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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1998
Commission file number 1-3605
KAISER ALUMINUM & CHEMICAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-0928288
(State of Incorporation) (I.R.S. Employer
Identification No.)
6177 SUNOL BOULEVARD, PLEASANTON, CALIFORNIA 94566-7769
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (925)
462-1122
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
Cumulative Convertible on which registered
Preference Stock
(par value $100)
4 1/8% Series None
4 3/4% (1957 Series) None
4 3/4% (1959 Series) None
4 3/4% (1966 Series) None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Cumulative (1985 Series A) Preference Stock
Cumulative (1985 Series B) Preference Stock
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,
and (2) has been subject to such filing requirements for the past
90 days. Yes X No
--- ----
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___
As of March 23, 1999, there were 46,171,365 shares of the common
stock of the registrant outstanding, all of which were owned by
Kaiser Aluminum Corporation, the parent corporation of the
registrant. As of March 23, 1999, non-affiliates of the
registrant held 353,724 shares of Cumulative (1985 Series A)
Preference Stock and 42,156 shares of Cumulative (1985 Series B)
Preference Stock of the registrant. The aggregate value of such
Cumulative (1985 Series A) Preference Stock and Cumulative (1985
Series B) Preference Stock, based upon the redemption price for
such stock, is $19.8 million.
Certain portions of the registrant's definitive proxy statement
to be filed not later than 120 days after the close of the
registrant's fiscal year are incorporated by reference into Part
III of this Report on Form 10-K.
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NOTE
Kaiser Aluminum & Chemical Corporation's Report on Form 10-K
filed with the Securities and Exchange Commission includes all
exhibits required to be filed with the Report. Copies of this
Report on Form 10-K, including only Exhibit 21 of the exhibits
listed on pages 57 - 62 of this Report, are available without
charge upon written request. The registrant will furnish copies
of the other exhibits to this Report on Form 10-K upon payment of
a fee of 25 cents per page. Please contact the office set forth
below to request copies of this Report on Form 10-K and for
information as to the number of pages contained in each of the
other exhibits and to request copies of such exhibits:
Corporate Secretary
Kaiser Aluminum & Chemical Corporation
6177 Sunol Boulevard
Pleasanton, California 94566-7769
(925) 462-1122
(i)
TABLE OF CONTENTS
Page
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PART I 1
ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 13
ITEM 3. LEGAL PROCEEDINGS 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 14
PART II 14
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 14
ITEM 6. SELECTED FINANCIAL DATA 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 55
PART III 55
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT 55
ITEM 11. EXECUTIVE COMPENSATION 55
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 55
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS 55
PART IV 55
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K 55
SIGNATURES 56
INDEX OF EXHIBITS 57
EXHIBIT 21 SUBSIDIARIES 63
(ii)
PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K (the "Report") 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
Report (see, for example, Item 1. "Business - Strategic
Initiatives," " - Business Operations," " - Competition," " -
Research and Development," " - Environmental Matters," and " -
Factors Affecting Future Performance," Item 3. "Legal
Proceedings," and Item 7. "Management's Discussion and Analysis
of Financial Condition and Results of Operations"). 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, new or modified statutory or regulatory
requirements, and changing prices and market conditions. Other
sections of this Report 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.
General
Kaiser Aluminum & Chemical Corporation (the "Company"), a
Delaware corporation organized in 1940, is a direct subsidiary of
Kaiser Aluminum Corporation ("Kaiser") and is an indirect
subsidiary of MAXXAM Inc. ("MAXXAM"). Kaiser owns all of the
Company's Common Stock; and MAXXAM and one of its wholly-owned
subsidiaries together own approximately 63% of Kaiser's Common
Stock, with the remaining approximately 37% publicly held. The
Company operates in all principal aspects of the aluminum
industry - the mining of bauxite, the refining of bauxite into
alumina, the production of primary aluminum from alumina, and the
manufacture of fabricated (including semi-fabricated) aluminum
products. In addition to the production utilized by the Company
in its operations, the Company sells significant amounts of
alumina and primary aluminum in domestic and international
markets. In 1998, the Company produced approximately 2,964,000
tons* of alumina, of which approximately 76% was sold to third
parties, and produced approximately 387,000 tons of primary
aluminum, of which approximately 68% was sold to third parties.
The Company is also a major domestic supplier of fabricated
aluminum products. In 1998, the Company shipped approximately
405,000 tons of fabricated aluminum products to third parties,
which accounted for approximately 5% of total United States
domestic shipments.
-----------
* All references to tons in this Report refer to metric tons of
2,204.6 pounds.
The Company's operations are conducted through its business
units. The following table sets forth total shipments and
intersegment transfers of the Company's alumina, primary
aluminum, and fabricated aluminum operations:
Year Ended December 31,
----------------------------------------------
1998 1997 1996
-------------- -------------- --------------
(in thousands of tons)
ALUMINA:
Shipments to Third Parties 2,250.0 1,929.8 2,073.7
Intersegment Transfers 750.7 968.0 912.4
-------------- -------------- --------------
3,000.7 2,897.8 2,986.1
-------------- -------------- --------------
PRIMARY ALUMINUM:
Shipments to Third Parties 263.2 327.9 355.6
Intersegment Transfers 162.8 164.2 128.3
-------------- -------------- --------------
426.0 492.1 483.9
-------------- -------------- --------------
FLAT-ROLLED PRODUCTS: 235.6 247.9 204.8
ENGINEERED PRODUCTS: 169.4 152.1 122.3
ITEM 1. BUSINESS (CONTINUED)
Note 12 of Notes to Consolidated Financial Statements is
incorporated herein by reference.
Labor Matters
Substantially all of the Company's hourly workforce at the
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 parties
did not reach an agreement prior to the expiration of the master
agreement and the USWA chose to strike. In January 1999 the
Company declined an offer by the USWA to have the striking
workers return to work at the five plants without a new
agreement. The Company 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
began. Based on operating results to date, the Company believes
that a significant business interruption will not occur.
As a result of the USWA strike, the Company temporarily curtailed
three out of a total of eleven potlines at its Mead and Tacoma,
Washington, aluminum smelters at September 30, 1998. The
curtailed potlines represent approximately 70,000 tons of annual
production capacity out of a total combined production capacity
of 273,000 tons per year at the facilities. In February 1999,
the Company began restarting the two curtailed potlines at its
Mead smelter representing approximately 50,000 tons of the
previously idle capacity. The Company has also announced that it
has completed preparations to restart 20,000 tons of idle
capacity at its Tacoma smelter. However, the timing for any
restart of the Tacoma potline has yet to be determined and will
depend upon market conditions and other factors. Costs
associated with the preparation and restart of the potlines at
the Mead and Tacoma facilities are expected to adversely affect
the Company's first quarter results.
While the Company initially experienced an adverse strike-related
impact on its profitability in the fourth quarter of 1998, the
Company currently believes that its operations at the affected
facilities have been substantially stabilized and will be able to
run at, or near, full capacity, and that the incremental costs
associated with operating the affected plants during the dispute
were eliminated or substantially reduced as of January 1999
(excluding the impacts of the restart costs discussed above and
the effect of market factors such as the continued market-related
curtailment at the Tacoma smelter). However, no assurances can
be given that the Company's efforts to run the plants on a
sustained basis, without a significant business interruption or
material adverse impact on the Company's operating results, will
be successful.
See Note 1 of Notes to Consolidated Financial Statements "- Labor
Related Costs," and Note 10 of Notes to Consolidated Financial
Statements "- Labor Matters."
Strategic Initiatives
The Company's strategic objectives include the improvement of the
earnings from its existing businesses; the redeployment of its
existing investment in assets that are not strategically
essential to continued profit growth; the addition of assets to
its growth businesses; and the improvement of its financial
structure.
In 1996, the Company set a 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 objective prior to the end of the
third quarter of 1998, when the impact of such items as smelter
operating levels, the USWA strike and foreign currency changes
are excluded from the analysis. Further, the Company believes
that it has implemented the steps that will allow it to sustain
the stated goal over the long term. The Company remains
committed to sustaining the full $120.0 million improvement and
to generating additional profit improvements in future years;
however, no assurances can be given that the Company will be
successful in this regard. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Labor
Matters, - Strategic Initiatives, and - Valco Operating Level",
and Note 1 of Notes to Consolidated Financial Statements "- Labor
Related Costs."
ITEM 1. BUSINESS (CONTINUED)
In addition to working to improve the performance of the
Company's existing assets, the Company has devoted significant
efforts analyzing its existing asset portfolio with the intent of
focusing its efforts and capital in sectors of the industry that
are considered most 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"), a joint venture that designs, manufactures and sells
heavy duty aluminum wheels, the rationalization of certain of the
Company's engineered products operations, and the Company's
investment to expand its capacity for heat treat flat-rolled
products at its Trentwood, Washington, rolling mill. The
restructuring activities resulted in the Company recording a net
pre-tax charge of $19.7 million in June 1997. See Notes 3 and 4
of Notes to Consolidated Financial Statements.
