERCLA to thirty-two respondents, including KACC, for remedial
design and action at the Waste Inc. Superfund Site at Michigan City,
Indiana. See Part I, Item 3. "LEGAL PROCEEDINGS - Waste Inc. Superfund
Site" in the Company's Form 10-K.
Other Proceedings
Matheson et al v. Kaiser Aluminum Corporation et al.
On August 29, 1996, the Delaware Supreme Court upheld the preliminary
injunction and remanded the case to the Court of Chancery. On September
24, 1996, the plaintiffs filed a motion to make permanent the temporary
injunction issued on April 8, 1996. On September 27, 1996, the Company's
Board of Directors adopted a resolution abandoning the Proposed
Recapitalization. On October 2, 1996, the Company filed a motion in the
Delaware Court of Chancery to dismiss the shareholder litigation relating
to the Proposed Recapitalization on the ground of mootness and filed a
response to plaintiffs' motion for entry of a permanent injunction. The
Court has not ruled on either motion. See Part I, Item 2. "MD&A -
Liquidity and Capital Resources - Capital Structure" of this Report and
Part I, Item 3. "LEGAL PROCEEDINGS - Matheson et al v. Kaiser Aluminum
Corporation et al" in the Company's Form 10-K, Part II, Item 1. "LEGAL
PROCEEDINGS - Matheson et al v. Kaiser Aluminum Corporation et al" in the
Company's First Quarter 10-Q and Part II, Item 1. "LEGAL PROCEEDINGS -
Matheson et al v. Kaiser Aluminum Corporation et al" in the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 (the
"Second Quarter 10-Q").
Hammons v. Alcan Aluminum Corp. et al
On July 18, 1996, the plaintiff filed a notice of appeal to the United
States Court of Appeals for the Ninth Circuit appealing the summary
judgement granted by the United States District Court for the Central
District of California in favor of KACC and other defendants and the
Court's dismissal of the complaint as to all defendants. See Part I, Item
3. "LEGAL PROCEEDINGS - Hammons v. Alcan Aluminum Corp. et al" in the
Company's Form 10-K, Part II, Item 1. "LEGAL PROCEEDINGS - Hammons v. Alcan
Aluminum Corp. et al" in the Company's First Quarter 10-Q and Part II, Item
1. "LEGAL PROCEEDINGS - Hammons v. Alcan Aluminum Corp. et al" in the
Company's Second Quarter 10-Q.-----------------
Asbestos-related Litigation
KACC is a defendant in a number of lawsuits, some of which involve
claims of multiple persons, in which the plaintiffs allege that certain of
their injuries were caused by, among other things, exposure to asbestos
during, and as a result of, their employment or association with KACC or
exposure to products containing asbestos produced or sold by KACC. The
portion of Note 45 of the Notes to Interim Consolidated Financial Statements
contained in this report under the heading "Asbestos Contingencies" is
incorporated herein by reference. See Part I, Item 3. "LEGAL PROCEEDINGS -
- Asbestos-related Litigation" in the Company's Form 10-K.10-K for the year ended
December 31, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits.
Exhibit No. Exhibit
----------- -------
4.1 Sixth3.1 Restated Certificate of Incorporation of Kaiser Aluminum
Corporation (the "Company" or "KAC"), dated February 21, 1991
(incorporated by reference to Exhibit 3.1 to Amendment No. 2 to
the Registration Statement on Form S-1, dated June 11, 1991,
filed by KAC, Registration No. 33-37895).
3.2 Certificate of Retirement of KAC, dated October 24, 1995
(incorporated by reference to Exhibit 3.2 to the Report on Form
10-K for the period ended December 31, 1995, filed by KAC, File
No. 1-9447).
*3.3 Amended and Restated Bylaws of KAC, dated October 1, 1997.
*4.7 Eleventh Amendment to Credit Agreement and Limited Waivers, dated
as of October 1, 1996,20, 1997, amending the Credit Agreement, dated as
of February 15, 1994, as amended, among the Company, KACC, KAC, the financial
institutions a party thereto, and BankAmerica Business Credit,
Inc., as Agent.
4.2 Indenture, dated as of October 23, 1996, among KACC, as issuer,
Kaiser Alumina Australia Corporation, Alpart Jamaica Inc., Kaiser
Jamaica Corporation, Kaiser Finance Corporation, Kaiser Micromill
Holdings, LLC, Kaiser Sierra Micromills, LLC, Kaiser Texas
Micromill Holdings, LLC and Kaiser Texas Sierra Micromills, LLC,
as subsidiary guarantors (the "Subsidiary Guarantors"), and First
Trust National Association, as Trustee regarding KACC's 10 7/8%
Senior Notes due 2006.
4.3 Registration Rights Agreement, dated as of October 23, 1996,
among KACC, the Subsidiary Guarantors and the initial purchasers
of KACC's 10 7/8% Senior Notes due 2006.
10 Employment Agreement made and entered into as of September 1,
1996, by and between KACC and Jack A. Hockema.
27*27 Financial Data Schedule.
(b) Reports on Form 8-K.
No reportA Current Report on Form 8-K was filed by the Company during(under Item 5.)
on August 15, 1997, announcing the quarter
ended September 30, 1996.Company's intention to redeem its
8.255% PRIDES, Convertible Preferred Stock, par value $.05 per share
("PRIDES"), on August 29, 1997, pursuant to the PRIDES Certificate of
Designations.
- ---------------
* Filed herewith
SIGNATURE
Pursuant to the requirements 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, who hashave signed this report on
behalf of the registrant and as the principal financial officer and principal
accounting officer of the registrant.registrant, respectively.
KAISER ALUMINUM CORPORATION
/s/ John T. La Duc
By:________________________ ----------------------------
John T. La Duc
Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ Arthur S. DonaldsonDaniel D. Maddox
By:________________________
Arthur S. Donaldson ----------------------------
Daniel D. Maddox
Controller - Corporate
Consolidation and Reporting
(Principal Accounting Officer)
Dated: November 7, 19965, 1997