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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, 1997
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:(510)
462-1122
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Cumulative Convertible
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 17, 1998, 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 17, 1998, non-affiliates of the
registrant held 513,977 shares of Cumulative (1985 Series A)
Preference Stock and 59,889 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 $28.7 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 50 - 54 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
TABLE OF CONTENTS
Page
----
PART I 1
ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 10
ITEM 3. LEGAL PROCEEDINGS 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
PART II 12
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 12
ITEM 6. SELECTED FINANCIAL DATA 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 48
PART III 48
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
48
ITEM 11. EXECUTIVE COMPENSATION 48
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
48
PART IV 48
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K 48
SIGNATURES 49
INDEX OF EXHIBITS 50
EXHIBIT 21 SUBSIDIARIES 55
PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K 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 - Profit Improvement Program," " -
Business Development in Strategic Areas," " - Production
Operations," " - Competition," " - Research and Development," and
" - Environmental Matters," and Item 3. "Legal Proceedings").
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 1997, the Company produced approximately 2,945,000
tons* of alumina, of which approximately 66% was sold to third
parties, and produced approximately 493,000 tons of primary
aluminum, of which approximately 67% was sold to third parties.
The Company is also a major domestic supplier of fabricated
aluminum products. In 1997, the Company shipped approximately
400,000 tons of fabricated aluminum products to third parties,
which accounted for approximately 5% of total United States
domestic shipments. Note 12 of the Notes to Consolidated
Financial Statements is incorporated herein by reference.
The Company's operations are conducted through the Company's
business units which compete throughout the aluminum industry.
The following table sets forth total shipments and intracompany
transfers of the Company's alumina, primary aluminum, and
fabricated aluminum operations:
Year Ended December 31,
----------------------------------------------
1997 1996 1995
----------------------------------------------
(in thousands of tons)
ALUMINA:
Shipments to Third Parties 1,929.8 2,073.7 2,040.1
Intracompany Transfers 968.0 912.4 800.6
PRIMARY ALUMINUM:
Shipments to Third Parties 327.9 355.6 271.7
Intracompany Transfers 164.2 128.3 217.4
FABRICATED ALUMINUM PRODUCTS:
Shipments to Third Parties 400.0 327.1 368.2
* All references to tons in this Report refer to metric tons of
2,204.6 pounds.
ITEM 1. BUSINESS (CONTINUED)
Profit Improvement Program
In October 1996, the Company established a goal of achieving $120
million per year 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. At the end of 1997, the Company had
achieved approximately half of the desired profit improvement.
This program is being effected through reductions in production
costs, decreases in corporate general and administrative
expenses, and enhancements to product mix and volume throughput.
There can be no assurance that the initiative will result in the
desired cost reductions and other profit improvements. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Recent Events and Developments" and Note
4 of the Notes to Consolidated Financial Statements.
Business Development in Strategic Areas
The Company's strategic objectives include both improving the
financial performance of its existing facilities (see "-Profit
Improvement Program") and implementing modifications to its
existing portfolio of businesses and assets in an effort to focus
its business activities in areas which hold the best potential
for improving the Company's financial performance. The Company
is actively pursuing opportunities to increase its participation
in businesses and assets in targeted areas of its portfolio
consistent with its strategic objectives, by internal investment
and by acquisition, both domestically and internationally, by
using its technical expertise and capital to form joint ventures
or to acquire equity in aluminum-related facilities. Recent
examples of such activities include the formation with Accuride
Corporation of a joint venture to design, manufacture and market
heavy duty aluminum wheels for the commercial transportation
industry, and the acquisition of an aluminum extrusion plant in
Richmond, Virginia, from Reynolds Metals Company, in the second
quarter of 1997. See "-Production Operations."
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 its 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 for periods of up to three months. 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 effectively lock-in or fix the price that the Company
will receive for its shipments. The Company also uses option
contracts (i) to establish a minimum price for its product
shipments, (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 Notes 1 and 11 of
the Notes to Consolidated Financial Statements.
ITEM 1. BUSINESS (CONTINUED)
Production Operations
- Alumina
-------
The following table lists the Company's bauxite mining and
alumina refining facilities as of December 31, 1997:
Annual
Production Total
Capacity Annual
Company Available to Production
Activity Facility Location Ownership the Company Capacity
---------- -------------- -------------- -------------- ---------------- --------------
(tons) (tons)
Bauxite Mining KJBC(1) Jamaica 49% 4,500,000 4,500,000
Alpart(2) Jamaica 65% 2,275,000 3,500,000
-------------- --------------
6,775,000 8,000,000
============== ==============
Alumina Refining Gramercy Louisiana 100% 1,050,000 1,050,000
Alpart Jamaica 65% 942,500 1,450,000
QAL Australia 28.3% 973,500 3,440,000
-------------- --------------
2,966,000 5,940,000
============== ==============
-------------
(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.
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.
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 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 June 1997, Alpart and JAMALCO, a joint venture between
affiliates of Aluminum Company of America and the government of
Jamaica, jointly announced that they had signed a non-binding
letter of intent agreeing to consolidate their bauxite mining
operations in Jamaica, with the objective of optimizing operating
and capital costs. The transaction is subject to various
conditions, including the negotiation of definitive agreements,
third party consents, and board approvals. No assurance can be
given that the conditions will be satisfied or that the
transaction will be consummated.