The portfolio analysis process also resulted in the Company's
fourth quarter 1998 decision to seek a strategic partner for
further development and deployment of the Company's Micromill(TM)
technology. While technological progress has been good,
management concluded that additional time and investment would be
required for success. Given the Company's other strategic
priorities, the Company believes that introducing added
commercial and financial resources is the appropriate course of
action for capturing the maximum long term value. This change in
strategic course required a different accounting treatment, and
the Company correspondingly recorded a $45.0 million impairment
charge to reduce the carrying value of the Micromill assets to
approximately $25.0 million. See Note 3 of Notes of Consolidated
Finanacial Statements.
Another area of emphasis has been a continuing focus on managing
the Company's legacy liabilities. One element of this process
has been actively pursuing claims in respect of insurance
coverage for certain incurred and future environmental costs.
During the fourth quarter of 1998, the Company received
recoveries totaling approximately $35.0 million related to
current and future claims against certain of its insurers.
Recoveries of $12.0 million were deemed to be allocable to
previously accrued (expensed) items and were reflected in
earnings during the fourth quarter of 1998. The remaining
recoveries were offset against increases in the total amount of
environmental reserves. 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. See Note 10 of Notes to Consolidated Financial
Statements.
In early 1999, the Company's program to focus its efforts and
capital in sectors of the industry which it considers to be the
most attractive, and in which the Company believes it is well
positioned to capture value, has resulted in an agreement to sell
one joint venture interest and a separate agreement to purchase
another. In January 1999, the Company signed a letter of intent
to sell its 50% interest in AKW to its joint venture partner. The
transaction, which would result in the Company recognizing a
substantial gain, is currently expected to close on or about
March 31, 1999. However, as the transaction is subject to
negotiation of a definitive purchase agreement, no assurances can
be given that this transaction will be consummated. Also, in
February 1999, the Company completed the acquisition of the
remaining 45% interest in Kaiser LaRoche Hydrate Partners, an
alumina marketing venture, from its joint venture partner for a
cash purchase price of approximately $10.0 million. See Note 14
of Notes to Consolidated Financial Statements. Additional
portfolio analysis and initiatives are continuing.
Sensitivity to Prices and Hedging Programs
The Company's operating results 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 and on the Company'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 and generally lag behind
primary aluminum prices. From time to time in the ordinary
course of business the Company enters into hedging transactions
to provide price risk management in respect of its net exposure
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 the
Company to lock-in or fix the effective price that the Company
will receive for its sales. The Company also uses option
contracts (i) to establish a minimum price for its product sales,
(ii) to establish a "collar" or range of prices for its
anticipated sales, and/or (iii) to permit the Company to realize
possible upside price movements. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -
Market-related Factors" and Note 1 - "Derivative Financial
Instruments" and Note 11 of Notes to Consolidated Financial
Statements.
ITEM 1. BUSINESS (CONTINUED)
Business Operations
The Company conducts its business through four main business
units, each of which is discussed below.
- Alumina Business Unit
---------------------
The following table lists the Company's bauxite mining and
alumina refining facilities as of December 31, 1998:
Annual
Production Total
Capacity Annual
Company Available to Production
Activity Facility Location Ownership the Company Capacity
-------------- -------------- -------------- -------------- -------------- --------------
(tons) (tons)
Bauxite Mining KJBC(1) Jamaica 49.0% 4,500,000 4,500,000
Alpart(2) Jamaica 65.0% 2,275,000 3,500,000
-------------- --------------
6,775,000 8,000,000
============== ==============
Alumina Refining Gramercy Louisiana 100.0% 1,050,000 1,050,000
Alpart Jamaica 65.0% 942,500 1,450,000
QAL Australia 28.3% 1,032,950 3,650,000
-------------- --------------
3,025,450 6,150,000
============== ==============
---------------
(1) Although the Company owns 49% of Kaiser Jamaica Bauxite
Company ("KJBC"), it has the right to receive all of KJBC's
output.
(2) Alumina Partners of Jamaica ("Alpart") bauxite is refined
into alumina at the Alpart refinery.
The Company's principal customers for bauxite and alumina consist
of other aluminum producers that purchase bauxite and
smelter-grade alumina, trading intermediaries who resell raw
materials to end-users, and users of chemical-grade alumina. The
Company believes that among alumina producers the Company is the
world's second largest seller of smelter-grade alumina to third
parties. The Company's strategy is to sell a substantial portion
of the alumina available to it in excess of its internal smelting
requirements under multi-year sales contracts with prices linked
to the price of primary aluminum. See "- Competition" and "-
Sensitivity to Prices and Hedging Programs."
Bauxite mined in Jamaica by KJBC is refined into alumina at the
Company's plant at Gramercy, Louisiana, or is sold to third
parties. In 1979, the Government of Jamaica granted the Company a
mining lease for the mining of bauxite sufficient to supply the
Company's then-existing Louisiana alumina refineries at their
annual capacities of 1,656,000 tons per year until January 31,
2020. Alumina from the Gramercy plant is sold to third parties.
The Gramercy, Louisiana, refinery is one of the five Company
plants which is subject to the continuing USWA dispute. See "-
Labor Matters" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Labor Matters."
In February 1999 the Company, through a subsidiary, purchased its
partner's 45% interest in Kaiser LaRoche Hydrate Partners, a
partnership which markets chemical-grade alumina manufactured by
the Company's Gramercy facility. These products are sold at a
premium price over smelter-grade alumina, and this acquisition
will permit the Company to expand its market position in this
business in North America. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -
Strategic Initiatives."
ITEM 1. BUSINESS (CONTINUED)
Alpart holds bauxite reserves and owns a 1,450,000 ton per year
alumina plant located in Jamaica. The Company owns a 65%
interest in Alpart, and Hydro Aluminium Jamaica a.s ("Hydro")
owns the remaining 35% interest. The Company has management
responsibility for the facility on a fee basis. The Company and
Hydro have agreed to be responsible for their proportionate
shares of Alpart's costs and expenses. The Government of Jamaica
has granted Alpart a mining lease and has entered into other
agreements with Alpart designed to assure that sufficient
reserves of bauxite will be available to Alpart to operate its
refinery, as it may be expanded up to a capacity of 2,000,000
tons per year, through the year 2024.
In 1999, Alpart and JAMALCO, a joint venture between affiliates
of Alcoa Inc. and the government of Jamaica, reached an
agreement to form a joint venture bauxite mining operation to
consolidate their bauxite mining operations in Jamaica, with the
objective of optimizing mining operating and capital costs. The
transaction is subject to various conditions. Subject to
satisfaction of those conditions, the joint venture is expected
to commence operations during the second half of 1999.
The Company owns a 28.3% interest in Queensland Alumina Limited
("QAL"), which owns the largest and one of the most competitive
alumina refineries in the world, located in Queensland,
Australia. QAL refines bauxite into alumina, essentially on a
cost basis, for the account of its stockholders under long-term
tolling contracts. The stockholders, including the Company,
purchase bauxite from another QAL stockholder under long-term
supply contracts. The Company has contracted with QAL to take
approximately 792,000 tons per year of capacity or pay standby
charges. The Company is unconditionally obligated to pay amounts
calculated to service its share ($97.6 million at December 31,
1998) of certain debt of QAL, as well as other QAL costs and
expenses, including bauxite shipping costs.
The Company sold alumina in 1998 to approximately 20 customers,
the largest and top five of which accounted for approximately 19%
and 67% of such sales, respectively. All of the Company's third-
party sales of bauxite in 1998 were made to one customer, which
represents approximately 6% of total bauxite and alumina third
party revenues.
- Primary Aluminum Business Unit
------------------------------
The following table lists the Company's primary aluminum smelting
facilities as of December 31, 1998:
Annual Rated Total 1998
Capacity Annual Average
Company Available to Rated Operating
Location Facility Ownership the Company Capacity Rate
----------------- -------------- -------------- -------------- -------------- --------------
Domestic
Washington Mead 100% 200,000 200,000 103% (1)
Washington Tacoma 100% 73,000 73,000 94%
-------------- --------------
Subtotal 273,000 273,000
-------------- --------------
International
Ghana Valco 90% 180,000 200,000 25%
Wales, United Kingdom Anglesey 49% 66,150 135,000 100%
-------------- --------------
Subtotal 246,150 335,000
-------------- --------------
Total 519,150 608,000
============== ==============
---------------
(1) In recent years the Mead smelter has consistently operated
at an annual rate in excess of its rated capacity of 200,000
tons. As a result of the strike-related partial curtailment
of the Mead smelter, the 1998 average operating rate
declined from that of a year ago but remained above 100% of
rated capacity.
ITEM 1. BUSINESS (CONTINUED)
The Company's principal primary aluminum customers consist of
large trading intermediaries and metal brokers. In 1998, the
Company sold its primary aluminum production not utilized for
internal purposes to approximately 42 customers, the largest and
top five of which accounted for approximately 30% and 58% of such
sales, respectively. See "- Competition." Marketing and sales
efforts are conducted by personnel located in Pleasanton,
California; Houston, Texas; and Tacoma and Spokane, Washington.
A majority of the business unit's sales are based upon long-term
relationships with metal merchants and end-users.
The Company has developed and installed proprietary retrofit and
control technology in all of its smelters, as well as at third
party locations. This technology - which includes the redesign
of the cathodes, anodes and bus that conduct electricity through
reduction cells, improved feed systems that add alumina to the
cells, computerized process control and energy management
systems, and furnace technology for baking of anode carbon - has
significantly contributed to increased and more efficient
production of primary aluminum and enhanced the Company's ability
to compete more effectively with the industry's newer smelters.
