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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
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)
(925) 462-1122
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
------ ------
At August 6, 1999, the registrant had 46,171,365 shares of
Common Stock outstanding.
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KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
June 30, December 31,
1999 1998
------------------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 26.2 $ 98.3
Receivables 277.5 288.2
Inventories 524.7 543.5
Prepaid expenses and other current assets 132.1 104.9
------------------------------
Total current assets 960.5 1,034.9
Investments in and advances to unconsolidated affiliates 101.2 128.3
Property, plant, and equipment - net 1,088.0 1,108.7
Deferred income taxes 404.9 376.9
Other assets 495.7 346.0
------------------------------
Total $ 3,050.3 $ 2,994.8
==============================
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 148.1 $ 173.3
Accrued interest 37.3 37.3
Accrued salaries, wages, and related expenses 62.4 73.8
Accrued postretirement medical benefit obligation -
current portion 48.2 48.2
Other accrued liabilities 168.5 150.2
Payable to affiliates 78.5 75.3
Long-term debt - current portion .4 .4
------------------------------
Total current liabilities 543.4 558.5
Long-term liabilities 670.2 533.0
Accrued postretirement medical benefit obligation 687.5 694.3
Long-term debt 962.3 962.6
Minority interests 95.6 101.9
Redeemable preference stock 19.2 20.1
Commitments and contingencies
Stockholders' equity:
Preferred stock 1.5 1.5
Common stock 15.4 15.4
Additional capital 2,113.0 2,052.8
Accumulated deficit (204.9) (151.2)
Less: Note receivable from parent (1,852.9) (1,794.1)
------------------------------
Total stockholders' equity 72.1 124.4
------------------------------
Total $ 3,050.3 $ 2,994.8
==============================
The accompanying notes to interim consolidated financial
statements are an integral part of these statements.
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED INCOME (LOSS)
(Unaudited)
(In millions of dollars)
Quarter Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
----------------------------- -----------------------------
Net sales $ 525.0 $ 614.8 $ 1,004.4 $ 1,211.8
----------------------------- -----------------------------
Costs and expenses:
Cost of products sold 473.9 503.5 933.8 1,000.6
Depreciation and amortization 24.1 24.9 48.5 50.3
Selling, administrative, research and
development, and general 26.2 31.0 54.2 60.5
----------------------------- -----------------------------
Total costs and expenses 524.2 559.4 1,036.5 1,111.4
----------------------------- -----------------------------
Operating income (loss) .8 55.4 (32.1) 100.4
Other income (expense):
Interest expense (27.4) (26.9) (55.1) (54.9)
Other - net 1.3 (2.4) 2.6 (1.8)
----------------------------- -----------------------------
Income (loss) before income taxes and minority
interests (25.3) 26.1 (84.6) 43.7
Benefit (provision) for income taxes 8.6 (9.0) 28.8 (15.2)
Minority interests 1.4 .3 2.8 1.3
----------------------------- -----------------------------
Net income (loss) $ (15.3) $ 17.4 $ (53.0) $ 29.8
============================= =============================
The accompanying notes to interim consolidated financial
statements are an integral part of these statements.
KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(In millions of dollars)
Six Months Ended
June 30,
------------------------------
1999 1998
------------------------------
Cash flows from operating activities:
Net income (loss) $ (53.0) $ 29.8
Adjustments to reconcile net income (loss) to net cash
(used) provided by operating activities:
Depreciation and amortization (including deferred
financing costs of $2.1 and $2.0) 50.6 52.3
Gain on sale of interest in AKW joint venture (50.5) -
Equity in (income) loss of unconsolidated
affiliates, net of distributions (4.2) 1.5
Minority interests (2.8) (1.3)
Decrease in receivables 10.8 45.2
Decrease in inventories 18.8 61.5
(Increase) decrease in prepaid expenses and other
current assets (37.4) 11.0
Decrease in accounts payable and accrued interest (25.2) (19.7)
Increase (decrease) in payable to affiliates and
other accrued liabilities 4.3 (31.4)
(Decrease) increase in accrued and deferred
income taxes (36.5) 5.3
Increase (decrease) in net long-term assets and
liabilities 11.1 (9.8)
Other 1.5 7.7
------------------------------
Net cash (used) provided by operating
activities (112.5) 152.1
------------------------------
Cash flows from investing activities:
Proceeds from sale of interest in AKW joint venture 70.4 -
Capital expenditures (30.3) (36.7)
Other .3 (3.1)
------------------------------
Net cash provided (used) by investing
activities 40.4 (39.8)
------------------------------
Cash flows from financing activities:
Borrowings under revolving credit facility, net - -
Repayments of long-term debt (.4) (7.0)
Capital stock issued 1.3 -
Decrease in restricted cash, net .8 1.2
Dividends paid (.3) (.4)
Redemption of minority interests' preference stock (1.4) (8.5)
------------------------------
Net cash used by financing activities - (14.7)
------------------------------
Net (decrease) increase in cash and cash equivalents
during the period (72.1) 97.6
Cash and cash equivalents at beginning of period 98.3 15.8
------------------------------
Cash and cash equivalents at end of period $ 26.2 $ 113.4
==============================
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest $ 53.0 $ 53.2
Income taxes paid 8.8 7.2
Tax allocation payments to Kaiser Aluminum Corporation - 1.7
The accompanying notes to interim consolidated financial
statements are an integral part of these statements.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except prices and per share amounts)
1. GENERAL
Kaiser Aluminum & Chemical Corporation (the "Company") is
the principal operating subsidiary of Kaiser Aluminum Corporation
("Kaiser"). Kaiser is a subsidiary of MAXXAM Inc. ("MAXXAM").