ITEM 1. BUSINESS (CONTINUED)
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,
1997) of certain debt of QAL, as well as other QAL costs and
expenses, including bauxite shipping costs.
The Company's principal customers for bauxite and alumina consist
of other aluminum producers that purchase bauxite and
reduction-grade alumina, trading intermediaries who resell raw
materials to end-users, and users of chemical-grade alumina. All
of the Company's third-party sales of bauxite in 1997 were made
to two customers, the largest of which accounted for
approximately 91% of such sales. The Company also sold alumina
in 1997 to 29 customers, the largest and top five of which
accounted for approximately 24% and 85% of such sales,
respectively. See "- Competition." The Company believes that
among alumina producers it 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 "- Sensitivity to Prices and Hedging
Programs."
- Primary Aluminum Products
-------------------------
The following table lists the Company's primary aluminum smelting
facilities as of December 31, 1997:
Total 1997
Annual Average
Company Rated Operating
Location Facility Ownership the Company Capacity Rate
-------------------- ------------- ------------- ------------- ------------- -------------
(tons) (tons)
Domestic
Washington Mead 100% 200,000 200,000 108%
Washington Tacoma 100% 73,000 73,000 103%
------------- -------------
- -
Subtotal 273,000 273,000
------------- -------------
International
Ghana Valco 90% 180,000 200,000 76%
Wales, United Kingdom Anglesey 49% 55,000 112,000 118%
------------- -------------
Subtotal 235,000 312,000
------------- -------------
Total 508,000 585,000
============= =============
The Mead facility uses pre-bake technology and produces primary
aluminum. Approximately 64% of Mead's 1997 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 Company is modernizing and expanding the carbon baking
furnace at its Mead smelter at an estimated cost of approximately
$54.5 million. The project will improve the reliability of the
carbon baking operations, increase productivity, enhance safety,
and improve 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, has been completed and is in
operation. The remaining modernization work is expected to be
completed in late 1998, when an existing furnace will be rebuilt.
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.
Electric power represents an important production cost for the
Company at its aluminum smelters. In 1995, the Company
successfully restructured electric power purchase agreements for
its facilities in the Pacific Northwest, which resulted in
significantly lower electric power costs in 1996 for the Mead and
Tacoma, Washington, smelters compared to 1995 electric power
costs. The Company continued to benefit from savings in electric
power costs at those facilities in 1997 and expects to continue
to benefit from such savings in future years.
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. Power for the Valco smelter
is supplied under an agreement with the Volta River Authority
(the "VRA") which expires in 2017. The agreement indexes
two-thirds of the price of the contract quantity of power to the
market price of primary aluminum. The agreement also provides
for a review and adjustment of the base power rate and the price
index every five years. The most recent review was completed in
April 1994 for the 1994-1998 period.
Effective January 1, 1998, the VRA reduced the allocation of
electric power to the Valco smelter. Kaiser announced that, due
to the reduced power allocation, Valco expected to operate three
potlines in 1998 compared to the four potlines which were
operated throughout 1997. During February 1998, Valco and the
VRA reached an agreement whereby Valco agreed to receive
compensation in lieu of the power necessary to operate one of its
three remaining operating potlines. Compensation under the
agreement is expected to substantially offset the financial
impact of the curtailment of that potline. As a result of the
curtailment, Valco said that it expected to operate two of its
five potlines after February 25, 1998. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Recent Events and Developments."
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. Power for the
Anglesey aluminum smelter is supplied under an agreement which
expires in 2001.
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, and a computerized process control and energy management
system - 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 is actively engaged 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."
During October 1997, a joint decision was made by a subsidiary of
the Company and its joint venture partner to terminate and
dissolve the Sino-foreign aluminum joint venture formed in 1995.
In January 1998, the Company's subsidiary reached an agreement to
sell its interests in the venture to its partner. The terms of
the agreement are subject to certain governmental approvals by
officials of the People's Republic of China.
ITEM 1. BUSINESS (CONTINUED)
The Company's principal primary aluminum customers consist of
large trading intermediaries and metal brokers, who resell
primary aluminum to fabricated product manufacturers, and large
and small international aluminum fabricators. In 1997, the
Company sold its primary aluminum production not utilized for
internal purposes to approximately 52 customers, the largest and
top five of which accounted for approximately 13% and 47% 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.
- 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. The Company's fabricated products compete
with those of numerous domestic and foreign producers and with
products made of steel, copper, glass, plastic, and other
materials. Product quality, price, and availability are the
principal competitive factors in the market for fabricated
aluminum products. The Company has focused its fabricated
products operations on selected products in which it has
production expertise, high-quality capability, and geographic and
other competitive advantages.
Fabricated aluminum products are manufactured by two business
units - flat-rolled products and engineered products. The
products include heat-treated products; body, lid, and tab stock
for beverage containers; sheet and plate products; screw machine
stock; redraw rod; forging stock; truck wheels and hubs; air bag
canisters; engine manifolds; and other castings, forgings and
extruded products, which are manufactured at plants located in
principal marketing areas of the United States and Canada. The
aluminum utilized in the Company's fabricated products operations
is comprised of primary aluminum, obtained both internally and
from third parties, and scrap metal purchased from third parties.