The Company engages in efforts to license this technology and
sell technical and managerial assistance to other producers
worldwide, and may participate in joint ventures or similar
business partnerships which employ the Company's technical and
managerial knowledge. See "-Research and Development."
Domestic Smelters
The Mead facility uses pre-bake technology and produces primary
aluminum. Approximately 64% of Mead's 1998 production was used
at the Company's Trentwood, Washington, rolling mill, and the
balance was sold to third parties. The Tacoma facility uses
Soderberg technology and produces primary aluminum and
high-grade, continuous-cast, redraw rod, which currently commands
a premium price in excess of the price of primary aluminum. Both
smelters have achieved significant production efficiencies
through retrofit technology and a variety of cost controls,
leading to increases in production volume and enhancing their
ability to compete with newer smelters. The Mead and Tacoma,
Washington, smelters are two of the five Company plants which are
subject to the continuing USWA dispute. See "-Labor Matters."
The Company has modernized and expanded the carbon baking furnace
at its Mead smelter at an estimated cost of approximately $55.3
million. The project has improved the reliability of the carbon
baking operations, increased productivity, enhanced safety, and
improved the environmental performance of the facility. The
first stage of this project, the construction of a new $40.0
million 90,000 ton per year furnace, was completed in 1997. The
remaining modernization work was completed in 1998 and early
1999. A portion of this project was financed with the net
proceeds (approximately $18.6 million) of 7.6% Solid Waste
Disposal Revenue Bonds due 2027 issued in March 1997 by the
Industrial Development Corporation of Spokane County, Washington.
Foreign Smelters
The Company manages, and owns a 90% interest in, the Volta
Aluminium Company Limited ("Valco") aluminum smelter in Ghana.
The Valco smelter uses pre-bake technology and processes alumina
supplied by the Company and the other participant into primary
aluminum under tolling contracts which provide for proportionate
payments by the participants. The Company's share of the primary
aluminum is sold to third parties.
During most of 1998, the Valco smelter operated only one of its
five potlines, as compared to 1997, when Valco operated four
potlines. Each of Valco's potlines produces approximately 40,000
tons of primary aluminum per year. Valco received compensation
(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 impact 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. Based on
Valco's proposed 1999 power allocation from the VRA, Valco has
announced that it expects to operate three lines during 1999.
The decision to operate at that level was based on the power
allocation that Valco has received from the VRA as well as
consideration of market and other factors. Valco has notified
the VRA that it believes it had the contractual rights 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 in the future. No assurances can be given as to the
success of these discussions.
ITEM 1. BUSINESS (CONTINUED)
The Company owns a 49% interest in the Anglesey Aluminium Limited
("Anglesey") aluminum smelter and port facility at Holyhead,
Wales. The Anglesey smelter uses pre-bake technology. The
Company supplies 49% of Anglesey's alumina requirements and
purchases 49% of Anglesey's aluminum output. The Company sells
its share of Anglesey's output to third parties.
Electric Power
Electric power represents an important production cost for the
Company at its aluminum smelters. For a discussion of this
subject, see "Factors Affecting Future Performance - Electric
Power."
- Flat-Rolled Products Business Unit
----------------------------------
The flat-rolled products business unit operates the Trentwood,
Washington, rolling mill. The Trentwood facility accounted for
approximately 58% of the Company's 1998 fabricated aluminum
products shipments. The business unit supplies the aerospace and
general engineering markets (producing heat treat sheet and plate
products), the beverage container market (producing body, lid,
and tab stock), and the specialty coil markets (producing
automotive brazing sheet, wheel, and tread products), both
directly and through distributors. The Trentwood facility is one
of the five Company plants which is subject to the continuing
USWA dispute. See "- Labor Matters," and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -
Labor Matters."
The Company continues to enhance the process and product mix of
its Trentwood rolling mill in an effort to maximize its
profitability and maintain full utilization of the facility. In
1998, the Company continued to implement a plan to improve the
reliability and to expand the annual production capacity of heat
treat flat-rolled products at the Trentwood facility by
approximately one-third over 1996 levels. Approximately $8.0
million remains to be spent to implement the plan. Global sales
of the Company's heat treat products are made primarily to the
aerospace and general engineering markets, and remained strong in
the first half of 1998 after record shipments in 1997; demand for
such products softened in the second half of 1998. In 1998, the
business unit shipped products to approximately 141 customers in
the aerospace, transportation, and industrial ("ATI") markets,
most of which were distributors who sell to a variety of
industrial end-users. The top five customers in the ATI markets
for flat-rolled products accounted for approximately 18% of the
business unit's revenue.
The Company's flat-rolled products are also sold to beverage
container manufacturers located in the western United States and
in the Asian Pacific Rim countries where the Trentwood plant's
location provides the Company with a transportation advantage.
Quality of products for the beverage container industry, service,
and timeliness of delivery are the primary bases on which the
Company competes. The Company is one of the highest quality
producers of aluminum beverage can stock in the world. In 1998,
the business unit had approximately 21 domestic and foreign can
stock customers, supplying approximately 41 can plants worldwide.
The largest and top five of such customers accounted for
approximately 12% and 35%, respectively, of the business unit's
revenue. See "- Competition." The marketing staff for the
business unit is located at the Trentwood facility and in
Pleasanton, California. Sales are made directly to end-use
customers and distributors from four sales offices in the United
States, from a sales office in England, and by independent sales
agents in Asia and Latin America.
The Micromill facility was constructed near Reno, Nevada, in 1996
as a demonstration and production facility. Micromill technology
is based on a proprietary thin-strip, high-speed, continuous-belt
casting technique linked directly to hot and cold rolling mills.
The Company is continuing its efforts to implement the Micromill
technology on a full-scale basis. However, the Micromill
technology has not yet been fully implemented or commercialized,
and there can be no assurance that it will be successfully
implemented and commercialized for use at full-scale facilities.
The Company has decided to seek a strategic partner for further
development and deployment of the Micromill technology. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Strategic Initiatives" and Note 3 of
Notes to Consolidated Financial Statements.
ITEM 1. BUSINESS (CONTINUED)
- Engineered Products Business Unit
---------------------------------
The engineered products business unit operates soft-alloy and
hard-alloy extrusion facilities and engineered component
(forgings) facilities in the United States and Canada. Major
markets for extruded products are in the transportation industry,
to which the business unit provides extruded shapes for
automobiles, trucks, trailers, cabs, and shipping containers, and
in the distribution, durable goods, defense, building and
construction, ordnance and electrical markets. The business unit
supplies forged parts to customers in the automotive, commercial
vehicle and ordnance markets. The high strength-to-weight
properties of forged aluminum make it particularly well-suited
for automotive applications. The business unit maintains its
headquarters and a sales and engineering office in Southfield,
Michigan, which works with automobile makers and other customers
and plant personnel to create new automotive component designs
and to improve existing products.
Soft-alloy extrusion facilities are located in Los Angeles,
California; Sherman, Texas; Richmond, Virginia; and London,
Ontario, Canada. Each of the soft-alloy extrusion facilities has
fabricating capabilities and provides finishing services. The
Richmond, Virginia, facility was acquired in mid-1997 and
increased the Company's extruded products capacity and enhanced
its existing extrusion business due to that facility's ability to
manufacture seamless tubing and large circle size extrusions and
to serve the distribution and ground transportation industries.
Hard-alloy rod and bar extrusion facilities are located in
Newark, Ohio, and Jackson, Tennessee, and produce screw machine
stock, redraw rod, forging stock, and billet. The Newark
facility is one of the five Company plants which is subject to
the continuing USWA dispute. See "- Labor Matters," and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Labor Matters." A facility located in
Richland, Washington, produces seamless tubing in both hard and
soft alloys for the automotive, other transportation, export,
recreation, agriculture, and other industrial markets. The
business unit also operates a cathodic protection business
located in Tulsa, Oklahoma, that extrudes both aluminum and
magnesium. The business unit operates forging facilities at
Oxnard, California, and Greenwood, South Carolina, and a machine
shop at Greenwood, South Carolina. The Company has entered into
an agreement to sell its casting operations in Canton, Ohio.
In 1997 the Company and Accuride Corporation formed AKW L.P. to
design, manufacture and sell heavy-duty aluminum truck wheels. In
January 1999, the Company signed a letter of intent to sell its
50% interest in AKW to its partner, which would result in the
Company recognizing a substantial gain. The Company expects the
transaction to close on or about March 31, 1999; however, as the
transaction is subject to certain conditions, no assurances can
be given that the transaction will be consummated. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Strategic Initiatives" and Note 14 of
Notes to Consolidated Financial Statements.
In 1998, the engineered products business unit had approximately
445 customers, the largest and top five of which accounted for
approximately 5% and 18%, respectively, of the business unit's
revenue. See "- Competition." Sales are made directly from
plants, as well as marketing locations elsewhere in the United
States.
