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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, 1998MARCH 31, 1999
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 November 2, 1998,April 30, 1999, the registrant had 79,153,54379,397,413 shares of Common
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,March 31, December 31,
1999 1998 1997
------------------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 97.410.8 $ 15.898.3
Receivables 298.1 340.2275.8 282.7
Inventories 519.7 568.3528.7 543.5
Prepaid expenses and other current assets 119.2 121.3116.1 105.5
------------------------------
Total current assets 1,034.4 1,045.6931.4 1,030.0
Investments in and advances to unconsolidated affiliates 130.3 148.6129.9 128.3
Property, plant, and equipment - net 1,156.1 1,171.81,098.6 1,108.7
Deferred income taxes 332.8 330.6396.0 377.9
Other assets 330.2 317.3377.7 346.0
------------------------------
Total $ 2,983.82,933.6 $ 3,013.92,990.9
==============================
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 171.9151.7 $ 176.2173.3
Accrued interest 24.6 37.624.7 37.3
Accrued salaries, wages, and related expenses 76.3 97.966.4 73.8
Accrued postretirement medical benefit obligation -
current portion 45.3 45.348.2 48.2
Other accrued liabilities 146.5 145.6178.8 148.3
Payable to affiliates 80.2 82.781.5 77.1
Long-term debt - current portion 2.0 8.8.4 .4
------------------------------
Total current liabilities 546.8 594.1551.7 558.4
Long-term liabilities 490.9 491.9531.0 532.9
Accrued postretirement medical benefit obligation 704.0 720.3690.9 694.3
Long-term debt 962.5 962.9962.3 962.6
Minority interests 121.5 127.7116.7 123.5
Commitments and contingencies
Stockholders' equity:
Common stock .8 .8
Additional capital 535.4 533.8535.4
Accumulated deficit (378.1) (417.6)(455.2) (417.0)
------------------------------
Total stockholders' equity 158.1 117.081.0 119.2
------------------------------
Total $ 2,983.82,933.6 $ 3,013.92,990.9
==============================
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 share amounts)
Quarter Ended
Nine Months Ended
September 30, September 30,March 31,
------------------------------
------------------------------1999 1998 1997 1998 1997
------------------------------
------------------------------
Net sales $ 541.6479.4 $ 634.1 $ 1,753.4 $ 1,778.6
------------------------------597.0
------------------------------
Costs and expenses:
Cost of products sold 460.6 523.7 1,466.3 1,473.7459.9 497.1
Depreciation 22.1 22.9 67.3 68.8and amortization 24.4 25.4
Selling, administrative, research and development,
and general 28.1 33.0 88.9 95.3
Restructuring of operations - - - 19.7
------------------------------29.7
------------------------------
Total costs and expenses 510.8 579.6 1,622.5 1,657.5
------------------------------512.4 552.2
------------------------------
Operating income 30.8 54.5 130.9 121.1(loss) (33.0) 44.8
Other income (expense):
Interest expense (27.7) (27.5) (82.6) (83.3)(28.0)
Other - net 1.3 2.1 (.6) 1.7.8
------------------------------
------------------------------
Income (loss) before income taxes and minority interests 4.4 29.1 47.7 39.5(59.4) 17.6
Benefit (provision) for income taxes 6.7 (11.0) (8.5) (2.4)20.2 (6.2)
Minority interests (.3) (.6) .3 (3.3)
------------------------------1.0 .6
------------------------------
Net income 10.8 17.5 39.5 33.8
Dividends on preferred stock - (1.3) - (5.5)
------------------------------ ------------------------------
Net income available to common shareholders(loss) $ 10.8(38.2) $ 16.2 $ 39.5 $ 28.312.0
==============================
==============================
Earnings (loss) per share:
Basic $ .14(.48) $ .22 $ .50 $ .39.15
Diluted $ .14(.48) $ .22 $ .50 $ .39.15
Weighted average shares outstanding (000):
Basic 79,150 74,453 79,102 72,61779,154 79,008
Diluted 79,169 74,663 79,166 72,77579,154 79,086
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 MonthsQuarter Ended
September 30,March 31,
------------------------------
1999 1998 1997
------------------------------
Cash flows from operating activities:
Net income (loss) $ 39.5(38.2) $ 33.812.0
Adjustments to reconcile net income (loss) to net cash
(used) provided (used) by operating activities:
Depreciation 67.3 68.8
Restructuring of operations - 19.7
Non-cash benefit for income taxes (8.3) (12.5)
Amortization of excess investment over equity in
unconsolidated affiliates 7.5 8.7
Amortization ofand amortization (including deferred
financing costs and net
discount on long-term debt 3.0 4.5costs) 25.4 26.7
Equity in (income) loss of unconsolidated
affiliates, net of distributions .9 16.7(4.4) (3.7)
Minority interests (.2) 3.3(1.1) (.6)
Decrease (increase) in receivables 27.3 (59.5)6.9 21.0
Decrease in inventories 48.6 5.7
Decrease14.8 40.2
Increase in prepaid expenses and other current
assets 32.8 1.1(11.7) (1.2)
Decrease in accounts payable (4.3) (28.6)
Decrease inand accrued interest (12.9) (10.8)
Decrease(34.2) (38.6)
Increase (decrease) in payable to affiliates and
other accrued liabilities (64.7) (29.8)
Increase (decrease)26.4 (24.6)
Decrease in accrued and deferred incometaxes 3.1 (2.1)income taxes (20.5) (1.1)
Decrease in net long-term assets and liabilities (31.0) (8.1)
Other 7.0 3.6.1 1.6
------------------------------
Net cash (used) provided by operating
activities 146.6 22.6(67.5) 23.6
------------------------------
Cash flows from investing activities:
Capital expenditures (52.3) (94.7)
Net proceeds from disposition of property and
investments 3.6 22.2(16.5) (13.7)
Other (3.4) (2.6)(2.7) (3.2)
------------------------------
Net cash used by investing activities (52.1) (75.1)(19.2) (16.9)
------------------------------
Cash flows from financing activities:
Borrowings under revolving credit facility, net - -
Borrowings of long-term debt - 19.0
Repayments of long-term debt (7.1) (8.6)(.3) (.9)
Decrease (increase) in restricted cash, net 3.3 (6.5).8 .6
Redemption of minority interests' preference stock (8.6) (2.0)
Dividends paid - (4.2)
Incurrence of financing costs (.6) (.6)
Capital stock issued .1 .4(1.3) (1.1)
------------------------------
Net cash used by financing activities (12.9) (2.5)(.8) (1.4)
------------------------------
Net (decrease) increase (decrease) in cash and cash equivalents
during the period 81.6 (55.0)(87.5) 5.3
Cash and cash equivalents at beginning of period 98.3 15.8 81.3
------------------------------
Cash and cash equivalents at end of period $ 97.410.8 $ 26.321.1
==============================
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest $ 92.639.3 $ 89.539.4
Income taxes paid 12.5 14.8.5 6.4
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 and one of its wholly owned subsidiaries together
own approximately 63% of the Company's Common Stock with the remaining
approximately 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,
1997.1998. 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 nine-month period ended September 30, 1998,March 31, 1999, are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1998.
See Note 6 regarding recent accounting pronouncements.
2. INVENTORIES1999.
Certain reclassifications of prior-year information were made to
conform to the current presentation.
LABOR RELATED COSTS
The classificationCompany is currently operating five of inventoriesits U.S. facilities with
salaried employees and other workers as a result of the September 30, 1998,
strike by the United Steelworkers of America ("USWA") and the subsequent
"lock-out" by the Company in January 1999. For purposes of computing the
costs and liabilities related to pension and other postretirement medical
plans reflected in the accompanying interim consolidated financial
statements for the quarter ended March 31, 1999, the Company based its
accruals on the terms of the previously existing (expired) USWA contract.