Flat-Rolled Products - The flat-rolled products business unit
operates the Trentwood, Washington, rolling mill and the
Micromill(TM) facility, near Reno, Nevada. The Trentwood
facility accounted for approximately 62% of the Company's 1997
fabricated aluminum products shipments. The business unit
supplies the aerospace and general engineering markets (producing
heat-treat 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 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. The
Company is implementing a plan to expand its annual production
capacity of heat-treated flat-rolled products at the Trentwood
facility by approximately one-third over 1996 levels, most of
which was achieved in 1997. Implementation of the plan also will
enable the Company to improve the reliability of its heat-treated
operations, enhance the quality of its heat-treat products, and
improve Trentwood's operating efficiency. The project is
estimated to cost approximately $22.0 million and is expected to
be completed in late 1998. Global sales of the Company's heat-
treat products have increased significantly over the last
several years and are made primarily to the aerospace and general
engineering markets, which have been experiencing growth in
demand. In 1997, 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 17% 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. In recent years the Company has made
significant capital expenditures at Trentwood in rolling
technology and process control to improve the metal integrity,
shape and gauge control of its products. The Company believes
that such improvements have enhanced the quality of its products
for the beverage container industry and the capacity and
efficiency of its manufacturing operations. The Company believes
that it is one of the highest quality producers of aluminum
beverage can stock in the world. In 1997, the business unit had
37 domestic and foreign can stock customers. The largest and top
five of such customers accounted for approximately 15% and 27%,
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 sales offices
in England and Japan, and by independent sales agents in Europe,
Asia and Latin America.
The first Micromill(TM) facility, constructed in 1996 as a
demonstration and production facility, was in a start-up mode
during 1997. Micromill(TM) technology is based on a proprietary
thin-strip, high-speed, continuous-belt casting technique linked
directly to hot and cold rolling mills. Assuming the successful
implementation and commercialization of the Micromill(TM)
technology, the capital and conversion costs of Micromill(TM)
facilities are expected to be significantly lower than
conventional rolling mills. The Company is continuing its
efforts to implement the Micromill(TM) technology on a full-scale
basis. The facility is currently shipping qualification
quantities of product to various customers. However, the
Micromill(TM) 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.
Engineered Products - The engineered products business unit
maintains its headquarters and a sales and engineering office in
Southfield, Michigan, which works with car makers and other
customers, the Company's Center for Technology ("CFT," see
"-Research and Development"), and plant personnel to create new
automotive component designs and to improve existing products.
The business unit operates soft-alloy and hard-alloy extrusion
facilities and engineered component (forging and casting)
facilities in the United States and in Canada. Soft-alloy
extrusion facilities are located in Los Angeles, California;
Santa Fe Springs, 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, acquired in mid-1997
by Kaiser Bellwood Corporation, a wholly-owned subsidiary of the
Company, 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 circular
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,
which produce screw machine stock, redraw rod, forging stock, and
billet. 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. 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 engineered products business unit operates forging facilities
at Oxnard, California, and Greenwood, South Carolina; a machine
shop at Greenwood, South Carolina; and a casting facility in
Canton, Ohio; and participates in a joint venture with Accuride
Corporation, located in Erie, Pennsylvania, and Cuyahoga Falls,
Ohio, that designs, manufactures and markets aluminum wheels for
the commercial transportation industry. The business unit is one
of the largest producers of aluminum forgings in the United
States and is a major supplier of high-quality forged parts to
customers in the automotive, commercial vehicle and ordnance
markets. The high strength-to-weight properties of forged and
cast aluminum make it particularly well-suited for automotive
applications. The business unit's casting facility manufactures
aluminum engine manifolds for the automobile, truck and marine
markets.
In 1997, the engineered products business unit had 641 customers,
the largest and top five of which accounted for approximately 8%
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.
ITEM 1. BUSINESS (CONTINUED)
Competition
Aluminum competes in many markets with steel, copper, glass,
plastic, and other materials. In recent years, plastic
containers have increased and glass containers have decreased
their respective shares of the soft drink sector of the beverage
container market. 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.
Within the aluminum business, 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. The Company's principal competitors in the sale of
alumina include Alcoa Alumina & Chemicals L.L.C., Billiton
Marketing and Trading BV, and Alcan Aluminium Limited. The
Company competes with most aluminum producers in the sale of
primary aluminum.
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. The Company also competes with a wide range of
domestic and international fabricators in the sale of fabricated
aluminum products. 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 its customers, including
intermediaries, would not have a material adverse effect on its
financial condition or results of operations.
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 Washington. Net expenditures for company-sponsored research
and development activities were $19.7 million in 1997, $20.5
million in 1996, and $18.5 million in 1995. The Company's
research staff totaled 133 at December 31, 1997. The Company
estimates that research and development net expenditures will be
approximately $11.6 million in 1998.
CFT performs research and development across a range of aluminum
process and product technologies to support the Company's
business units and new business opportunities. It also
selectively offers technical services to third parties.
Significant efforts are directed at product and process
technology for the aircraft, automotive, and can sheet markets,
and aluminum reduction cell models which are applied to improving
cell designs and operating conditions. 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.
CFT and the Reno, Nevada, facility are continuing their efforts
to implement the Micromill(TM) technology for the production of can
sheet and other sheet products. See "-Production Operations -
Fabricated Aluminum Products - Flat-Rolled Products."
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,
Jamaica, Sweden, Germany, Russia, India, Australia, Korea, New
Zealand, Ghana, United Arab Emirates, Bahrain, Venezuela, Brazil,
and the United Kingdom. The Company has technical services
contracts with smelters in Wales, Africa, Europe, the Middle
East, and India.