Competition
The Company competes with both domestic and foreign producers of
bauxite, alumina and primary aluminum, and with domestic and
foreign fabricators. Many of the Company's competitors have
greater financial resources than the Company. Primary aluminum
and, to some degree, alumina are commodities with generally
standard qualities, and competition in the sale of these
commodities is based primarily upon price, quality and
availability. Aluminum competes in many markets with steel,
copper, glass, plastic, and other materials. In the United
States, beverage container materials, including aluminum, face
increased competition from plastics as increased polyethylene
terephthalate ("PET") container capacity is brought on line by
plastics manufacturers. The Company competes with numerous
domestic and international fabricators in the sale of fabricated
aluminum products. The Company manufactures and markets
fabricated aluminum products for the transportation, packaging,
construction, and consumer durables markets in the United States
and abroad. Sales in these markets are made directly and through
distributors to a large number of customers. Competition in the
sale of fabricated products is based upon quality, availability,
price and service, including delivery performance. The Company
concentrates its fabricating operations on selected products in
which it has production expertise, high-quality capability, and
geographic and other competitive advantages. The Company believes
that, assuming the current relationship between worldwide supply
and demand for alumina and primary aluminum does not change
materially, the loss of any one of the Company's customers,
including intermediaries, would not have a material adverse
effect on the Company's consolidated financial condition or
results of operations.
ITEM 1. BUSINESS (CONTINUED)
See the discussion of competitive conditions, markets, and
principal methods of competition in the description of each
business unit under the headings "-Alumina Business Unit,"
"-Primary Aluminum Business Unit," "-Flat-Rolled Products
Business Unit," and "-Engineered Products Business Unit."
Research and Development
The Company conducts research and development activities
principally at two facilities - CFT in Pleasanton, California,
and the Northwest Engineering Center adjacent to the Mead smelter
in Spokane, Washington. Net expenditures for Company-sponsored
research and development activities were $13.7 million in 1998,
$19.7 million in 1997, and $20.5 million in 1996. The Company's
research staff totaled 52 at December 31, 1998. The Company
estimates that research and development net expenditures will be
in the range of $10 million to $15 million in 1999.
CFT performs research and development of aluminum process and
product technologies to support the Company's business units and
new business opportunities. In 1998 patents were issued to the
Company concerning the manufacture of continuous cast can sheet,
the brazing of aluminum alloys for heat exchanger applications,
improved lead-free aluminum machining alloys, and joining methods
for aluminum extrusions used in transportation applications. In
1998 CFT continued to support the development of the Micromill
technology deployed at the Micromill facility near Reno, Nevada,
for the production of can sheet and other sheet products. The
Northwest Engineering Center maintains specialized laboratories
and a miniature carbon plant where experiments with new anode and
cathode technology are performed. The Northwest Engineering
Center supports the Company's primary aluminum smelters, and
concentrates on the development of cost-effective technical
innovations such as equipment and process improvements.
The Company licenses its technology and sells technical and
managerial assistance to other producers worldwide. The
Company's technology has been installed in alumina refineries,
aluminum smelters and rolling mills located in the United States
and fourteen foreign countries.
Employees
During 1998, the Company employed an average of approximately
9,200 persons, compared with an average of approximately 9,600
persons in 1997 and 1996. At December 31, 1998, the Company
employed approximately 8,900 persons; this number does not
include persons employed temporarily during the USWA labor
dispute at the five facilities subject to the labor dispute.
In 1998, Alpart entered into a new three-year labor agreement
with workers at its refinery in Jamaica, and Valco entered into a
new three-year labor agreement with workers at its smelter in
Ghana. Each agreement includes productivity improvements.
Environmental Matters
The Company and Kaiser are subject to a wide variety of
international, federal, state and local environmental laws and
regulations. For a discussion of this subject, see "Factors
Affecting Future Performance - Environmental Contingencies and
Asbestos Contingencies."
Factors Affecting Future Performance
This section discusses certain factors that could cause actual
results to vary, perhaps materially, from the results described
in forward-looking statements made in this Report. Forward-
looking statements in this Report are not guarantees of future
performance and involve significant risks and uncertainties.
Actual results may vary materially from those in such forward-
looking statements as a result of factors including 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. No assurance can be given that
these factors and the specific factors discussed below are all of
the factors that could cause actual results to vary materially
from the forward-looking statements.
ITEM 1. BUSINESS (CONTINUED)
- Sensitivity to Prices and Hedging Programs
------------------------------------------
The Company's operating results 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 and on the Company'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 and generally lag behind
primary aluminum prices. Since 1993, the Average Midwest United
States transaction price (the "AMT Price") for primary aluminum
has ranged from approximately $.50 to $1.00 per pound. During
1998, the AMT Price per pound of primary aluminum declined during
the year, beginning the year in the $.70 to $.75 range and ending
the year in the low $.60 range. Subsequent to 1998, the AMT
Price continued to decline, and at February 26, 1999, the AMT
Price was approximately $.58 per pound.
From time to time in the ordinary course of business, the Company
enters into hedging transactions to provide price risk management
in respect of its net exposure 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. No assurance can
be given that the Company's hedging program will adequately
reduce its exposure to the risk of fluctuating primary aluminum
prices.
The Company is exposed to energy price risk from fluctuating
prices for fuel oil and natural gas consumed in the production
process. From time to time in the ordinary course of business,
the Company enters into hedging transactions with major suppliers
of energy and energy related financial instruments. The Company
also enters into foreign exchange contracts to hedge material
cash commitments to foreign subsidiaries and affiliates. No
assurance can be given that the Company's hedging program will
adequately reduce the Company's exposure to the risk from
fluctuating prices for fuel oil, natural gas, and foreign
currencies.
Note 11 of Notes to Consolidated Financial Statements is
incorporated herein by reference. See also "Quantitative and
Qualitative Disclosures about Market Risk," and Note 1 "-
Derivative Financial Instruments" of Notes to Consolidated
Financial Statements.
- Leverage
--------
The Company's ratio of consolidated indebtedness to consolidated
net worth is greater than the comparable ratio of most of its
North American competitors, who generally have greater financial
resources than the Company. Due to its highly leveraged
condition, the Company is more sensitive than less leveraged
companies to certain factors affecting its operations, including
changes in the prices for its products, changes in interest
rates, and general economic conditions. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Financing Activities and Liquidity."
- Electric Power
--------------
The process of converting alumina into aluminum requires
significant amounts of electric power, and the cost of electric
power is an important production cost for the Company at its
aluminum smelters. A portion of the electric power used at the
Mead and Tacoma, Washington, smelters, as well as the rolling
mill at Trentwood, Washington, is purchased from the Bonneville
Power Administration (the "BPA") under contracts which expire in
September 2001, and a portion of such electric power is purchased
from other suppliers. The Company has long-term arrangements,
expiring in 2015, with the BPA for the transmission of electric
power by the BPA to those facilities. The amount of electric
power which may be provided by the BPA to the Company after the
expiration of the contracts in 2001 is not yet determined;
however, the Company believes that adequate electric power will
be available at that time, from the BPA and other suppliers, for
the operation of its facilities in Washington. The electric
power supplied to the Valco smelter in Ghana is produced by
hydroelectric generators, and the delivery of electric power to
the smelter is subject to interruption from time to time because
of drought and other factors beyond the control of Valco. Such
power is supplied under an agreement with the VRA which expires
in 2017. The agreement indexes a portion of the price of power
to the market price of primary aluminum and provides for a review
and adjustment of the base power rate and the price index every
five years. Such a review is now underway together with
discussions concerning the reliability of the long-term supply of
power. Electric power for the Anglesey smelter in Wales is
supplied under an agreement which expires in 2001. The Company
is working to address these power supply and power price issues;
however, there can be no assurance that electric power at
affordable prices will be available in the future for these
smelters. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Valco Operating Level."
- Labor Matters
-------------
The material under the heading "Labor Matters" at page 2 of this
Report is incorporated herein by reference.
In connection with the USWA strike and subsequent lock-out by the
Company, certain allegations of unfair labor practices ("ULPs")
have been filed with the National Labor Relations Board by the
USWA and its members. The Company has responded to all such
allegations and believes that they are without merit. If the
allegations were sustained, the Company 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 impact on the Company's consolidated financial position,
results of operations, or liquidity.
- Environmental Contingencies and Asbestos Contingencies
------------------------------------------------------
The Company and Kaiser are subject to a wide variety of
international, federal, state and local environmental laws and
regulations (the "Environmental Laws"). The Environmental Laws
regulate, among other things, air and water emissions and
discharges; the generation, storage, treatment, transportation,
and disposal of solid and hazardous waste; the release of
hazardous or toxic substances, pollutants and contaminants into
the environment; and, in certain instances, the environmental
condition of industrial property prior to transfer or sale. In
addition, the Company and Kaiser are subject to various federal,
state, and local workplace health and safety laws and regulations
("Health Laws").
From time to time, the Company is subject, with respect to its
current and former operations, to fines or penalties assessed for
alleged breaches of the Environmental and Health Laws and to
claims and litigation brought by federal, state or local agencies
and by private parties seeking remedial or other enforcement
action under the Environmental and Health Laws or damages related
to alleged injuries to health or to the environment, including
claims with respect to certain waste disposal sites and the
remediation of sites presently or formerly operated by the
Company. The Company currently is subject to certain lawsuits
under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended by the Superfund Amendments and
Reauthorization Act of 1986 ("CERCLA"). The Company, along with
certain other entities, has been named as a Potentially
Responsible Party ("PRP") for remedial costs at certain
third-party sites listed on the National Priorities List under
CERCLA and, in certain instances, may be exposed to joint and
several liability for those costs or damages to natural
resources. The Company's Mead, Washington, facility has been
listed on the National Priorities List under CERCLA. The
Washington State Department of Ecology has advised the Company
that there are several options for remediation at the Mead
facility that would be acceptable to the Department. The Company
expects that one of these remedial options will be agreed upon
and incorporated into a Consent Decree. In addition, in
connection with certain of its asset sales, the Company has
agreed to indemnify the purchasers with respect to certain
liabilities (and associated expenses) resulting from acts or
omissions arising prior to such dispositions, including
environmental liabilities.