Any differences between the amounts accrued and the amounts ultimately
agreed to during the collective bargaining process will be reflected in
future results during the term of any new contract.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS No. 133") requires
companies to recognize all derivative instruments as assets or liabilities
in the balance sheet and to measure those instruments at fair value. SFAS
No. 133 must be adopted by the Company no later than January 1, 2000,
although earlier application is permitted. Under SFAS No. 133, the Company
will be required to "mark-to-market" its hedging positions at each period
end in advance of reflecting the physical transactions to which the hedges
relate. Changes in the fair value of the Company's open hedging positions
will be reflected as follows:
September 30, December 31,
1998 1997
------------------------------
Finished fabricated aluminum products $ 109.9 $ 103.9
Primary aluminum and work in process 187.3 226.6
Bauxite and alumina 101.0 108.4
Operating supplies and repair and maintenance parts 121.5 129.4
------------------------------
Total $ 519.7 $ 568.3
==============================
Substantially all product inventories are stated at last-in, first-out
(LIFO) cost, notan increase or reduction in excessstockholders' equity
through comprehensive income. The impact of market. Replacement costthe changes in fair value of
the Company's hedging positions will reverse out of comprehensive income
(net of any fluctuations in other "open" positions) and will be reflected
in traditional net income when the subsequent physical transactions occur.
Currently, the dollar amount of the Company's comprehensive income
adjustments is not significant so there is not a significant difference
between "traditional" net income and comprehensive income. However,
differences between comprehensive income and traditional net income may
become significant in excessfuture periods as SFAS No. 133 will result in
fluctuations in comprehensive income and stockholders' equity in periods of
LIFO cost.
3.price volatility, despite the fact that the Company's cash flow and
earnings will be "fixed" to the extent hedged. The amount of such
fluctuations could be significant. This result is contrary to the intent
of the Company's hedging program, which is to "lock-in" a price (or range
of prices) for products sold/used so that earnings and cash flows are
subject to reduced risk of volatility.
The Company is currently evaluating how and when to implement SFAS No.
133.
2. EARNINGS (LOSS) PER SHARE
Basic - Basic earnings (loss) per share is computed by deducting preferred stock
dividends, if any, fromdividing net income
in order to determine net income
available to common shareholders. This amount is then divided(loss) by the weighted average number of shares of Common Stock outstanding
during the period including the weighted average impact of the shares of
Common Stock issued during the year from the date(s) of issuance.
Diluted - Diluted earnings (loss) per share includefor the quarter ended March 31,
1998, includes the dilutive effect of outstanding stock options (19,000 and 213,000 sharesof 78,000
shares. The impact of outstanding stock options was excluded from the
computation for the quartersquarter ended September 30, 1998, and 1997, and 64,000 and 168,000 shares for the nine-
month periods ended September 30, 1998 and 1997, respectively). The
Company's 8.255% PRIDES, Convertible Preferred Stock ("PRIDES") have not
been treated "as if" converted for purposes of the Diluted computation in
the quarter and nine months ended September 30, 1997,March 31, 1999, as such treatmentits effect would have
been antidilutive.
3. INVENTORIES
The classification of inventories is as follows:
March 31, December 31,
1999 1998
------------------------------
Finished fabricated aluminum products $ 121.9 $ 112.4
Primary aluminum and work in process 168.0 205.6
Bauxite and alumina 120.2 109.5
Operating supplies and repair and maintenance parts 118.6 116.0
------------------------------
Total $ 528.7 $ 543.5
==============================
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.
4. CONTINGENCIES
ENVIRONMENTAL CONTINGENCIES
The Company and KACC are subject to a number of environmental laws, to
fines or penalties assessed for alleged breaches of such environmental
laws, and to claims and litigation based upon such laws. KACC currently is
subject to a number of lawsuitsclaims 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 on 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, 1998,March 31, 1999, the balance of such accruals,
which are primarily included in Long-term liabilities, was $28.3.$50.5. 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 actions 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 $9.0$8.0 for the years
19981999 through 20022003 and an aggregate of approximately $7.0$29.0 thereafter.
The Company believes that it has insurance coverage available to
recover certain incurred and future environmental costs and is actively
pursuing claims in this regard. Through September 30, 1998, no accruals
have been made for any such insurance recoveries. However, subsequent to
September 30, 1998, KACC determined that recoveries totalling up to
approximately $34.0 are likely to be received during the fourth quarter of
1998 related to current and future claims against certain of its insurers.
It is currently estimated that approximately one-fourth to one-third of the
recoveries are allocable to previously accrued (expensed) items. The
amount ultimately allocated to previously expensed items will be reflected
in earnings during the fourth quarter of 1998. No assurances can be given
that the Company will be successful in other attempts to recover incurred
or future costs from other insurers or that the amount of any recoveries
received will ultimately be adequate to cover costs incurred.
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 $18.0. As the resolution of these matters is subject to
further regulatory review and approval, no specific assurance can be given
as to when the factors upon which a substantial portion of this estimate is
based can be expected to be resolved. However, the Company is currently
working to resolve certain of these matters.
The Company believes that it has insurance coverage available to
recover certain incurred and future environmental costs and is actively
pursuing claims in this regard. No assurances can be given that the
Company will be successful in attempts to recover incurred or future costs
from insurers or that the amount of recoveries received will ultimately be
adequate to cover costs incurred.
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
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 manufacturedsold for at least 20
years. At September 30, 1998,March 31, 1999, the number of such claims pending was
approximately 86,400,91,300, as compared with 77,40086,400 at December 31, 1997.
During the quarter and nine months ended September 30,1998. In
1998, approximately 5,500 and 16,00022,900 of such claims were received and 3,00013,900 were
settled or dismissed. During the quarter ended March 31, 1999,
approximately 9,300 of such claims were received and 7,0004,400 of such claims
were settled or dismissed, respectively. In addition,dismissed. However, the foregoing pending claimsclaim and settlement
figures as of September 30, 1998,and for the quarter ended March 31, 1999, do not reflect the
fact that as of March 31, 1999, KACC has reached agreements under which it
will settle approximately 20,00026,000 of the pending asbestos-related claims
over an extended period.
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 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 $164.9,$187.7, before
consideration of insurance recoveries, is included primarily in Long-term
liabilities at September 30, 1998.March 31, 1999. 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. The Company
estimates that annual future cash payments in connection with such
litigation will be approximately $15.0$17.0 to $26.0$28.0 for each of the years 19981999
through 2002,2003, and an aggregate of approximately $64.0$79.0 thereafter.
The Company believes that KACC has insurance coverage available to
recover a substantial portion of its asbestos-related costs. Although the
Company has settled asbestos-related coverage matters with certain of its
insurance carriers, other carriers have not yet agreed to settlements. The
timing and amount of future recoveries from thethese insurance carriers will
depend on the pace of claims review and processing by such carriers and on
the resolution of any disputes which may arise in the course of discussions
regarding coverage under theirsuch policies. The
Company believes, based onthat substantial recoveries from the insurance carriers
are probable. The Company reached this conclusion after considering its
prior insurance-related recoveries in respect of asbestos-related claims,claims;
existing insurance policies,policies; and the advice of Thelen ReidHeller Ehrman White &
Priest LLP
(formerly Thelen, Marrin, Johnson & Bridges LLP)McAuliffe 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.policies. Accordingly, an estimated aggregate
insurance recovery of $131.9,$157.3, determined on the same basis as the asbestos-relatedasbestos-
related cost accrual, is recorded primarily in Other assets at September 30, 1998.March 31,
1999.
Management continues to monitor claims activity, the status of
lawsuits (including settlement initiatives), legislative progress,developments, 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 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.