ITEM 1. BUSINESS (CONTINUED)
Employees
During 1997, the Company employed an average of 9,553 persons,
compared with an average of 9,567 employees in 1996, and 9,546
employees in 1995. At December 31, 1997, the Company's work
force was 9,597, including a domestic work force of 6,081, of
whom 4,118 were paid at an hourly rate. Most hourly paid
domestic employees are covered by collective bargaining
agreements with various labor unions. Approximately 72% of such
employees are covered by a master agreement (the "Labor
Contract") with the United Steelworkers of America which expires
September 30, 1998. The Labor Contract covers the Company's
plants in Spokane (Trentwood and Mead) and Tacoma, Washington;
Gramercy, Louisiana; and Newark, Ohio. The Company anticipates
that the Labor Contract will be renegotiated during 1998.
The Labor Contract provides for base wages at all covered plants.
In addition, workers covered by the Labor Contract may receive
quarterly or more frequent bonus payments based on various
indices of profitability, productivity, efficiency, and other
aspects of specific plant or departmental performance, as well
as, in certain cases, the price of alumina or primary aluminum.
Pursuant to the Labor Contract, base wage rates were raised
effective November 3, 1997, and an amount in respect of the cost
of living adjustment under the previous master agreement has been
phased into base wages. In the first half of 1998, the Company
will acquire up to $4,000 per employee (80 shares) of preference
stock held in a stock plan for the benefit of certain employees
covered by the Labor Contract. The Company will make comparable
acquisitions of preference stock held for the benefit of certain
salaried employees.
Management considers the Company's employee relations to be
satisfactory.
Environmental Matters
The Company is 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 is 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"). See "Legal Proceedings."
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.
ITEM 1. BUSINESS (CONTINUED)
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, 1997,
the balance of such accruals, which are primarily included in
Long-term liabilities, was $29.7 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 1998 through
2002 and an aggregate of approximately $8.0 million thereafter.
Cash expenditures of $5.6 million in 1997, $8.8 million in 1996,
and $4.5 million in 1995 were charged to previously established
accruals relating to environmental costs. Approximately $5.1
million is expected to be charged to such accruals in 1998.
As additional facts are developed and definitive remediation
plans and necessary regulatory approvals for implementation of
remediation are established or alternative technologies are
developed, changes in these and other factors may result in
actual costs exceeding the current environmental accruals. The
Company believes that it is reasonably possible that costs
associated with these environmental matters may exceed current
accruals by amounts that could range, in the aggregate, up to an
estimated $18.0 million. 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. In addition to cash expenditures
charged to environmental accruals, environmental capital spending
was $6.8 million in 1997, $18.4 million in 1996, and $9.2 million
in 1995. Annual operating costs for pollution control, not
including corporate overhead or depreciation, were approximately
$27.5 million in 1997, $30.1 million in 1996, and $26.0 million
in 1995. Legislative, regulatory and economic uncertainties make
it difficult to project future spending for these purposes.
However, the Company currently anticipates that in the 1998-1999
period, environmental capital spending will be within the range
of approximately $5.0 million to $7.0 million per year, and
operating costs for pollution control will be approximately $35.0
million per year.
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 -
Environmental and Asbestos Contingencies."
The portion of Note 10 of the Notes to Consolidated Financial
Statements under the headings "Environmental Contingencies" and
"Asbestos Contingencies" is incorporated herein by reference.
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 "Business -
The Company - Production 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(TM)). See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Financing
Activities and Liquidity" and Note 5 of the 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.
Aberdeen Pesticide Dumps Site Matter
The Aberdeen Pesticide Dumps Site, listed on the Superfund
National Priorities List, is composed of five separate sites
around the town of Aberdeen, North Carolina (collectively, the
"Sites"). The Sites are of concern to the United States
Environmental Protection Agency (the "EPA") because of their past
use as either pesticide formulation facilities or pesticide
disposal areas from approximately the mid-1930's through the
late-1980's. The EPA issued unilateral Administrative Orders
under Section 106(a) of CERCLA ordering the respondents,
including the Company, to perform the soil remedial design and
remedial action and groundwater remediation for three of the
Sites. In March 1997, nine of the corporate respondents,
including the Company, entered into a Settlement Agreement and
Participation Agreement which allocates one hundred percent of
all costs incurred or to be incurred at each of the Sites.
Thereafter, the nine respondents entered into a Partial Consent
Decree with the United States Department of Justice (the "DOJ")
and the EPA regarding the work to be performed by the respondents
and their responsibility for past and future response costs
incurred by the United States. This Partial Consent Decree was
lodged with the United States District Court in December 1997.
Based on current estimates of future costs, the Company believes
that its aggregate financial exposure at these Sites is less that
$2.0 million.
United States of America v. Kaiser Aluminum & Chemical
Corporation
In February 1989, a civil action was filed by the DOJ at the
request of the EPA against the Company in the United States
District Court alleging that emissions from certain stacks at the
Company's Trentwood facility in Spokane, Washington,
intermittently violated the opacity standard contained in the
Washington State Implementation Plan ("SIP"), approved by the EPA
under the federal Clean Air Act. The Company and the EPA,
without adjudication of any issue of fact or law, and without any
admission of the violations alleged in the underlying complaint,
have entered into a Consent Decree, which was approved by a
Consent Order entered by the United States District Court for the
Eastern District of Washington in January 1996. As approved, the
Consent Decree settles the underlying disputes and requires the
Company to (i) pay a $.5 million civil penalty (which penalty has
been paid), (ii) complete a program of plant improvements and
operational changes that began in 1990 at its Trentwood facility,
including the installation of an emission control system to
capture particulate emissions from certain furnaces, and (iii)
achieve and maintain furnace compliance with the opacity standard
in the Washington SIP. The Company has completed the
installation of the emission control system. If the relevant
furnaces continue to show compliance through July 15, 1998, the
Company intends to request termination of the Consent Decree.