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 December 31, 1998,
the balance of such accruals, which are primarily included in
Long-term liabilities, was $50.7 million. 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 to be
performed. The Company expects remediation to occur over the
next several years and estimates that annual expenditures to be
charged to these environmental accruals will be approximately
$3.0 million to $8.0 million per year for the years 1999 through
2003 and an aggregate of approximately $29.0 million 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. Cash
expenditures of $3.5 million in 1998, $5.6 million in 1997, and
$8.8 million in 1996 were charged to previously established
accruals relating to environmental costs. Approximately $4.5
million is expected to be charged to such accruals in 1999. In
addition to cash expenditures charged to environmental accruals,
environmental capital spending was $5.7 million in 1998, $6.8
million in 1997, and $18.4 million in 1996. Annual operating
costs for pollution control, not including corporate overhead or
depreciation, were approximately $34.3 million in 1998, $27.5
million in 1997, and $30.1 million in 1996. Legislative,
regulatory and economic uncertainties make it difficult to
project future spending for these purposes. However, the Company
currently anticipates that in the 1999-2000 period, environmental
capital spending will be approximately $11.0 million per year,
and operating costs for pollution control will be approximately
$38.0 million per year.
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, the
Company 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.
The Company 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 the Company or exposure to
products containing asbestos produced or sold by the Company.
The lawsuits generally relate to products the Company has not
manufactured for at least 20 years. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -
Commitments and Contingencies."
The portion of Note 10 of Notes to Consolidated Financial
Statements under the headings "Environmental Contingencies" and
"Asbestos Contingencies" is incorporated herein by reference.
- Year 2000 Disclosure Statement
------------------------------
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.
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.
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. 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 no significant business interruptions
that would have a material impact on the Company's results or
financial condition will be encountered. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Year 2000."
- Foreign Activities
------------------
The Company's operations are located in several foreign
countries, including Australia, Canada, Ghana, Jamaica, and the
United Kingdom. Foreign operations, in general, may be more
vulnerable than domestic operations because of a variety of
political or governmental actions and other factors which may,
for example, disrupt or restrict operations and markets, impose
taxes and levies, impose import or export restrictions, restrict
the movement of funds, or impose limitations on foreign exchange
transactions. While the Company believes that its relationships
with the governments of the countries in which it conducts
operations directly or through joint ventures continue to be
satisfactory, there can be no assurance as to the future
influence of the foregoing factors.
ITEM 2. PROPERTIES
The locations and general character of the principal plants,
mines, and other materially important physical properties
relating to the Company's operations are described in Item 1 "-
Business Operations" and those descriptions are incorporated
herein by reference. The Company owns in fee or leases all the
real estate and facilities used in connection with its business.
Plants and equipment and other facilities are generally in good
condition and suitable for their intended uses, subject to
changing environmental requirements. Although the Company's
domestic aluminum smelters and alumina facility were initially
designed early in the Company's history, they have been modified
frequently over the years to incorporate technological advances
in order to improve efficiency, increase capacity, and achieve
energy savings. The Company believes that its plants are cost
competitive on an international basis.
The Company's obligations under the Credit Agreement entered into
on February 15, 1994, as amended (the "Credit Agreement"), are
secured by, among other things, mortgages on the Company's major
domestic plants (other than the Gramercy alumina refinery and
Nevada Micromill). See Note 5 of Notes to Consolidated Financial
Statements.
ITEM 3. LEGAL PROCEEDINGS
This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. See Item 1, above, for cautionary
information with respect to such forward-looking statements.
Hammons v. Alcan Aluminum Corp. et al
On March 5, 1996, a class action complaint was filed against
Kaiser, Alcan Aluminum Corp., Aluminum Company of America,
Alumax, Inc, Reynolds Metal Company, and the Aluminum Association
in the Superior Court of California for the County of Los
Angeles, alleging that the defendants conspired, in violation of
the California Cartwright Act (Bus. & Prof. Code Section16720 &
16750), in conjunction with a Memorandum of Understanding ("MOU")
entered into in 1994 by representatives of Australia, Canada, the
European Union, Norway, the Russian Federation and the United
States, to restrict the production of primary aluminum resulting
in rises in prices for primary aluminum and aluminum products.
The complaint sought certification of a class consisting of
persons who at any time between January 1, 1994, and the date of
the complaint purchased aluminum or aluminum products
manufactured by one or more of the defendants and estimated
damages sustained by the class to be $4.4 billion during the year
1994, before trebling. On July 11, 1996, the United States
District Court granted summary judgment in favor of Kaiser and
other defendants and dismissed the complaint as to all
defendants. On July 18, 1996, the plaintiff filed a notice of
appeal to the United States Court of Appeals for the Ninth
Circuit. On December 11, 1997, the United States Court of
Appeals for the Ninth Circuit affirmed the decision of the
District Court. On December 23, 1997, the plaintiff filed a
petition for rehearing en banc, which was denied May 4, 1998. 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. The plaintiff
subsequently requested reconsideration of its petition which was
also denied.
Asbestos-related Litigation
The Company 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 the Company or exposure to
products containing asbestos produced or sold by the Company.
The lawsuits generally relate to products the Company has not
manufactured for at least 20 years. For additional information,
see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Commitments and Contingencies." The
portion of Note 10 of Notes to Consolidated Financial Statements
under the heading "Asbestos Contingencies" is incorporated herein
by reference.
ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
Labor Matters
In connection with the USWA strike and subsequent lock-out by the
Company, certain allegations of unfair labor practices ("ULPs")
have been filed with the National Labor Relations Board by the
USWA and its members. The Company has responded to all such
allegations and believes that they are without merit. If the
allegations were sustained, the Company 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 impact on the Company's consolidated financial position,
results of operations, or liquidity.
Other Matters
Various other lawsuits and claims are pending against the
Company. 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 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of the
Company during the fourth quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
There is no established public trading market for the Company's
common stock, which is held solely by Kaiser. The information in
Note 5 of Notes to Consolidated Financial Statements under the
heading "Loan Covenants and Restrictions" at page 34 of
this Report is incorporated herein by reference. The Company
has not paid any dividends on its common stock during the two
most recent fiscal years.
The Indentures and the Credit Agreement (Exhibits 4.1 through
4.28 to this Report) contain restrictions on the ability of the
Company to pay dividends on or make distributions on account of
the Company's common stock and restrictions on the ability of the
Company's subsidiaries to transfer funds to the Company in the
form of cash dividends, loans or advances. Exhibits 4.1 through
4.28 to this Report, Note 5 of Notes to Consolidated Financial
Statements in this Report, and the information under the heading
"Financing Activities and Liquidity" at page 21 of this Report,
are incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the Company is incorporated herein by
reference to the table at page 1 of this Report, to the table at
pages 15 - 16 of this Report, to the discussion under the heading
"Results of Operations" at pages 18 - 20 of this Report, to Note
1 of Notes to Consolidated Financial Statements in this Report,
and to pages 53 - 54 of this Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company operates in all principal aspects of the aluminum
industry through the following business segments: Bauxite and
alumina, Primary aluminum, Flat-rolled products and Engineered
products. The Company uses a portion of its bauxite, alumina,
and primary aluminum production for additional processing at
certain of its downstream facilities. Intersegment transfers are
valued at estimated market prices. The table below provides
selected operational and financial information on a consolidated
basis with respect to the Company for the years ended December
31, 1998, 1997, and 1996. This information is presented in a
different format from that used in prior years as a result of the
Company's adoption of Statement of Financial Accounting Standards
No.131 as of December 31, 1998. Prior year information has been
restated to conform to the Company's new presentation format. The
following data should be read in conjunction with the Company's
consolidated financial statements and the notes thereto,
contained elsewhere herein. See Note 12 of Notes to Consolidated
Financial Statements for further information regarding segments.
(All references to tons refer to metric tons of 2,204.6 pounds.)