LABOR MATTERS
In connection with the USWA strike and subsequent lock-out by KACC,
certain allegations of unfair labor practices ("ULPs") have been filed with
the National Labor Relations Board by the USWA. KACC is responding to all
such allegations and believes that they are without merit. If the
allegations were sustained, KACC could be required to make locked-out
employees whole for back wages from the date of the lock-out in January
1999. While uncertainties are inherent in the final outcome of such
matters, the Company believes that the resolution of the alleged ULPs
should not result in a material adverse effect on the Company's
consolidated financial position, results of operations, or liquidity.
OTHER CONTINGENCIES
The Company andor KACC areis 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.
See Note 9 of the Notes to Consolidated Financial Statements for the year
ended December 31, 1997.1998.
5. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS
At September 30, 1998,March 31, 1999, the net unrealized gain on KACC's position in
aluminum forward sales and option contracts, based on an average contract
price of $.74 per pound of primary aluminum, natural gas, fuel oil and
diesel fuelenergy forward purchase and
option contracts, and forward foreign exchange contracts, was approximately
$17.6. Any$28.9 (based on comparisons to applicable quarter-end published market
prices). As KACC's hedging activities are generally designed to lock-in a
specified price or range of prices, gains or losses on the derivative
contracts utilized in KACC'sthese hedging activities arewill generally be offset by
losses or gains, respectively, on the transactions being hedged. However,
see Note 6 regarding a recent accounting pronouncement.
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.
Primary aluminum prices have historically been subject to significant
cyclical fluctuations. Since 1993, the Average Midwest transaction price for primary aluminum has ranged from approximately $.50 to $1.00 per pound.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. Since 1993,
the Average Midwest United States transaction price for primary aluminum
has ranged from approximately $.50 to $1.00 per pound.
From time to time in the ordinary course of business, KACC enters into
hedging transactions to provide price risk management in respect of the net
exposure of earnings and cash flows 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 price of primary aluminum.
Forward sales contracts are used by KACC to effectively fix the price that
KACC will receive for its shipments. KACC also uses option contracts (i)
to 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 to realize possible upside price movements. As of September
30, 1998,March 31,
1999, KACC had sold forward, at fixed prices, approximately 23,400 and
24,000 tons* of primary aluminum with respect to 1998 and 1999,
respectively. As of September 30, 1998, KACC had also purchased put options
to establish a minimum price for approximately 11,25018,000 tons of
primary aluminum with respect to 1998 and1999. As of March 31, 1999, KACC had also
entered into option contracts that established a price range for an
additional 57,900144,000 and 124,500 tons for
1998 and 1999, respectively. Additionally, at September 30, 1998, KACC
also held fixed price purchase contracts for 16,100323,000 tons of primary aluminum for 1999 and 2000,
respectively.
Additionally, through March 31, 1999, KACC had also entered a series
of transactions with respecta counterparty that will provide KACC with a premium
over the forward market prices at the date of the transaction for 4,000
tons of primary aluminum per month during the period July 1999 through June
2001. KACC also contracted with the counterparty to 1998.receive certain fixed
prices (also above the forward market prices at the date of the
transaction) on 8,000 tons of primary aluminum per month over a three year
period commencing October 2001, unless market prices during certain periods
decline below a stipulated "floor" price, in which case, the fixed price
sales portion of the transactions terminate. The price at which the
October 2001 and later transactions terminate is well below current market
prices. While the Company believes that the October 2001 and later
transactions are consistent with its stated hedging objectives, these
positions do not qualify for treatment as a "hedge" under current
accounting guidelines. Accordingly, these positions will be "marked to
market" each period. For the quarter ended March 31, 1999, the Company
recorded a mark-to-market charge of $0.5 in Other income (expense)
associated with the above transactions.
As of September 30, 1998,March 31, 1999, KACC had sold forward virtually all of the
alumina available to it in excess of its projected internal smelting
requirements for 1998, 1999, 2000 and 20002001 at prices indexed to future prices of
primary aluminum.
ENERGY
KACC is exposed to energy price risk from fluctuating prices for fuel
oil diesel fuel, and natural gas consumed in the production process. Accordingly, KACC
from time to time in the ordinary course of business enters into hedging
transactions with major suppliers of energy and energy related financial
instruments. As of September 30, 1998,March 31, 1999, KACC had a combination of fixed price
purchase and option contracts for the purchase of approximately 45,00032,700
MMBtu of natural gas per day during the remainder of 1998.1999. As of September 30, 1998,March 31,
1999, KACC also held a combination of fixed price purchase and option
contracts for an average of 232,000246,000 and 245,000179,000 barrels per month of fuel
oil and diesel fuel for 19981999 and 1999,2000, respectively.
FOREIGN CURRENCY
KACC enters into forward exchange contracts to hedge material cash
commitments to foreign subsidiaries or affiliates. At September 30, 1998,
- -------------
* All references to tons in this report refer tometric tons of 2,204.6
pounds.March 31, 1999, KACC
had net forward foreign exchange contracts totaling approximately $168.8$132.3
for the purchase of 246.6198.6 Australian dollars from October 1998April 1999 through
December 2000, in respect of its commitments for 1998the remainder of 1999
through 2000 expenditures denominated in Australian dollars.
See Note 10 of the Notes to Consolidated Financial Statements for the
year ended December 31, 1997.1998.
6. RECENT ACCOUNTING PRONOUNCEMENTS
StatementSIGNIFICANT ACQUISITIONS AND DISPOSITIONS
In February 1999, KACC, through a subsidiary, completed the
acquisition of Financial Accounting Standards No. 130, Reporting
Comprehensive Incomeits joint venture partner's 45% interest in Kaiser LaRoche
Hydrate Partners ("SFAS No. 130"KLHP") was issuedfor a cash purchase price of approximately $10.0.
As KACC already owned 55% of KLHP, the results of KLHP were already
included in June 1997 and was
adopted bythe Company's consolidated financial statements.
On April 1, 1999, KACC completed the previously announced sale of its
50% interest in AKW L.P. ("AKW"), an aluminum wheels joint venture, to its
partner, Accuride Corporation. The sale will result in the Company
asrecognizing a net pre-tax gain of January 1, 1998. SFAS No. 130 requires the
presentation of an additional income measure (termed "comprehensive
income"), which adjusts traditional net income for certain items that
previously were only reflected as direct charges to equity (such as minimum
pension liabilities).
Statement of Financial Accounting Standard No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS No. 133") was issued
in June 1998 and requires companies to recognize all derivative instruments
as assets or liabilitiesapproximately $50 million in the balance sheetsecond
quarter of 1999. The Company's equity in income of AKW was $2.5 and to measure those
instruments at fair value. SFAS No. 133 must be adopted by$1.1
for the Company no
later than January 1, 2000, although earlier application is permitted.quarters ended March 31, 1999 and 1998, respectively.
7. INTERIM OPERATING SEGMENT INFORMATION
The Company is currently evaluating howuses a portion of its bauxite, alumina and when to implement SFAS No. 133.
Currently, the dollar amountprimary
aluminum production for additional processing at its downstream facilities.
Transfers between business units are made at estimated market prices. The
accounting policies of the Company's comprehensive income
adjustments is not significant so there is not a significant difference
between "traditional" net income and comprehensive incomesegments are the same as those described in Note
1 of Notes to Consolidated Financial Statements for the quarteryear ended December
31, 1998. Business unit results are evaluated internally by management
before any allocation of corporate overhead and nine-month periodswithout any charge for
income taxes or interest expense. See Note 11 of Notes to Consolidated
Financial Statements for the year ended September 30,December 31, 1998.