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 Section 16720 &
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 seeks 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 estimates
damages sustained by the class to be $4.4 billion during the year
1994, before trebling. Plaintiff's counsel has estimated damages
to be $4.4 billion per year for each of the two years the MOU was
active, which when trebled equals $26.4 billion. On April 2,
1996, the case was removed to the United States District Court
for the Central District of California. On July 11, 1996, the
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.
ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
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. Subsequent to December 31,
1997, the Company reached agreements settling approximately
25,000 of the pending asbestos-related claims. Also, subsequent
to year-end 1997, the Company reached agreements on asbestos-
related coverage matters with two insurance carriers under
which the Company collected a total of approximately $17.5 million.
For additional information, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -
Environmental and Asbestos Contingencies." The portion of Note
10 of the Notes to Consolidated Financial Statements under the
heading "Asbestos Contingencies" is incorporated herein by
reference.
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 1997.
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 the Notes to Consolidated Financial Statements under
the heading "Loan Covenants and Restrictions" at pages 28 - 29 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
4.24 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
4.24 to this Report, Note 5 of the Notes to Consolidated
Financial Statements at pages 28 - 29 of this Report, and the
information under the heading "Financing Activities and
Liquidity" at page 17 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
page 13 of this Report, to the discussion under the heading
"Results of Operations" at pages 15 - 16 of this Report, to Note
1 of the Notes to Consolidated Financial Statements at pages 24 -
25 of this Report, and to pages 45 - 46 of this Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company operates in two business segments: bauxite and
alumina, and aluminum processing. As an integrated aluminum
producer, the Company uses a portion of its bauxite, alumina, and
primary aluminum production for additional processing at certain
of its facilities. Intracompany shipments and sales are excluded
from the information set forth in the table below. The table
below provides selected operational and financial information on
a consolidated basis with respect to the Company for the years
ended December 31, 1997, 1996, and 1995. The following should be
read in conjunction with the Company's consolidated financial
statements and the notes thereto, contained elsewhere herein.
Year Ended December 31,
----------------------------------------------
(In millions of dollars, except shipments and prices) 1997 1996 1995
----------------------------------------------------------------------------------------------------------
Shipments: (000 tons) (1)
Alumina 1,929.8 2,073.7 2,040.1
Aluminum products:
Primary aluminum 327.9 355.6 271.7
Fabricated aluminum products 400.0 327.1 368.2
-------------- -------------- --------------
Total aluminum products 727.9 682.7 639.9
============== ============== ==============
Average realized sales price:
Alumina (per ton) $ 198 $ 195 $ 208
Primary aluminum (per pound) .75 .69 .81
Net sales:
Bauxite and alumina:
Alumina $ 382.1 $ 404.1 $ 424.8
Other (2)(3) 106.5 103.9 89.4
-------------- -------------- --------------
Total bauxite and alumina 488.6 508.0 514.2
-------------- -------------- --------------
Aluminum processing:
Primary aluminum 543.4 538.3 488.0
Fabricated aluminum products 1,324.3 1,130.4 1,218.6
Other (3) 16.9 13.8 17.0
-------------- -------------- --------------
Total aluminum processing 1,884.6 1,682.5 1,723.6
-------------- -------------- --------------
Total net sales $ 2,373.2 $ 2,190.5 $ 2,237.8
============== ============== ==============
Operating income (loss):
Bauxite and alumina $ 20.0 $ 1.1 $ 54.0
Aluminum processing (4) 222.6 156.5 238.9
Corporate (4) (72.7) (57.5) (81.8)
-------------- -------------- --------------
Total operating income $ 169.9 $ 100.1 $ 211.1
============== ============== ==============
Net income $ 52.1 $ 13.2 $ 65.3
============== ============== ==============
Capital expenditures $ 128.5 $ 161.5 $ 88.4
============== ============== ==============
(1) All references to tons refer to metric tons of 2,204.6
pounds.
(2) Includes net sales of bauxite.
(3) Includes the portion of net sales attributable to minority
interests in consolidated subsidiaries.
(4) Includes pre-tax charges of $15.1 for the Aluminum
processing segment and $4.6 for the Corporate segment
recorded in the quarter ended June 30, 1997, related to
restructuring of operations.
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,"
"Recent Events and Developments," "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, 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
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 the Notes to Consolidated Financial Statements for a
discussion of the Company's hedging activities.
During the first eleven months of 1997, the Average Midwest
United States transaction price ("AMT Price") for primary
aluminum remained relatively stable generally in the $.75 - $.80
per pound range. During December of 1997, the AMT Price fell to
the $.70 - $.75 per pound range. However, the average 1997 AMT
Price compared favorably to the average 1996 AMT Price which
remained fairly stable generally in the $.70 - $.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. The AMT Price for 1995 was
generally in the $.80 - $.90 per pound range. For the week ended
February 20, 1998, the AMT Price was $.70 per pound.