Year Ended December 31,
----------------------------------------------
(In millions of dollars, except shipments and prices) 1998 1997 1996
----------------------------------------------------------------------------------------------------------
Shipments: (000 tons)
Alumina
Third Party 2,250.0 1,929.8 2,073.7
Intersegment 750.7 968.0 912.4
-------------- -------------- --------------
Total Alumina 3,000.7 2,897.8 2,986.1
-------------- -------------- --------------
Primary Aluminum
Third Party 263.2 327.9 355.6
Intersegment 162.8 164.2 128.3
-------------- -------------- --------------
Total Primary Aluminum 426.0 492.1 483.9
-------------- -------------- --------------
Flat-Rolled Products 235.6 247.9 204.8
-------------- -------------- --------------
Engineered Products 169.4 152.1 122.3
-------------- -------------- --------------
Average Realized Third Party Sales Price: (1)
Alumina (per ton) $ 197 $ 198 $ 195
Primary Aluminum (per pound) $ 0.71 $ 0.75 $ 0.69
Net Sales:
Bauxite and Alumina
Third Party (includes net sales of bauxite) $ 472.7 $ 411.7 $ 431.0
Intersegment 135.8 201.7 194.1
-------------- -------------- --------------
Total Bauxite & Alumina 608.5 613.4 625.1
-------------- -------------- --------------
Primary Aluminum
Third Party 409.8 543.4 538.3
Intersegment 233.5 273.8 217.4
-------------- -------------- --------------
Total Primary Aluminum 643.3 817.2 755.7
-------------- -------------- --------------
Flat-Rolled Products 714.6 743.3 626.0
Engineered Products 581.3 581.0 504.4
Minority Interests 78.0 93.8 90.8
Eliminations (369.3) (475.5) (411.5)
-------------- -------------- --------------
Total Net Sales $ 2,256.4 $ 2,373.2 $ 2,190.5
============== ============== ==============
Operating Income (Loss):
Bauxite & Alumina (2) $ 42.0 $ 54.2 $ 27.7
Primary Aluminum (2) 49.9 148.3 79.1
Flat-Rolled Products (2) (3) 70.8 28.2 35.3
Engineered Products (2) (3) 47.5 42.3 21.7
Micromill(TM) (4) (63.4) (24.5) (14.5)
Eliminations 8.9 (5.9) 8.3
Corporate (3) (64.7) (72.7) (57.5)
-------------- -------------- --------------
Total Operating Income $ 91.0 $ 169.9 $ 100.1
============== ============== ==============
Net Income $ 2.7 $ 52.1 $ 13.2
============== ============== ==============
Capital Expenditures $ 77.6 $ 128.5 $ 161.5
============== ============== ==============
(1) Average 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) Fourth quarter 1998 results for the Bauxite and alumina,
Primary aluminum, Flat-rolled products and Engineered
products segments included unfavorable strike-related
impacts of approximately $10.0, $24.0, $13.0, and $3.0,
respectively.
(3) Second quarter 1997 results included pre-tax charges of
$2.6, $12.5 and $4.6 related to restructuring of operations
for the Flat-rolled products, Engineered products and
Corporate segments, respectively.
(4) Fourth quarter 1998 results included a non-cash charge of
$45.0 related to impairment of the Company's Micromill
assets.
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 "Overview," "Results of
Operations," "Liquidity and Capital Resources" and "Other
Matters"). 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. 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.
OVERVIEW
Market-related Factors
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 the Company's hedging
strategies. Primary aluminum prices have historically been
subject to significant cyclical price fluctuations. See Notes 1
and 11 of Notes to Consolidated Financial Statements for a
discussion of the Company'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 1997,
the AMT Price remained in the $.75 to $.80 price range for the
first eleven months before declining to the low $.70 range in
December. The AMT Price for 1996 remained fairly stable,
generally in the $.70 to $.75 range, through June and then
declined during the second half of the year, reaching a low of
approximately $.65 per pound for October 1996, before recovering
late in the year.
Subsequent to December 31, 1998, the AMT Price has continued to
decline. At February 26, 1999, the AMT Price was approximately
$.58.
Labor Matters
Substantially all of the Company's hourly workforce at the
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 parties
did not reach an agreement prior to the expiration of the master
agreement and the USWA chose to strike. As previously announced,
in January 1999 the Company declined an offer by the USWA to have
the striking workers return to work at the five plants without a
new agreement. The Company 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
began. Based on operating results to date, the Company believes
that a significant business interruption will not occur.
The Company and the USWA 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.
As a result of the USWA strike, the Company temporarily curtailed
three out of a total of eleven potlines at its Mead and Tacoma,
Washington, aluminum smelters at September 30, 1998. The
curtailed potlines represent 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, the Company began restarting the two
curtailed potlines at its Mead smelter representing approximately
50,000 tons of the previously idle capacity. The Company has
also announced that it has completed preparations to restart
20,000 tons of idle capacity at its Tacoma smelter. However, the
timing for any restart of the Tacoma potline has yet to be
determined and will depend upon market conditions and other
factors. Costs associated with the preparation and restart of
the potlines at the Mead and Tacoma facilities are expected to
adversely affect the Company's first quarter results.
While the Company initially experienced an adverse strike-related
impact on its profitability in the fourth quarter of 1998, the
Company currently believes that its operations at the affected
facilities have been substantially stabilized and will be able to
run at, or near, full capacity, and that the incremental costs
associated with operating the affected plants during the dispute
were eliminated or substantially reduced as of January 1999
(excluding the impacts of the restart costs discussed above and
the effect of market factors such as the continued market-related
curtailment at the Tacoma smelter). However, no assurances can
be given that the Company's efforts to run the plants on a
sustained basis, without a significant business interruption or
material adverse impact on the Company's operating results, will
be successful.
Strategic Initiatives
The Company has previously disclosed that it set a 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 objective prior
to the end of the third quarter of 1998, when the impact of such
items as smelter operating levels, the USWA strike and foreign
currency changes are excluded from the analysis. Further, the
Company believes that it has implemented the steps that will
allow it to sustain the stated goal over the long term. The
Company remains committed to sustaining the full $120.0 million
improvement and to generating additional profit improvements in
future 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 devoted significant
efforts analyzing its existing asset portfolio with the intent of
focusing its efforts and capital in sectors of the industry that
are considered most 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"), a joint venture that designs, manufactures and sells
heavy duty aluminum wheels, the rationalization of certain of the
Company's engineered products operations and the Company's
investment to expand its capacity for heat treat flat-rolled
products at its Trentwood, Washington, rolling mill. The
restructuring activities resulted in the Company recording a net
pre-tax charge of $19.7 million in June 1997. See Notes 3 and 4
of Notes to Consolidated Financial Statements.
The portfolio analysis process also resulted in the Company's
fourth quarter 1998 decision to seek a strategic partner for
further development and deployment of the Company's Micromill
technology. While technological progress has been good,
management concluded that additional time and investment would be
required for success. Given the Company's other strategic
priorities, the Company believes that introducing added
commercial and financial resources is the appropriate course of
action for capturing the maximum long term value. This change in
strategic course required a different accounting treatment, and
the Company correspondingly recorded a $45.0 million impairment
charge to reduce the carrying value of the Micromill assets to
approximately $25.0 million.
Another area of emphasis has been a continuing focus on managing
the Company's legacy liabilities. One element of this process
has been actively pursuing claims in respect of insurance
coverage for certain incurred and future environmental costs.
During the fourth quarter of 1998, the Company received
recoveries totalling approximately $35.0 million related to
current and future claims against certain of its insurers.
Recoveries of $12.0 million were deemed to be allocable to
previously accrued (expensed) items and were reflected in
earnings during the fourth quarter of 1998. The remaining
recoveries were offset against increases in the total amount of
environmental reserves. 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. See Note 10 of Notes to Consolidated Financial
Statements.
Additional portfolio analysis and initiatives are continuing.
In early 1999, the Company's program to focus its efforts and
capital in sectors of the industry which it considers to be the
most attractive, and in which the Company believes it is well
positioned to capture value, has resulted in an agreement to sell
one joint venture interest and a separate agreement to purchase
another. As previously announced, in January 1999, the Company
signed a letter of intent to sell its 50% interest in AKW to its
joint venture partner. The transaction, which would result in the
Company recognizing a substantial gain, is currently expected to
close on or about March 31, 1999. However, as the transaction is
subject to negotiation of a definitive purchase agreement, no
assurances can be given that this transaction will be
consummated. Also, in February 1999, as previously announced,
the Company completed the acquisition of the remaining 45%
interest in Kaiser LaRoche Hydrate Partners, an alumina marketing
venture, from its joint venture partner for a cash purchase price
of approximately $10.0 million. See Note 14 of Notes to
Consolidated Financial Statements.
Valco Operating Level
During most of 1998, the Company's 90%-owned Volta Aluminium
Company Limited ("Valco") smelter in Ghana operated only one of
its five potlines, as compared to 1997, when Valco operated four
potlines. Each of Valco's potlines produces approximately 40,000
tons of primary aluminum per year. Valco received compensation
(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 impact 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. Based on
Valco's proposed 1999 power allocation from the VRA, Valco has
announced that it expects to operate three lines during 1999.
The decision to operate at that level was based on the power
allocation that Valco has received from the VRA as well as
consideration of market and other factors. As previously
announced, Valco has notified the VRA that it believes it had the
contractual rights 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 in the future. No assurances
can be given as to the success of these discussions.
RESULTS OF OPERATIONS
1998 AS COMPARED TO 1997
Summary - The Company reported net income of $2.7 million for
1998 compared to net income of $52.1 million for 1997. Net sales
in 1998 totaled $2,256.4 million compared to $2,373.2 million in
1997.
Net income for 1998 included the effect of certain non-recurring
items, including approximately $60.0 million of pre-tax
incremental expense and the earnings impact of lost volume
associated with a strike by members of the USWA (more fully
discussed above), a $45.0 million pre-tax non-cash charge to
reduce the carrying value of the Company's Micromill assets and
an $8.3 million non-cash tax benefit resulting from the
resolution of certain tax matters. Net income for 1997 included
the effect of two essentially offsetting non-recurring items: a
$19.7 million pre-tax restructuring charge and an approximate
$12.5 million non-cash tax benefit related to settlement of
certain tax matters.