Financial information by operating segment for the quarters ended March 31,
1999 and 1998 and 1997. However,
differences between comprehensive income and traditional net income may
become significant in future periodsis as a result of SFAS No. 133. As
discussed more fully in Note 5,follows:
Quarter Ended
March 31,
------------------------------
1999 1998
- ------------------------------------------------------------------------------------------
Net Sales:
Bauxite and Alumina:
Net sales to unaffiliated customers $ 89.7 $ 93.3
Intersegment sales 23.0 42.2
-------------- --------------
112.7 135.5
-------------- --------------
Primary Aluminum:
Net sales to unaffiliated customers 89.1 126.2
Intersegment sales 49.1 66.8
-------------- --------------
138.2 193.0
-------------- --------------
Flat-Rolled Products 148.3 194.3
Engineered Products 133.5 162.6
Minority interests 18.8 20.6
Eliminations (72.1) (109.0)
-------------- --------------
$ 479.4 $ 597.0
============== ==============
Operating income (loss):
Bauxite and Alumina $ (7.8) $ 11.6
Primary Aluminum (22.1) 20.1
Flat-Rolled Products 7.4 16.3
Engineered Products 6.9 16.3
Micromill (3.3) (5.2)
Eliminations 3.6 3.1
Corporate and Other (17.7) (17.4)
-------------- --------------
$ (33.0) $ 44.8
============== ==============
Depreciation and amortization:
Bauxite and Alumina $ 8.9 $ 9.6
Primary Aluminum 7.3 7.5
Flat-Rolled Products 4.1 4.1
Engineered Products 2.7 2.7
Micromill .7 .7
Corporate and Other .7 .8
-------------- --------------
$ 24.4 $ 25.4
============== ==============
Excluding the intentFebruary 1999 purchase of the Company's hedging program
is to "lock-in" a price (or rangeremaining interest in
KLHP, which affected the Bauxite and Alumina segment, and the April 1999
sale of prices) for products sold/used so that
earnings and cash flows are subject to reduced risk of volatility. Under
SFAS No. 133,KACC's interest in AKW, which affected the Company will be required to "mark-to-market" its hedging
positions at each period end in advance of reflecting the physical
transaction to which the hedge relates. Pursuant to SFAS No. 130, the
Company will reflectEngineered Products
segment, there were no material changes in segment assets since December
31, 1998. Capital expenditures made during the fair valuefirst quarter of its open hedging
positions as an increase or reduction in stockholders' equity through
comprehensive income. Under SFAS No. 130,1999
(other than the impact of the changes in
fair value of financial instruments will reverse out of comprehensive
income (net of any fluctuations in other "open" positions) and will be
reflected in traditional net income when the subsequent physical
transaction occurs.
The combined result of SFAS No's. 130 and 133 will be that there will
be fluctuations in comprehensive income and stockholders' equity in periods
of price volatility, despite the fact that the Company's cash flow and
earnings will be "fixed" to the extent hedged. The amount of such
fluctuations could be significant.KLHP acquisition) were incurred on a relatively ratable
basis among KACC's four primary operating business segments.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
This section should be read in conjunction with the response to Item
1, Part I, of this Report.
This section contains statements which constitute "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, "Recent Events and Developments," "Results of
Operations," and "Liquidity and Capital Resources"). Such statements can
be identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "estimates," "will," "should," "plans" or "anticipates"
or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy. Readers are cautioned that any
such forward-looking statements are not guarantees of future performance
and involve significant risks and uncertainties, and that actual results
may vary materially from those in the forward-looking statements as a
result of various factors. These factors include the effectiveness of
management's strategies and decisions, general economic and business
conditions, developments in technology, year 2000 technology issues, 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, 1997,1998, each identify other factors that
could cause such differences. No 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
LABOR MATTERS
Substantially all of KACC's hourly workforce at theits Gramercy,
Louisiana, alumina refinery, Mead and Tacoma, Washington, aluminum
smelters, Trentwood, Washington, rolling mill, and Newark, Ohio, extrusion
facility were covered by a master labor agreement with the United
Steelworkers of America (the "USWA") which expired on September 30, 1998.
The Company has previously reported that itparties did not reach a settlement with
the USWAan agreement prior to the expiration of the
master agreement and the USWA chose to strike. UntilAs previously announced, in
January 1999 KACC declined an offer by the USWA to have the striking
workers return to work at the five plants without a new agreement. KACC
imposed a lock-out to support its bargaining position and continues to
operate the plants with salaried employees and other workers as it has
since the strike ends, the Company plans to run the facilities
using a combination of temporary workers, salaried employees, retirees and
others.began. Based on operating results to date, the Company
believes that a significant business interruption will not occur.
The Company will
initially experience an adverse impact on its profitability until plant
operations and temporary workforce levels are stabilized at the five
facilities. The Company currently expects operations at those facilities
to be stabilized and able to run at, or near, full capacity, if it is
deemed appropriate to do so, at a level of profitability approximating pre-
strike levels (subject to market conditions) by the end of the fourth
quarter of 1998 or during the first quarter of 1999. However, no assurances
can be given that the Company's efforts to run the plants on a sustained
basis, without a business interruption or material negative impact on the
Company's operating results will be successful.
The CompanyKACC and the USWA are communicating and several meetings have
been held. However,continue to communicate; however, no formal schedule
for bargaining sessions has been developed at this time. The objective of
the Company has been, and continues to be, to negotiate a fair labor
contract that is consistent with its business strategy and the commercial
realities of the marketplace.
TheAs a result of the USWA strike, the Company has previously announced that it temporarily curtailed
three out of a total of eleven potlines at its Mead and Tacoma, Washington,
aluminum smelters at September 30, 1998 as a result of the USWA strike.
The curtailed potlines represent(representing approximately 70,000
tons of annual production capacity out of a total combined production
capacity of 273,000 tons per year at the facilities.) As previously
announced, in February 1999, KACC began restarting the two curtailed
potlines at its Mead smelter representing approximately 50,000 tons of the
previously idle capacity. The Companyfirst of the two Mead potlines was restarted
in March 1999. The second of the two Mead potlines is currently expected
to commence restart activity during the second quarter of 1999, although it
may not be fully operational until the third quarter of the year. KACC has
also announced that it has beguncompleted preparations to restart all three curtailed lines.the 20,000
tons of idle capacity at its Tacoma smelter. However, neither the numbertiming for any
restart of potlines nor the actual timing of any such restartTacoma potline has yet to be determined and will be dependentdepend upon
market conditions and other factors.
During 1998,While the Company's 90%-owned Volta Aluminium Company Limited
("Valco") smelter in Ghana reachedinitially experienced an agreement withadverse strike-related
impact on its profitability, the Volta River
Authority ("VRA")Company currently believes that KACC's
operations at the affected facilities have been substantially stabilized
and will be able to receive compensation in lieurun at, or near, full capacity, and that the effect of
the power necessary to
run two potlines thatincremental costs associated with operating the affected plants during
the dispute were curtailed during February 1998 and April 1998.
The compensation iseliminated or substantially mitigatingreduced as of January 1999
(excluding the financial impactimpacts of the curtailment. Valco had previously curtailed one additional potline in
January 1998, for which it received no compensation. Valco is now
operating only onerestart costs discussed above and the effect
of its five potlines,market factors such as compared to 1997, when Valco
operated four potlines. Each of Valco's potlines produces, on average,
approximately 40,000 tons of primary aluminum per year. As previously
announced, the Company has notified the VRA that it believes it had the
contractual rightscontinued market-related curtailment at the
beginning of 1998 to sufficient energy to run
four and one-half potlines for the balance of the year. Valco continues to
seek compensation from the VRA with respect to the January 1998 reduction
of its power allocation. Valco and the VRA also are in continuing
discussions concerning other matters, including steps that might be taken
to reduce the likelihood of power curtailments beyond 1998. No assurances
can be given as to the success of these discussions. In November 1998
Valco received notification from the VRA as to the facility's proposed
1999 power allocation. Valco anticipates making a formal response to the
VRA's proposalTacoma smelter). However, no later than early to mid-December. While the proposed
allocation would enable Valco to operate up to approximately three potlines,
any decisions by Valco to restart any of the currently curtailed potlines
will be made only after further discussions with the VRA and after
consideration of market and other economic factors.