RECENT EVENTS AND DEVELOPMENTS
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. Management believes that recent operating
performance has been at a rate which indicates that approximately
half of the desired profit improvement was achieved at year-end
1997 and that the remainder should be achieved in the second half
of 1998. However, there are inherent uncertainties regarding
operating factors and economic and other external forces (such as
the Valco power situation discussed below), many of which are
outside management's direct control, and, as such, no assurances
can be given that the desired benefit of profit improvements will
be achieved.
In addition to working to improve the performance of the
Company's existing assets, the Company has expended significant
efforts on analyzing its current asset portfolio with the intent
of focusing its efforts and capital in sectors of the industry
that are considered most attractive. The initial steps of this
process resulted in the Company recording a $19.7 million pre-tax
restructuring charge during June 1997 related to the closing and
rationalization of certain businesses and facilities.
Additionally, this process led to the Company's acquisition of
the Bellwood aluminum extrusion plant in Richmond, Virginia. See
Notes 3 and 4 of the Notes to Consolidated Financial Statements.
As discussed more fully in Note 10 of the Notes to Consolidated
Financial Statements, at December 31, 1997, there were
approximately 77,400 claims pending against the Company
pertaining to asbestos-related matters and the Company had
accrued approximately $158.8 million related to the litigation
and settlement of these claims and estimated future claims.
Subsequent to December 31, 1997, the Company reached agreements
settling approximately 25,000 of the pending asbestos-related
claims. Also, subsequent to year-end 1997, the Company reached
agreements on asbestos related coverage matters with two
insurance carriers under which the Company will collect a total
of approximately $17.5 million during the first quarter of 1998.
The insurance recoveries will reduce the approximately $134.0
million of asbestos related receivable accrued at December 31,
1997. As the amounts related to the claim settlements and
insurance recoveries were consistent with the Company's year-end
1997 accrual assumptions, these events are not expected to have a
material impact on the Company's financial position, results of
operations or liquidity.
The Company has previously disclosed that the Volta River
Authority ("VRA") would partially reduce its electric power
allocation to the Company's 90%-owned Volta Aluminium Company
Limited ("Valco") smelter facility in Ghana in January 1998 and
that Valco expected to operate approximately three potlines at
the facility in 1998 as compared to the four potlines operated
throughout 1997. During February 1998, Valco and the VRA reached
an agreement whereby Valco agreed to receive compensation in lieu
of the power necessary to run one of the three remaining
operating potlines, effective February 25, 1998. Compensation
under the agreement is expected to substantially offset the
financial impact of the curtailment. As previously disclosed
Valco has notified the VRA that it believes it has contractual
rights to sufficient energy to run four and one-half potlines in
1998 and 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 such power curtailments beyond 1998. No assurances
can be given, however, as to the success of these discussions,
the possibility of requests by the VRA for additional
curtailments, or the operating level of Valco for the remainder
of 1998 or beyond. Valco intends to pursue its legal rights in
respect of reduced power allocation and compensation in respect
of such reductions.
RESULTS OF OPERATIONS
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 sales
in 1997 totaled $2,373.2 million compared to $2,190.5 million in
1996.
Net income for 1997 includes the effect of certain non-recurring
items, including a $19.7 million pre-tax restructuring charge
(discussed above), an approximate $12.5 million non-cash tax
benefit related to settlement of certain tax matters, and a $5.8
million pre-tax charge related to additional litigation reserves.
Bauxite and Alumina - Net segment sales decreased by 4% in 1997
as a 7% decline in alumina shipments more than offset a 2%
increase in average realized alumina prices. Shipment volumes
were down as compared to 1996 as a result of the timing of
shipments and a slight increase in internal transfers. Segment
operating income improved substantially from 1996 to 1997 despite
the reduced level of shipments and certain increased costs, in
part resulting from a slowdown at the Company's 49%-owned Kaiser
Jamaican Bauxite Company, prior to the signing of a new labor
contract in December 1997, primarily due to lower overall
operating costs.
Aluminum Processing - Net sales of primary aluminum in 1997
approximated 1996 net sales figures as a 10% increase in average
realized prices offset an 8% decrease in primary aluminum
shipments. Net sales of fabricated aluminum products for 1997
were up 17% as compared to 1996 as a 22% increase in shipments
more than offset a 4% decrease in average realized prices. The
increase in fabricated aluminum product shipments over 1996 was
primarily the result of the Company's June 1997 acquisition of an
extrusion facility in Richmond, Virginia, and to a lesser extent
the result of increased international shipments of can sheet and
increased shipments of heat-treated products.
The aluminum processing segment's operating income improved
substantially in 1997 as a result of the increases in average
realized prices for primary aluminum and shipments of fabricated
aluminum product cited above. Additionally, reduced power, raw
material and supply costs and improved operating efficiencies
also contributed to the improvement in segment operating income.
Included in the segment's operating income for the quarter and
year ended December 31, 1997, was approximately $2.8 million and
$10.3 million of operating income realized during the periods,
related to the settlement of certain energy service contract
issues. Operating income for the year ended December 31, 1997,
also included a $15.1 million second quarter pre-tax charge
resulting from the restructuring of operations.
Corporate - Corporate operating expenses represent corporate
general and administrative expenses which are not allocated to
the Company's business segments. Operating results for 1997
included a second quarter pre-tax charge of approximately $4.6
million 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.