Bauxite and Alumina - Third party net sales of alumina were up
16% in 1998 as compared to 1997 primarily due to a 17% increase
in third party shipments. The increase in 1998 third party
shipments (and offsetting decrease in 1998 intersegment
shipments) resulted from reduced shipments to Valco, due to the
production curtailment more fully discussed above and to a lesser
extent, 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 only
slightly as the allocated net gains from the Company's hedging
activities substantially 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 was essentially unchanged, excluding the
impact of the approximate $11.0 million of incremental strike-
related costs. The adverse impact of reduced intersegment
realized prices was essentially offset by improved operating
performance resulting from higher production as well as lower
energy costs.
Primary Aluminum - 1998 third party net sales of primary aluminum
were down 25% as compared to 1997 primarily as a result of a 20%
reduction in shipments, caused by the 1998 potline curtailments
at Valco and the Washington smelters. A 5% reduction in average
realized third party sales prices between 1998 and 1997
(reflecting lower market prices offset, in part, by allocated net
gains from the Company's hedging activities), also adversely
impacted third party net sales. Intersegment net sales were down
approximately 15% between 1998 and 1997. While intersegment
shipments were essentially unchanged from the prior year, average
realized prices dropped by 14% reflecting lower market prices for
primary aluminum.
Segment operating income in 1998 was down significantly from
1997. The operating income impact of the Valco potline
curtailments was partially mitigated by the compensation from the
VRA for two of the three curtailed potlines. In addition to the
impact of the one uncompensated potline curtailment at Valco,
1998 results were also negatively affected by the impact of the
potline curtailments at the Company's Washington smelters,
reduced average realized prices (primarily on intersegment
sales), and an adverse strike-related impact of approximately
$29.0 million.
Flat-Rolled Products - Net sales of flat-rolled products
decreased by 4% during 1998 as compared to 1997 as a 5% reduction
in product shipments was modestly offset by the price impact of
changes in product mix. The mix of product shipments in 1998
reflects a higher demand for heat treat products, primarily in
the first half of the year, offset by reduced can sheet shipments
and an increased level of tolling, all as compared to 1997.
Segment operating income increased significantly in 1998
primarily as a result of the increased demand for heat treat
products in the first half of 1998 and improved operating
efficiencies. Segment results for 1998 were particularly strong
in light of the unfavorable strike-related impact of
approximately $16.0 million. Segment results for 1997 included a
non-cash charge recorded in the second quarter of 1997 in
connection with restructuring activities.
Engineered Products - Net sales of engineered products were
relatively flat year to year. An 11% increase in product
shipments was effectively offset by market-related reductions in
product prices as well as by the price impact of changes in
product mix. The increase in year-over-year shipments is in part
due to the impact of the Company's ownership of the Bellwood
extrusion facility in Richmond, Virginia, for all of 1998 versus
only half of 1997. This was, in part, offset by a decline in
year-over-year sales, attributable to the AKW wheels joint
venture formation in May 1997 and reduced shipments caused by
labor difficulties at two major customers.
Segment operating income declined by approximately 6% in 1998 as
compared to 1997, excluding the 1997 pre-tax net charge related
to restructuring of operations and approximately $4.0 million of
adverse incremental strike-related impact in 1998, as a result of
the market impact of the previously mentioned labor difficulties
at two major customers and due to an overall softening in demand,
particularly in the second half of the year.
Eliminations - Eliminations of intersegment profit vary from
period to period depending on fluctuations in market prices as
well as the amount and timing of the affected segments'
production and sales.
Corporate and Other - Corporate operating expenses represent
corporate general and administrative expenses which are not
allocated to the Company's business segments. Excluding the 1997
pre-tax charge associated with the Company's restructuring of
operations, corporate expenses were lower in 1998 than in 1997
primarily as a result of lower consulting and other costs
associated with the Company's ongoing profit improvement program
and portfolio review initiatives.
1997 AS COMPARED TO 1996
Summary - The Company reported net income of $52.1 million for
1997 compared to net income of $13.2 million for 1996. Net
income for 1997 included the effect of two essentially offsetting
non-recurring items: a $19.7 million pre-tax restructuring and an
approximate $12.5 million non-cash tax benefit related to
settlement of certain tax matters. Net sales in 1997 totaled
$2,373.2 million compared to $2,190.5 million in 1996.
Bauxite and Alumina - Third party net sales of alumina in 1997
decreased by 4% as compared to 1996 as a 7% decline in third
party shipments more than offset a 2% increase in average
realized prices. Third party shipment volumes were down as
compared to 1996 as a result of the timing of shipments and a 6%
increase in intersegment transfers, primarily due to the
operation in 1997 of an additional one-half of a potline at Valco
over the 1996 operating level. Intersegment net sales increased
by approximately 4% between 1996 and 1997 as a result of the
previously mentioned increase in intersegment shipments offset by
a 2% decline in intersegment prices.
Segment operating income improved substantially in 1997 from
1996, despite the reduced level of shipments and certain
increased costs in part resulting from a slowdown at the
Company's 49%-owned Kaiser Jamaica Bauxite Company, prior to the
signing of a new labor contract in December 1997, primarily due
to lower overall operating costs.
Primary Aluminum - Third party net sales of primary aluminum were
up only slightly in 1997 as compared to 1996 as a 9% increase in
average realized prices was substantially offset by an 8% decline
in third party shipments. Intersegment net sales were up 26%
year-over-year as a result of a 28% increase in intersegment
shipments offset, in part by a 2% decline in intersegment prices.
The change in intersegment shipments of primary aluminum between
1996 and 1997 was attributable to increased requirements of the
flat-rolled and engineered products segments.
Segment operating income improved significantly in 1997 from 1996
as a result of the aforementioned volume and price effects as
well as reduced power, raw material and supply costs and improved
operating efficiencies. Segment operating income for 1997 also
included $10.3 million related to the settlement of certain
energy service contract issues.
Flat-Rolled Products - Net sales of flat-rolled products in 1997
increased by 19% over 1996 levels as a 21% increase in product
shipments was only slightly offset by the pricing impact of
changes in product mix. The increase in 1997 product shipments
over 1996 was primarily the result of the increased international
shipments of can sheet and increased shipments of heat treat
products reflecting in part, increased aerospace demand.
Segment operating income in 1997 declined as a result of a second
quarter pre-tax charge related to restructuring of operations
together with reduced profitability of international can sheet
sales.
Engineered Products - Net sales of engineered products increased
15% year-to-year as a 24% increase in product shipments was
partially offset by the price impact of changes in product mix.
The increase in 1997 shipments over 1996 levels was primarily the
result of the Company's June 1997 acquisition of the Bellwood
extrusion facility in Richmond, Virginia, offset, in part, by the
formation of AKW in May 1997.
Segment operating income improved substantially over 1996,
despite a second quarter 1997 pre-tax net charge related to
restructuring of operations, as a result of the aforementioned
volume and product mix effects along with improved operating
efficiencies.
Eliminations - Eliminations of intersegment profit vary from
period to period depending on fluctuations in market prices as
well as the amount and timing of the affected segments'
production and sales.
Corporate and Other - Corporate operating results for 1997
included a second quarter pre-tax charge associated with the
Company's restructuring of operations. Corporate operating
expenses for the year ended December 31, 1997, also include
consulting and other costs associated with the Company's ongoing
profit improvement program and portfolio review initiatives.
LIQUIDITY AND CAPITAL RESOURCES
See Note 5 of Notes to Consolidated Financial Statements for a
listing of the Company's indebtedness and information concerning
certain restrictive debt covenants.
Operating Activities
Cash provided by operating activities was $171.2, $45.6 and $22.9
million in 1998, 1997 and 1996, respectively. The improvement in
cash flows from operating activities between 1998 and 1997 was
due primarily to a reduced investment in working capital
(excluding cash), the receipt of $35.0 million of environmental
insurance recoveries and the impact of current year results
(excluding non-cash charges). The improvement in cash flows from
operating activities between 1996 and 1997 was primarily due to
higher earnings resulting from increased product prices and
increased sales of fabricated products partially offset by
increased investment in working capital.
Investing Activities
Total consolidated capital expenditures were $77.6, $128.5 and
$161.5 million in 1998, 1997 and 1996, respectively (of which
$7.2, $6.6 and $7.4 million were funded by the minority partners
in certain foreign joint ventures), and were made primarily to
improve production efficiency, reduce operating costs, expand
capacity at existing facilities and construct or acquire new
facilities. Total consolidated capital expenditures are
currently expected to be between $70 and $90 million per annum in
each of 1999 through 2001 (of which approximately 8% is expected
to be funded by the Company's minority partners in certain
foreign joint ventures). 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, the Company's ability to assure future cash flows
through hedging or other means, the Company's financial position
and other factors.
A substantial portion of the increase in capital expenditures in
1996 was attributable to the development and construction of the
Company's proprietary Micromill technology for the production of
can sheet and other sheet products from molten metal. During
1998, the Micromill facility, near Reno, Nevada, commenced
product shipments to customers, but the amount of such shipments
was nominal. As previously announced, in order to attempt to
capture the maximum long-term value and given other strategic
priorities, the Company has decided to seek a strategic partner
for the further development and deployment of the Micromill
technology. As more fully discussed in Note 3 of Notes to
Consolidated Financial Statements, this change in strategic
course required a different accounting treatment, and
accordingly, the Company recorded a $45.0 million non-cash charge
to reduce the carrying value of the Micromill assets. There can
be no assurances regarding whether the future development or
deployment of the Micromill technology will be successful.