The Company believes that it has insurance coverage available to
recover certain incurred and future environmental costs and is actively
pursuing claims in this regard. Through September 30, 1998, no accruals
have been made for any such insurance recoveries. However, subsequent to
September 30, 1998, KACC determined that recoveries totalling up to
approximately $34.0 million are likely to be received during the fourth
quarter of 1998 related to current and future claims against certain of
its insurers. It is currently estimated that approximately one-fourth to
one-third of the recoveries are allocable to previously accrued (expensed)
items. The amount ultimately allocated to previously expensed items will
be reflected in earnings during the fourth quarter of 1998. No assurances can be given that KACC's efforts
to run the Companyplants on a sustained basis, without a significant business
interruption or material adverse impact on the Company's operating results,
will be successful in other attempts to
recover incurred or future costs from other insurers or that the amount of
any recoveries received will ultimately be adequate to cover costs incurred.successful.
STRATEGIC INITIATIVES
The Company has previously disclosed that it set abelieves that it had met,
and exceeded, its goal of achieving $120.0 million of pre-tax cost
reductions and other profit improvements, independent of metal price
changes, with the full effect planned to be
realized in 1998 and beyond, measured against 1996 results. The Company
believes that its operations had achieved the run rate necessary to meet
this objectiveresults prior to the end of the third
quarter of 1998, when the impact of such items as thesmelter operating level at Valco,levels,
the USWA strike and changes in foreign currency changesexchange rates are excluded
from the analysis, and that it has
implemented the steps that will allow it to sustain the stated goal over
the long term.analysis. The Company remains committed to sustaining the full
$120.0 million improvement and to generating additional profit improvements
in future years,years; however, no assurances can be given that the Company will
be successful in this regard.
In addition to working to improve the performance of the Company's
existing assets, the Company has expendeddevoted significant efforts on analyzing its
existing asset portfolio with the intent of focusing its efforts and
capital in sectors of the industry that are considered most attractive.attractive, and
in which the Company believes it is well positioned to capture value. The
initial steps of this process resulted in the June 1997 acquisition of the
Bellwood extrusion facility, the May 1997 formation of AKW L.P. ("AKW"),
the rationalization of certain of the Company's Engineered Products
operations, the Company's investment to expand its production capacity for
heat treat flat-rolled products at its Trentwood, Washington, rolling mill,
and the Company's fourth quarter 1998 decision to seek a strategic partner
for further development and deployment of KACC's Micromill(TM) technology.
This process has continued in 1999. In February 1999, KACC completed the
acquisition of the remaining 45% interest in Kaiser LaRoche Hydrate
Partners ("KLHP"), an alumina marketing venture, from its joint venture
partner for a cash purchase price of approximately $10.0 million.
Additionally, in April 1999, KACC sold its 50% interest in AKW to its joint
venture partner for approximately $70 million in cash proceeds. The
transaction will result in the Company recognizing a pre-tax gain of
approximately $50 million in the second quarter of 1999. See Note 6 of
Notes to Interim Consolidated Financial Statements.
Another area of emphasis has been a continuing focus on managing the
Company's legacy liabilities, including the Company's active pursuit of
claims in respect of insurance coverage for certain incurred and future
environmental costs, as evidenced by the Company's fourth quarter 1998,
receipt of recoveries totaling approximately $35.0 million related to
current and future claims against certain of its insurers. See Note 9 of
Notes to Consolidated Financial Statements for the year ended December 31,
1998.
Additional portfolio analysis and initiatives are ongoing.
RESULTS OF OPERATIONScontinuing.
VALCO OPERATING LEVEL
The tableCompany's 90%-owned Volta Aluminium Company Limited ("Valco")
smelter in Ghana operated only one of its five potlines during most of
1998, although, on average, two potlines were operated during most of the
following page provides selected operationalfirst quarter of 1998. Each of Valco's potlines is capable of producing
approximately 40,000 tons of primary aluminum per year. Valco earned
compensation in 1998 (in the form of energy credits to be utilized over the
last half of 1998 and during 1999) from the Volta River Authority ("VRA")
in lieu of the power necessary to run two of the potlines that were
curtailed during 1998. The compensation substantially mitigated the
financial information on a consolidated basisimpact in 1998 of the curtailment of such lines. Valco did not
receive any compensation from the VRA for one additional potline which was
curtailed in January 1998. Valco currently expects to operate an average
of three lines during 1999. As of April 30, 1999, two of the previously
curtailed potlines had been restarted.
Valco has notified the VRA that it believes it had the contractual
rights at the beginning of 1998 and 1999 to sufficient energy to run four
and one-half potlines for the balance of both years. Valco continues to
seek compensation from the VRA with respect to the Company
for the quarter and nine-month periods ended September 30, 1998 and 1997.1999 reductions
in its power allocation. Valco and the VRA also are in continuing
discussions concerning other matters, including steps that might be taken
to reduce the likelihood of power curtailments in the future. No
assurances can be given as to the success of these discussions.
RESULTS OF OPERATIONS
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 otherdownstream facilities. Intracompany shipmentsIntersegment transfers are valued
at estimated market prices. The following table provides selected
operational and sales are
excluded fromfinancial information on a consolidated basis with respect
to the Company for the quarters ended March 31, 1999 and 1998. The
following data should be read in conjunction with the Company's interim
consolidated financial statements and the notes thereto, contained
elsewhere herein. See Note 11 of Notes to Consolidated Financial
Statements for the year ended December 31, 1998, for further information
set forth on the following page.regarding segments.
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,March 31,
------------------------------
------------------------------1999 1998
1997 1998 1997
------------------------------ ------------------------------- ------------------------------------------------------------------------------------------
Shipments: (1)(000 tons)
Alumina
644.6 579.2 1,721.7 1,457.0Third Party 487.0 424.6
Intersegment 150.3 215.8
-------------- --------------
Total Alumina 637.3 640.4
-------------- --------------
Primary Aluminum
products:Third Party 62.9 80.5
Intersegment 39.5 43.6
-------------- --------------
Total Primary aluminum 61.5 86.4 210.3 246.9
Fabricated aluminum products 97.7 105.2 311.0 299.5
------------------------------ ------------------------------
Total aluminum products 159.2 191.6 521.3 546.4
============================== ==============================Aluminum 102.4 124.1
------------- -------------
Flat-Rolled Products 52.5 59.7
-------------- --------------
Engineered Products 41.4 45.8
-------------- --------------
Average realized sales price:Realized Third Party Sales Price: (1)
Alumina (per ton) $ 190172 $ 200 $ 195 $ 196201
Primary aluminumAluminum (per pound) .70 .76 .70 .75$ .64 $ .71
Net sales:Sales:
Bauxite and alumina:Alumina
Third Party (includes net sales of bauxite) $ 89.7 $ 93.3
Intersegment 23.0 42.2
-------------- --------------
Total Bauxite & Alumina 112.7 135.5
-------------- --------------
Primary Aluminum
Third Party 89.1 126.2
Intersegment 49.1 66.8
-------------- --------------
Total Primary Aluminum 138.2 193.0
-------------- --------------
Flat-Rolled Products 148.3 194.3
Engineered Products 133.5 162.6
Minority Interests 18.8 20.6
Eliminations (72.1) (109.0)
-------------- --------------
Total Net Sales $ 479.4 $ 597.0
============== ==============
Operating Income (Loss):
Bauxite & Alumina $ 122.6(7.8) $ 115.911.6
Primary Aluminum (2) (22.1) 20.1
Flat-Rolled Products 7.4 16.3
Engineered Products 6.9 16.3
Micromill(TM) (3.3) (5.2)
Eliminations 3.6 3.1
Corporate (17.7) (17.4)
-------------- --------------
Total Operating Income (Loss) $ 336.4(33.0) $ 285.6
Other (2) (3) 24.7 27.1 77.2 80.2
------------------------------ ------------------------------
Total bauxite and alumina 147.3 143.0 413.6 365.8
------------------------------ ------------------------------
Aluminum processing:
Primary aluminum 94.6 145.0 326.6 409.5
Fabricated aluminum products 298.8 341.7 1,008.7 990.6
Other (3) .9 4.4 4.5 12.7
------------------------------ ------------------------------
Total aluminum processing 394.3 491.1 1,339.8 1,412.8
------------------------------ ------------------------------
Total net sales44.8
============== ==============
Net Income (Loss) $ 541.6(38.2) $ 634.112.0
============== ==============
Capital Expenditures $ 1,753.416.5 $ 1,778.6
============================== ==============================
Operating income (loss):
Bauxite and alumina (4) $ 9.2 $ 8.8 $ 30.4 $ 14.8
Aluminum processing (4) (5) 38.8 64.1 152.7 161.6
Corporate (6) (17.2) (18.4) (52.2) (55.3)
------------------------------ ------------------------------
Total operating income $ 30.8 $ 54.5 $ 130.9 $ 121.1
============================== ==============================
Net income $ 10.8 $ 17.5 $ 39.5 $ 33.8
============================== ==============================
Capital expenditures $ 15.6 $ 25.9 $ 52.3 $ 94.7
============================== ==============================13.7
============== ==============
- ---------------
(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.