1996 AS COMPARED TO 1995
Summary - For the year ended December 31, 1996, the Company's net
income was $13.2 million, compared to net income of $65.3
million, in 1995. Net sales for 1996 were $2,190.5 million,
compared to $2,237.8 million in 1995. Results for the year ended
December 31, 1996, included an after tax benefit of approximately
$17.0 million resulting from settlements of certain tax matters
in December 1996. Excluding the impact of these non-recurring
items, the Company would have reported a net loss for the year
ended December 31, 1996.
Results for the year ended December 31, 1996, reflected the
substantial reduction in market prices for primary aluminum more
fully discussed above. Alumina prices, which are significantly
influenced by changes in primary aluminum prices, also declined
from period to period. The decrease in product prices more than
offset the positive impact of increases in shipments in several
segments of the Company's business, as more fully discussed
below. Results for 1996 also included approximately $20.5
million in research and development expenses and other costs
related to the Company's new Micromill(TM) facility as well as
additional expenses related to other strategic initiatives.
Results for 1995 included approximately $17.0 million of first
quarter 1995 pre-tax expenses associated with an eight-day strike
at five major U.S. locations, a six-day strike at the Company's
65% owned Alumina Partners of Jamaica ("Alpart") bauxite mining
and alumina refinery in Jamaica, and a four-day disruption of
alumina production at Alpart caused by a boiler failure.
Bauxite and Alumina - Net segment sales for 1996 were basically
unchanged from 1995 as a nominal decline in the average realized
price of alumina was offset by a modest increase in alumina
shipments. The reduction in prices realized reflected the
substantial decline in primary aluminum prices experienced in
1996 discussed above.
Operating income for this segment of the Company's business
declined significantly from prior year periods as a result of
reduced gross margins from alumina sales resulting from the
previously discussed price declines and increased natural gas
costs at the Company's Gramercy, Louisiana, alumina refinery.
Operating income for the year ended December 31, 1996, was also
unfavorably impacted by high operating costs associated with
disruptions in the power supply at the Company's Alpart alumina
refinery during the first nine months of 1996, higher
manufacturing costs resulting from higher market prices for fuel
and caustic soda, and a temporary raw material quality problem
experienced at the Company's Gramercy facility during the second
quarter of 1996.
Aluminum Processing - An increase in primary aluminum shipments
in 1996 of 31% more than offset a 15% decline in the average
realized price for primary aluminum from period to period. The
increase in shipments during the year ended December 31, 1996,
was the result of increased shipments of primary aluminum to
third parties as a result of a decline in intracompany transfers.
Net sales of fabricated aluminum products were down 7% for the
year ended December 31, 1996, as compared to the prior year as a
result of a decrease in shipments (primarily related to can sheet
activities) resulting from reduced growth in demand and the
reduction of customer inventories. The impact of reduced product
shipments was to a limited degree offset by a 4% increase in the
average realized price from the sale of fabricated aluminum
products, resulting primarily from a shift in product mix to
higher value added products.
Operating income for the aluminum processing segment for 1996 was
also impacted by approximately $5.6 million of scheduled non-
recurring maintenance costs at the Company's Trentwood,
Washington, rolling mill facility in the fourth quarter of 1996,
offset by $11.5 million ($7.2 on an after-tax basis) of reduced
operating costs resulting from the non-cash settlement in
December 1996 of certain tax matters.
Corporate - A substantial portion of the 1996 reduction in
operating losses of the corporate segment as compared to 1995 was
due to reduced incentive compensation accruals resulting from the
decline in earnings from the prior year period. Reduced post
employment benefit plan and pension plan costs also contributed
to the 1996 reduction.
LIQUIDITY AND CAPITAL RESOURCES
See Note 5 of the 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 $45.6, $22.9 and $119.5
million in 1997, 1996 and 1995, respectively. 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. The reduction
in cash generated by operating activities from 1995 to 1996 was
primarily due to lower earnings resulting from the reduction in
prices realized by the Company from the sale of primary aluminum
and alumina.
At December 31, 1997, the Company had working capital of $456.6
million, compared with working capital of $409.3 million at
December 31, 1996. The increase in working capital in 1997 was
due primarily to an increase in Receivables, offset by a
reduction in Cash and cash equivalents.
INVESTING ACTIVITIES
Total consolidated capital expenditures were $128.5, $161.5 and
$88.4 million in 1997, 1996 and 1995, respectively (of which
$6.6, $7.4, and $8.3 million were funded by the minority partners
in certain foreign joint ventures in 1997, 1996, and 1995,
respectively), and were made primarily to construct or acquire
new facilities, improve production efficiency, reduce operating
costs, and expand capacity at existing facilities. Total
consolidated capital expenditures are currently expected to be
between $75.0 and $125.0 million per annum in each of 1998
through 2000 (of which approximately 8% is expected to be funded
by the Company's minority partners in certain foreign joint
ventures).
A substantial portion of the increase in capital expenditures in
1996 over the 1995 level was attributable to the development and
construction of the Company's proprietary Micromill(TM)
technology for the production of can sheet and other sheet
products from molten metal. The first Micromill(TM) facility,
which was constructed in Nevada during 1996 as a demonstration
and production facility, remained in a start-up mode throughout
1997. During January of 1998, the facility commenced trial
product shipments to customers. The Company currently
anticipates that commercial deliveries from the facility will
commence during the first quarter of 1998. However, the
Micromill(TM) technology has not yet been fully implemented or
commercialized and there can be no assurances that full
implementation or commercialization will be successful.