Financing Activities and Liquidity
The Company has a credit agreement (as amended, the "Credit
Agreement") under which it is able to borrow by means of
revolving credit advances and letters of credit (up to $125.0
million) an aggregate amount equal to the lesser of $325.0
million or a borrowing base relating to eligible accounts
receivable and eligible inventory. The Credit Agreement, which
matures in August 2001, is guaranteed by Kaiser and by certain of
the Company's significant subsidiaries. The Credit Agreement
requires the Company to comply with certain financial covenants,
places significant restrictions on the Company and Kaiser, and is
secured by a substantial majority of the Company's and Kaiser's
assets. The Credit Agreement does not permit the Company or
Kaiser to pay any dividends on their common stock. The Company's
public indebtedness also includes various restrictions on the
Company and its subsidiaries and repurchase obligations upon a
Change of Control.
As of December 31, 1998, the Company's total consolidated
indebtedness was $963.0 million. No amounts were outstanding
under the revolving credit facility of the Credit Agreement. The
Company had $274.1 million of unused availability remaining under
the Credit Agreement at February 28, 1999, after allowances of
$50.9 million for outstanding letters of credit.
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 satisfy its working
capital and capital expenditure requirements for the next year.
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.
Commitments and Contingencies
The Company is subject to a number of environmental laws, to
fines or penalties assessed for alleged breaches of the
environmental laws, and to claims and litigation based upon such
laws. The Company currently is subject to a number of lawsuits
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 current evaluation of these and
other environmental matters, the Company has established
environmental accruals of $50.7 million at December 31, 1998.
The Company is also 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 the Company or exposure to
products containing asbestos produced or sold by the Company. The
lawsuits generally relate to products the Company has not sold
for at least 20 years. Based on past experience and reasonably
anticipated future activity, the Company has established a $186.2
million accrual for estimated asbestos-related costs for claims
filed and estimated to be filed through 2008, before
consideration of insurance recoveries. However, the Company
believes that substantial recoveries from insurance carriers are
probable. The Company reached this conclusion based on prior
insurance-related recoveries in respect of asbestos-related
claims, existing insurance policies and the advice of outside
counsel with respect to applicable insurance coverage law
relating to the terms and conditions of these policies.
Accordingly, the Company has recorded an estimated aggregate
insurance recovery of $152.5 million (determined on the same
basis as the asbestos-related cost accrual) at December 31, 1998.
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 these carriers will depend on the pace of
claims review and processing by such carriers and on the
resolution of any disputes regarding coverage under such policies
that may arise.
While uncertainties are inherent in the final outcome of these
matters and it is presently impossible to determine the actual
costs that ultimately may be incurred and insurance recoveries
that ultimately may be received, management currently believes
that the resolution of these uncertainties and the incurrence of
related costs, net of any related insurance recoveries, should
not have a material adverse effect on the Company's consolidated
financial position, results of operations, or liquidity.
In connection with the USWA strike and subsequent "lock-out" by
the Company, certain allegations of unfair labor practices
("ULPs") have been filed with the National Labor Relations Board
by the USWA and its members. The Company has responded to all
such allegations and believes that they are without merit. If
the allegations were sustained, the Company 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 impact on the Company's financial position,
results of operations, or liquidity.
See Note 10 of Notes to Consolidated Financial Statements for a
more detailed discussion of these contingencies and the factors
affecting management's beliefs. See also "Overview."
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. Total
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 million range. Approximately half of the year 2000
expenditures are expected to be made during 1999. 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. The Company has
established an internal goal of having all necessary system
changes in place and tested by mid-year 1999. The Company plans
to commit the necessary resources to meet this deadline.
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.
Recent Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income ("SFAS No. 130") as 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 Standards 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 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. The Company
is currently evaluating how and when to implement SFAS No. 133.
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
future periods as a result of SFAS No. 133. As discussed more
fully in Notes 1 and 11 of Notes to Consolidated Financial
Statements, the intent of the Company's hedging program 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. 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 transaction to which the hedge
relates. Pursuant to SFAS No. 130, the Company will reflect
changes in the fair value of its open hedging positions as an
increase or reduction in stockholders' equity through
comprehensive income. Under SFAS No. 130, 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 effect of SFAS No's. 130 and 133 will result in
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.
Income Tax Matters
The Company's net deferred income tax assets as of December 31,
1998, were $376.5 million, net of valuation allowances of $107.7
million. The Company believes a long-term view of profitability
is appropriate and has concluded that these net deferred income
tax assets will more likely than not be realized. See Note 6 of
Notes to Consolidated Financial Statements for a discussion of
these and other income tax matters.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
This section contains forward-looking statements that involve
risk and uncertainties. Actual results could differ materially
from those projected in these forward-looking statements.
As discussed more fully in Notes 1 and 11 of Notes to
Consolidated Financial Statements, the Company utilizes hedging
transactions to lock-in a specified price or range of prices for
certain products which it sells or consumes and to mitigate the
Company's exposure to changes in foreign currency exchange rates.
The following sets forth the impact on future earnings of adverse
market changes related to the Company's hedging positions with
respect to commodity and foreign exchange contracts described
more fully in Note 11 of Notes to Consolidated Financial
Statements. The impact of market changes on energy derivative
activities is generally not significant.
Alumina and Primary Aluminum
Alumina and primary aluminum production in excess of internal
requirements is sold in domestic and international markets,
exposing the Company to commodity price risks. The Company's
hedging transactions are intended to provide price risk
management in respect of the net exposure of 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 price of primary
aluminum. On average, before consideration of hedging
activities, any fixed price contracts with fabricated aluminum
products customers, variation in production and shipment levels,
and timing issues related to price changes the Company estimates
that each $.01 increase (decrease) in the market price per price-
equivalent pound of primary aluminum increases (decreases) the
Company's annual pre-tax earnings by approximately $15 million.
Based on the December 31, 1998 London Metal Exchange cash price
for primary aluminum of approximately 56 cents per pound, the
Company estimates that it would realize approximately $100
million of net aggregate pre-tax benefits from its hedging
positions and fixed price customer contracts during 1999 and
2000. The Company also estimates that a hypothetical 10 cent
decrease from the above stated year-end 1998 price level would
result in additional net aggregate pre-tax benefits of
approximately $150 million being realized during 1999 and 2000
related to the Company's hedging positions and fixed price
customer contracts. Both amounts are versus what the Company's
results would have been without the derivative commodity
contracts and fixed price customer contracts discussed above.
Conversely, the Company estimates that a hypothetical 10 cent
increase from the above stated year-end 1998 price would result
in a net aggregate reduction to pre-tax earnings of approximately
$20 million being realized during 1999 and 2000 related to the
Company's hedging positions and fixed price customer contracts.
It should be noted, however, that, since the hedging positions
and fixed price customer contracts lock-in a specified price or
range of prices, any increase or decrease in earnings
attributable to the Company's hedging positions or fixed price
customer contracts would be significantly offset by a decrease or
increase in the value of the hedged transactions.
The foregoing estimated earnings impact on 2000 excludes the
possible effect on pre-tax income of Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which must be adopted by the
Company as of January 1, 2000. The foregoing estimate of a
hypothetical 10 cent-per-pound increase in primary aluminum
prices on the Company's hedging positions and fixed price
customer contracts excludes the cash impact of possible margin
deposit requirements. The Company estimates that its cash
exposure related to margin deposit requirements on such
positions, if such a hypothetical price increase were to occur,
would not have a material adverse impact on the Company's current
liquidity or financial position.
Foreign Currency
The Company enters into forward exchange contracts to hedge
material cash commitments for foreign currencies. The Company's
primary foreign exchange exposure is related to the Company's
Australian Dollar (A$) commitments in respect of activities
associated with its 28.3%-owned affiliate, Queensland Alumina
Limited. The Company estimates that, before consideration of any
hedging activities, a US $0.01 increase (decrease) in the value
of the A$ results in an approximate $1-2 million (decrease)
increase in the Company's annual pre-tax earnings.
At December 31, 1998, the Company held derivative foreign
currency contracts hedging approximately 75% and 50% of its A$
currency commitments for 1999 and 2000, respectively. The
Company estimates that a hypothetical 10% reduction in the A$
exchange rate would result in the Company recognizing a net
aggregate pre-tax cost of approximately $10-15 million during
1999 and 2000 related to the Company's foreign currency hedging
positions. This cost is versus what the Company's results would
have been without the Company's derivative foreign currency
contracts. It should be noted, however, that, since the hedging
positions lock-in specified rates, any increase or decrease
in earnings attributable to currency hedging instruments would be
offset by a corresponding decrease or increase in the value of
the hedged commitments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Report of Independent Public Accountants................... 25
Consolidated Balance Sheets................................ 26
Statements of Consolidated Income (Loss)................... 27
Statements of Consolidated Cash Flows...................... 28
Notes to Consolidated Financial Statements................. 29
Quarterly Financial Data (Unaudited)....................... 52
Five-Year Financial Data................................... 53
Financial statement schedules are inapplicable or the required
information is included in the Consolidated Financial Statements
or the Notes thereto.