(4) Operating incomeAverage realized prices for the Company's Flat-rolled products and
Engineered products segments are not presented as such prices are
subject to fluctuations due to changes in product mix. Average
realized third party sales prices for alumina and primary aluminum
include the impact of hedging activities.
(2) First quarter and nine-month period ended September
30, 1998, reflects a reduced level of profitability and increased
costs related to preparation1999 results for the work stoppage at five locations
(see Recent Events). The third quarter profitability impact for the
Bauxite and aluminaPrimary aluminum segment was nominal.
(5) Includes a pre-tax chargeinclude
potline restart costs of $15.1 related to restructuring of
operations recorded in the quarter ended June 30, 1997.
(6) Includes a pre-tax charge of $4.6 related to restructuring of
operations recorded in the quarter ended June 30, 1997.$7.1.
OVERVIEW
The Company's operating results are sensitive to changes in prices of
alumina, primary aluminum, and fabricated 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 1997, the Average Midwest Transaction Price ("AMT Price") for
primary aluminum remained fairly stable generally in the $.75 - $.80 range
through November and then declined during December to the $.70 - $.75
range. After beginning 1998 at approximately $.73, the AMT Price for
primary aluminum has declined throughout 1998 to approximately $.63 at the
end of September 1998. The AMT Price for primary aluminum for the week
ended October 30, 1998, was approximately $.62 per pound.fluctuations. See
Note 5 of the Notes to Interim Consolidated Financial Statements for a
discussion of KACC's hedging activities.
During 1998, the Average Midwest United States transaction price ("AMT
Price") per pound of primary aluminum experienced a steady decline during
the year, beginning the year in the $.70 to $.75 range and ending the year
in the low $.60 range. During the first quarter of 1999, the AMT Price for
primary aluminum was in the $.57 to $.59 per pound range most of the
quarter, but increased in March 1999 and ended the quarter at approximately
$.62. The AMT Price for primary aluminum for the week ended April 23,
1999, was approximately $.64 per pound.
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998,MARCH 31, 1999, COMPARED TO QUARTER AND
NINE MONTHS ENDED SEPTEMBER 30, 1997MARCH 31, 1998
SUMMARY
The Company reported a net incomeloss of $10.8$38.2 million, or $.48 of basic
earningsloss per share, of $.14, for the thirdfirst quarter of 1998,1999, compared to a net income of
$17.5$12.0 million, or $.15 of basic earnings per share, of $.22, for the same period of
1997.1998. Net sales in the thirdfirst quarter of 19981999 totaled $541.6$479.4 million
compared to $634.1$597.0 million in the thirdfirst quarter of 1997.
For the nine-month period ended September 30, 1998, net income was
$39.5 million, or basic earnings per share of $.50, compared to net income
of $33.8 million, or basic earnings per share of $.39, for the nine-month
period ended September 30, 1997. Net sales for the nine-month period ended
September 30, 1998, were $1,753.4 million compared to $1,778.6 million for
the first nine months of 1997.
Results for the quarter and nine-month period ended September 30,
1998, included two essentially offsetting non-recurring items, a favorable
$8.3 million non-cash tax provision benefit resulting from the resolution
of certain matters and the unfavorable gross profit impact of preparing for
a strike by employees represented by the USWA at five locations.
Results for the nine-month period ended September 30, 1997, included
the effect of certain nonrecurring items including a $19.7 million
restructuring charge and an offsetting $12.5 million non-cash tax benefit
related to settlement of certain matters. Additionally, results for the
nine-month periods ended September 30, 1998, and 1997, included charges
related to additional litigation reserves of $3.9 million and $5.8 million,
respectively.1998.
BAUXITE AND ALUMINA
NetThird party net sales of alumina increased by 6%were down 2% for the quarter ended
September
30,March 31, 1999, as compared to the same period in 1998 from the comparable prior year period, as a result of an 11%15% increase in
aluminathird party shipments was more than offset by a 5% decreasedecline in average realized
price. ForThe increase in 1999 third party shipments (and offsetting decrease
in 1999 intersegment shipments) resulted from reduced shipments to Valco,
due to the nine-month period ended September 30, 1998,production curtailment more fully discussed above and the fourth
quarter strike-related curtailment of three potlines at the Company's
Washington smelters. The average realized price for third party alumina
sales was down as the allocated net gains from the Company's hedging
activities only partially offset the decline in market prices related to
the Company's primary aluminum-linked customer sales contracts. In
addition to being impacted by the reduced shipments to Valco and the
Washington smelters as discussed above, intersegment sales were adversely
affected by a substantial market-related decline in intersegment average
sales prices.
Segment operating income declined significantly between years due to
the decline in market related prices discussed above. The impact of
increased third party shipments of alumina was substantially offset by a
corresponding decline in intersegment shipments.
PRIMARY ALUMINUM
First quarter 1999 third party net sales of alumina increased by 18%, fromprimary aluminum were down
29% as compared to the comparable period in the prior year due
to a 18% increase in alumina shipments. Increased shipments of alumina in
the quarter and nine-month period ended September 30, 1998, were due, in
part, to reduced intracompany usage of alumina at Valco.
On a comparative basis, operating income for the segment was flat for
the quarter, and up for nine-month period ended September 30, 1998 primarily due to the price and volume factors discussed above.
ALUMINUM PROCESSING
Net sales of primary aluminum for the quarter ended September 30, 1998
decreased by 35% from the comparable prior year period as a result of a
28%
decrease22% reduction in shipments, primarily duecaused by the 1998 potline curtailments at
Valco and the Washington smelters. Reduced average realized third party
sales prices between first quarter 1999 and 1998 (reflecting lower market
prices offset, in part, by allocated net gains from KACC's hedging
activities) also adversely impacted third party net sales. Intersegment
net sales were down approximately 27% between first quarter 1999 and 1998.
Intersegment shipments were down 9% from the prior year comparable period
and average realized prices dropped by 18% reflecting lower market prices
for primary aluminum.