During October 1997, a joint decision was made by a subsidiary of
the Company and its joint venture partner to terminate and
dissolve the Sino-foreign aluminum joint venture formed in 1995.
In January 1998, the Company's subsidiary reached an agreement to
sell its interests in the venture to its partner. The terms of
the agreement are subject to certain governmental approvals by
officials of the People's Republic of China. This transaction
will not have a material effect on the Company's results of
operations or financial position.
Management continues to evaluate numerous projects, all of which
would require substantial capital, both in the United States and
overseas.
FINANCING ACTIVITIES AND LIQUIDITY
Under the Credit Agreement, the Company 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. During January 1998, the
maturity of the Credit Agreement was extended from February 1999
to August 2001. The Credit Agreement is guaranteed by the
Company and by certain of its significant subsidiaries of the
Company. The Credit Agreement also requires the Company to
maintain 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
Company's public indebtedness also includes various restrictions
and a repurchase obligation upon a Change of Control. The Credit
Agreement does not permit the Company or Kaiser to pay any
dividends on their common stock.
See Notes 5 and 8 of the Notes to Consolidated Financial
Statements.
As of December 31, 1997, the Company's total consolidated
indebtedness was $971.7 million, no amounts were outstanding
under the revolving credit facility of the Credit Agreement, and
after allowances for $51.6 million of outstanding letters of
credit, $273.4 million of unused availability remained under the
Credit Agreement.
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.
ENVIRONMENTAL AND ASBESTOS 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 $29.7 million at December 31, 1997.
However, the Company believes that it is reasonably possible that
changes in various factors could cause costs associated with
these environmental matters to exceed current accruals by amounts
that could range, in the aggregate, up to an estimated $18.0
million. The Company believes that it has insurance coverage
available to recover certain incurred and future environmental
costs and is actively pursuing claims in this regard. However,
no accruals have been made for any such insurance recoveries and
no assurances can be given that the Company will be successful in
its attempt to recover incurred or future costs.
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
manufactured for at least 20 years. Based on past experience and
reasonably anticipated future activity, the Company has
established a $158.8 million accrual for estimated asbestos-
related costs for claims filed and estimated to be filed through
2008, before consideration of insurance recoveries. The Company,
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, believes that it has insurance coverage available to
recover a substantial portion of its asbestos-related costs and
that substantial insurance recoveries are probable. Accordingly,
the Company has recorded an estimated aggregate insurance
recovery of $134.0 million (determined on the same basis as the
asbestos-related cost accrual) at December 31, 1997. However,
claims for recovery from some of the Company's insurance carriers
are currently subject to pending litigation and other carriers
have raised certain defenses, which have resulted in delays in
recovering costs from the insurance carriers.
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.
See Note 10 of the Notes to Consolidated Financial Statements for
a more detailed discussion of these contingencies and the factors
affecting management's beliefs. See also "Recent Events and
Developments."
OTHER MATTERS
YEAR 2000
The Company utilizes software and related technologies throughout
its business that will be affected by the date change to the year
2000. An internal assessment has been undertaken to determine
the scope and the related costs to assure that the Company's
systems continue to function adequately to meet the Company's
needs and objectives. A detailed implementation plan is being
developed from these findings. Spending for related projects,
which began in 1997 and will likely continue through 1999, is
currently expected to total in the $10 million to $15 million
range. System modification costs will be expensed as incurred.
Costs associated with new systems will be capitalized and
amortized over the life of the product.
RECENT ASIAN ECONOMIC DOWNTURN
The Company has not experienced any significant direct financial,
operating or other difficulties to date as a result of the recent
Asian economic downturn. Further, no significant direct impact
is currently anticipated as direct sales to the region are
relatively limited and the Company has taken steps to assure the
creditworthiness of customers. No assurance can be given,
however, as to any possible indirect impact that the Asian
economic downturn may have on the volume of shipments and prices
on sales to customers outside the region.
RECENT ACCOUNTING PRONOUNCEMENTS
During June 1997, two new accounting standards were issued that
will affect future financial reporting. Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income
("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. 131, Disclosures About Segments of an Enterprise
and Related Information ("SFAS No. 131"), requires that segment
reporting for public reporting purposes be conformed to the
segment reporting used by management for internal purposes. SFAS
No. 131 also adds a requirement for the presentation of certain
segment data on a quarterly basis starting in 1999. SFAS No. 130
and SFAS No. 131 must both be adopted in the Company's year-end
1998 reporting. Management is currently evaluating the impact of
these two standards on the Company's future financial reporting.
INCOME TAX MATTERS
The Company's net deferred income tax assets as of December 31,
1997, were $350.1 million, net of valuation allowances of $113.3
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
the Notes to Consolidated Financial Statements for a discussion
of these and other income tax matters.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Report of Independent Public Accountants................. 20
Consolidated Balance Sheets.............................. 21
Statements of Consolidated Income........................ 22
Statements of Consolidated Cash Flows.................... 23
Notes to Consolidated Financial Statements............... 24
Five-Year Financial Data................................ 45
Quarterly Financial Data (Unaudited).................... 47
Financial statement schedules are inapplicable or the required
information is included in the Consolidated Financial Statements
or the Notes thereto.