Segment operating income in first quarter 1999 was down significantly
from first quarter 1998. The primary reason for the decline was the
significant reduction in shipments and average realized prices, discussed
above. However, first quarter 1999 results also reflect the adverse impact
of the Valco and Washington smelter potline curtailments, the lack of any
compensation from the VRA in 1999 related to the aforementioned Valco potline
curtailments, as well as a 7% decrease in average realized prices.and costs of approximately $7.1 million associated with
preparing and restarting potlines at Valco and the Washington smelters.
FLAT-ROLLED PRODUCTS
Net sales of fabricated aluminumflat-rolled products for thedecreased by 24% during first
quarter ended September 30,
1998, were down 13%1999 as compared to the prior year period1998 as a result of a 7% decrease12% reduction in product
shipments and a 6% decrease13% decline in average realized prices. The decreasereduction in
fabricated aluminum productquarterly shipments from the third quarter of
1997 was the result of areflects reduced aerospace demand for engineeredheat treat
products resulting
from strikes at two major end users of such products and an inventory
destocking among customers of heat-treat general engineering products.
For the nine-month period ended September 30, 1998, net sales for the
aluminum processing segment decreased by approximately 5%as compared to the nine-month period ended September 30, 1997. Net salesfirst quarter of 1998 as well as customer
deferrals of can stock purchases into the second quarter of 1999. The
decline in average realized prices reflects lower market prices for primary
aluminum foras well as the 1998 period declined by 20% fromprice impact of the comparable prior year periodchanges in product mix
discussed above.
Segment operating income decreased significantly in first quarter 1999
primarily as a result of the price, volume and volumeproduct mix factors
discussed above.
This decline
was partially offset on a year-to-date basis by a 2% increase in netENGINEERED PRODUCTS
Net sales of fabricated aluminum products. The increaseengineered products were down approximately 18% year to
year, reflecting a 10% decrease in net sales of fabricated
aluminum products on a year-to-date basis was the result of a 4% increase
inproduct shipments offset by a 2% decreaseand 9% decline in
average realized prices. Increased
year-over-yearThe reduction in shipments reflect increasedprimarily resulted
from seasonality and softening demand primarily in aerospace market
sectors. These factors were somewhat offset by strong demand for soft
alloy extrusions. The change in average realized prices reflects lower
market prices for primary aluminum as well as the price impact of changes
in product mix.
Segment operating income declined significantly in the first halfquarter
of the
year, particularly for heat treat products.
Operating income for the aluminum processing segment declined in the
quarter and nine-month period ended September 30, 1998, from the comparable
prior year periods primarily due1999 as compared to the increased costs and reduced
profitability caused by preparations for a work stoppage at the Company's
five USWA locations (as further discussed above) and due to a decline in
the average realized price for primary aluminum. Reduced shipments of
primary aluminum in the thirdfirst quarter of 1998 primarily as a result of
the price, volume, and product mix factors discussed above.
ELIMINATIONS
Eliminations of intersegment profit vary from period to period
depending on fluctuations in market prices as well as on a year-to-date
basis, were substantially offset by compensation recorded by the Company
(which will be received over a 18-month period which began in July 1998)
for twoamount and timing
of the three Valco potlines curtailed during 1998. Segment
operating income for the quarteraffected segments' production and year-to-date periods ended September
30, 1998, was also impacted by the price and volume factors affecting
fabricated aluminum products discussed above.
Operating income for the quarter and nine-month period ended September
30, 1997, included approximately $2.7 million and $7.5 million,
respectively, from the settlement of certain issues related to energy
service contracts. Operating income for the nine-month period ended
September 30, 1997, also included a $15.1 million charge resulting from the
previously discussed restructuring of operations.sales.
CORPORATE AND OTHER
Corporate operating expenses represent 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, include a pre-tax charge of approximately $4.6 million associated
with the Company's restructuring of operations.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
At March 31, 1999, the Company had working capital of $379.7 million,
compared with working capital of $471.6 million at December 31, 1998. The
decrease in working capital primarily resulted from a decrease in Cash and
cash equivalents.
INVESTING ACTIVITIES
Capital expenditures during the quarter ended March 31, 1999, were
$16.5 million consisting primarily of the purchase of the remaining 45%
interest in KLHP, discussed above. The remainder of the first quarter 1999
capital expenditures were used to improve production efficiency and reduce
operating costs. Total consolidated capital expenditures (of which
approximately 8% is expected to be funded by the Company's minority
partners in certain foreign joint ventures) are expected to be between $70
and $90 million per annum in each of 1999 through 2001. Management
continues to evaluate numerous projects all of which would require
substantial capital, both in the United States and overseas. The level of
capital expenditures may be adjusted from time to time depending on the
Company's price outlook for primary aluminum and other products, KACC's
ability to assure future cash flows through hedging or other means, the
Company's financial position and other factors.
FINANCING ACTIVITIES AND LIQUIDITY
At March 31, 1999, the Company had long-term debt of $962.7 million,
compared with $963.0 million at December 31, 1998.
At March 31, 1999, $273.4 million (of which $73.4 million could have
been used for letters of credit) was available to KACC under the Credit
Agreement and no amounts were outstanding under the revolving credit
facility. 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.
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 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.
CAPITAL STRUCTURE
MAXXAM Inc. ("MAXXAM") and one of its wholly owned subsidiaries
collectively own approximately 63% of the Company's Common Stock, with the
remaining approximately 37% of the Company's Common Stock being publicly
held. Certain of the shares of the Company's Common Stock beneficially
owned by MAXXAM are subject to certain pledge agreements by MAXXAM and its
subsidiary.
During August 1997, the remaining 8,673,850 shares of outstanding
PRIDES were converted into 7,227,848 shares of the Company's Common Stock
pursuant to the PRIDES Certificate of Designations.
The Company 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 made by means of a prospectus.
The Company also has an effective "shelf" registration statement covering
the offering of up to 10,000,000 shares of the Company's Common Stock that
are owned by MAXXAM. The Company will not receive any of the net proceeds
from any transaction initiated by MAXXAM pursuant to this registration
statement.
OPERATING ACTIVITIES
At September 30, 1998, the Company had working capital of $487.6
million, compared with working capital of $451.5 million at December 31,
1997. The increase in working capital primarily results from increases in
Cash and cash equivalents and decreases in accrued interest and accrued
salaries, wages and related expenses offset, in part, by decreases in
Receivables and Inventories.
INVESTING ACTIVITIES
Capital expenditures during the nine months ended September 30, 1998,
were $52.3 million and were used primarily to improve production
efficiency, reduce operating costs, expand capacity at existing facilities,
and construct new facilities. Total consolidated capital expenditures (of
which approximately 8% is expected to be funded by the Company's minority
partners in certain foreign joint ventures) are expected to be between
$75.0 and $125.0 million per annum in each of 1998 through 2000.
During 1998, the Micromill(TM) facility commenced shipments of
commercial products to customers, but the amount of such shipments has been
minimal. Additional product trials for international and domestic
customers were conducted in the third quarter. However, the Micromill(TM)
technology has not yet been fully implemented or commercialized, and there
can be no assurances that full implementation or commercialization will be
successful. In October 1998, the Company temporarily suspended
substantially all of its Micromill(TM) commercialization efforts and
temporarily transferred the employees of the Micromill(TM) facility to KACC's
strike affected plants in the State of Washington in order to supplement
the workforce at those locations. Re-commencement of the commercialization
efforts on the Micromill(TM) technology will depend on when the strike ends,
when the employees from the Micromill(TM) facility are no longer needed at
the strike affected plants and other economic considerations.
Management continues to evaluate numerous projects, including the
Micromill(TM) technology, all of which would require substantial capital,
both in the United States and overseas.
FINANCING ACTIVITIES AND LIQUIDITY
At September 30, 1998, the Company had long-term debt of $964.5
million, compared with $971.7 million at December 31, 1997.
At September 30, 1998, $274.1 million (of which $74.1 million could
have been used for letters of credit) was available to KACC under the
Credit Agreement and no amounts were outstanding under the revolving credit
facility. 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 nine-month period ended
September 30, 1998, the average per annum interest rates on loans
outstanding under the Credit Agreement was approximately 9%. The Credit Agreement does not permit the Company or KACC to pay any
dividends on their common stock.
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 flow, together
with the expected ability to obtain both short and long-term financing,
should provide sufficient funds to meet the Company's working capital and
capital expenditure requirements.
OTHER MATTERS
YEAR 2000 READINESS DISCLOSURE
The Company utilizes software and related technologies throughout its
business that will be affected by the date change to the year 2000. There
may also be technology embedded in certain of the equipment owned or used
by the Company that is susceptible to the year 2000 date change as well.
The Company has implemented a company-wide program to coordinate the year
2000 efforts of its individual business units and to track their progress.
The intent of the program is to make sure that critical items are
identified on a sufficiently timely basis to assure that the necessary
resources can be committed to address any material risk areas that could
prevent the Company's systems and assets from being able to meet the
Company's business needs and objectives. Year 2000 progress and readiness
has also been the subject of the Company's normal, recurring internal audit
function.
Each of the Company's business units has developed or is completing,
year 2000 plans
specifically tailored to their individual situations. A wide range of
solutions is being implemented, including modifying existing systems and,
in limited cases where it is cost effective, purchasing new systems. SpendingTotal
spending related to these projects, which began in 1997 and is expected to
continue through 1999, is currently estimated to be in the $10-
15$10-15 million
range. As of April 30, 1999, the Company estimates that approximately $4-6
million of year 2000 expenditures are yet to be incurred. Such remaining
amounts are expected to be incurred over the balance of 1999, primarily in
the second and third quarters of the year. System modification costs are
being expensed as incurred. Costs associated with new systems are being
capitalized and will be amortized over the life of the product.system. The Company
has established an internal goal of having all necessary system changes in
place and tested by mid-year 1999. Substantially all facilities and
systems are expected to meet this goal. However, a limited number of
systems and pieces of equipment will not be completely remediated and
tested until sometime in the third quarter of the year. The Company plans
to commit the necessary resources to meet
this deadline.for all remediation efforts.
In addition to addressing the Company's internal systems, the company-
wide program involves identification of key suppliers, customers, and other
third-party relationships that could be impacted by year 2000 issues. A
general survey has been conducted of the Company's supplier and customer
base. Direct contact has been made, or is in progress, with parties which
are deemed to be particularly critical including financial institutions,
power suppliers, and customers, with which the Company has a material
relationship.
Each business unit, including the corporate group, is developing a
contingency plan covering the steps that would be taken if a year 2000
problem were to occur despite the Company's best efforts to identify and
remediate all critical at-risk items. Each contingency plan will address,
among other things, matters such as alternative suppliers for critical
inputs, incremental standby labor requirements at the millennium to address
any problems as they occur, and backup processing capabilities for critical
equipment or processes. The goal of the contingency plans will be to
minimize any business interruptions and the associated financial
implications.
While the Company believes that its program is sufficient to identify
the critical issues and associated costs necessary to address possible year
2000 problems in a timely manner, there can be no assurances that the
program, or underlying steps implemented, will be successful in resolving
all such issues by the Company's mid-1999 goal or prior to the year 2000.
If the steps taken by the Company (or critical third parties) are not made
in a timely manner, or are not successful in identifying and remediating
all significant year 2000 issues, business interruptions or delays could
occur and could have a material adverse impact on the Company's results and
financial condition. However, based on the information the Company has
gathered to date and the Company's expectations of its ability to remediate
problems encountered, the Company currently believes that significant
business interruptions that would have a material impact on the Company's
results or financial condition will not be encountered.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
See Part I, Item 7A. "QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK" in the Company's Form 10-K for the year ended December 31,
1998.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
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 4 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 for the year ended
December 31, 1997.
United States of America v. Kaiser Aluminum & Chemical Corporation
On August 28, 1998, a Certificate of Completion was filed with the
United States District Court for the Eastern District of Washington,
evidencing completion of a program of plant improvements and operational
changes at KACC's Trentwood, Washington, facility, and the attainment and
maintenance of furnace compliance with the capacity standard in the
Washington State Implementation Plan. Thirty days thereafter, the Consent
Decree between KACC and the United States Environmental Protection Agency
was terminated.
Hammons v. Alcan Aluminum Corp. et al
On May 4, 1998, the United States Court of Appeals for the Ninth
Circuit denied the plaintiff's petition for a rehearing en banc. On August
12, 1998, the plaintiff filed a petition with the Supreme Court of the
United States for a writ of certiorari, which petition was denied on
October 19, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits.
Exhibit No. Exhibit
--------------------- -------
3.1 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 Certificate of Retirement of KAC, dated February 12, 1998
(incorporated by reference to Exhibit 3.3 to the Report on Form
10-K for the period ended December 31, 1997, filed by KAC, File
No. 1-9447).
3.4 Amended and Restated Bylaws of KAC, dated October 1, 1997
(incorporated by reference to Exhibit 3.3 to the Report on Form
10-Q for the quarterly period ended September 30, 1997, filed by
KAC, File No. 1-9447).
*10.1 Letter Agreement,*4.1 Fourth Supplemental Indenture, dated July 21, 1998, between Kaiser
Aluminum & Chemical Corporation ("KACC") and Lawrence L.
Watts concerning employment and severance matters.
*10.2 Agreement, effective January 1,as of March 31, 1999, between KACC and
Lawrence L. Watts concerning certain consulting services to
be provided to KACC.
*10.3 Employment agreement between KACC and Raymond J. Milchovich
made effective for the period from January 1, 1998, to
December 31, 2002.
*10.4 Time-Based Stock Option Grant Pursuant to the
Kaiser 1997
Omnibus Stock Incentive Plan to Raymond J. Milchovich
effective July 2, 1998.
*10.5 Employment agreement between KACC and John T. La Duc made
effective for the period from JanuaryIndenture, dated as of February 1, 1998 to December1993, regarding KACC's 12-3/4%
Senior Subordinated Notes due 2003.
*4.2 Third Supplemental Indenture, dated as of March 31, 2002.
*10.6 Time-Based Stock Option Grant Pursuant1999, to the
Kaiser 1997
Omnibus Stock Incentive PlanIndenture, dated as of February 17, 1994, regarding KACC's 9-7/8%
Senior Notes due 2002.
*4.3 Second Supplemental Indenture, dated as of March 31, 1999, to John T. La Duc effective
July 10, 1998.the
Indenture, dated as of October 23, 1996, regarding KACC's 10-7/8%
Series B Senior Notes due 2006.
*4.4 Second Supplemental Indenture, dated as of March 31, 1999, to the
Indenture, dated as of December 23, 1996, regarding KACC's
10-7/8% Series D Senior Notes due 2006.
*27 Financial Data Schedule.
(b) Reports on Form 8-K.
No Report on Form 8-K was filed by the Company during the quarter
ended September 30, 1998.March 31, 1999.
- ---------------
* 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 have signed this report on
behalf of the registrant as the principal financial officer and principal
accounting officer of the registrant, respectively.
KAISER ALUMINUM CORPORATION
/s/ John T. La Duc
By: ---------------------------------------------------------
John T. La Duc
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ Daniel D. Maddox
By: ---------------------------------------------------------
Daniel D. Maddox
Vice President and Controller
(Principal Accounting Officer)
Dated: November 16, 1998
May 7, 1999