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 foregoing unaudited interim consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of
Regulation S-X as promulgated by the Securities and Exchange
Commission. Accordingly, these financial statements do not
include all of the disclosures required by generally accepted
accounting principles for complete financial statements. These
unaudited interim consolidated financial statements should be
read in conjunction with the audited consolidated financial
statements for the year ended December 31, 1998. In the opinion
of management, the unaudited interim consolidated financial
statements furnished herein include all adjustments, all of which
are of a normal recurring nature, necessary for a fair statement
of the results for the interim periods presented.
The preparation of financial statements in accordance with
generally accepted accounting principles requires the use of
estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and
liabilities known to exist as of the date the financial
statements are published, and the reported amounts of revenues
and expenses during the reporting period. Uncertainties with
respect to such estimates and assumptions are inherent in the
preparation of the Company's consolidated financial statements;
accordingly, it is possible that the actual results could differ
from these estimates and assumptions, which could have a material
effect on the reported amounts of the Company's consolidated
financial position and results of operations.
Operating results for the quarter and six-month periods
ended June 30, 1999, are not necessarily indicative of the
results that may be expected for the year ending December 31,
1999.
Certain reclassifications of prior-year information were
made to conform to the current presentation.
INCIDENT AT GRAMERCY FACILITY
On July 5, 1999, the Company's Gramercy, Louisiana alumina
refinery was extensively damaged by an explosion in the digestion
area of the plant. Approximately 24 employees were injured in the
incident, several of them severely. The cause of the incident is
under investigation by the Company and governmental agencies.
As previously announced, the Company expects that production
at the plant will be curtailed for many months. The Company has
declared force majeure with respect to certain of its sales and
purchase contracts, but continues to work with customers to
assist them in securing alternative sources of alumina.
More than 30 lawsuits have been filed against the Company
alleging, among other things, property damage and personal injury
as a result of the incident. In addition, a claim for alleged
business interruption losses has been made by a neighboring
business. The aggregate amount of damages sought in the lawsuits
and other claims cannot be determined at this time.
The Company has significant amounts of property damage,
business interruption, liability and workers compensation
insurance coverage relating to the Gramercy incident.
Deductibles and self-retention provisions under the insurance
coverage for the Gramercy incident total $5.0.
The incident will cause the Company to incur incremental
costs for clean-up and other activities in the second half of
1999 and will cause the affected operations to incur certain
operating losses until production can be restored. Further,
depending on the outcome of the ongoing investigations by various
regulatory agencies, the Company could also be subject to certain
fines or penalties, which may not be covered by insurance.
However, based on what is known to date, the Company currently
believes that the financial impact of this incident (in excess of
the deductibles and self-retention provisions) will be largely
offset by insurance coverage.
The accompanying consolidated financial statements as of and
for the periods ended June 30, 1999, do not include any
provisions for the Gramercy incident.
LABOR RELATED COSTS
The Company is currently operating five of its U.S.
facilities with salaried employees and other workers as a result
of the September 30, 1998, strike by the United Steelworkers of
America ("USWA") and the subsequent "lock-out" by the Company in
January 1999. However, the Company has continued to accrue
certain benefits for the USWA members during the period of the
strike and subsequent lock-out. For purposes of computing the
benefit-related costs and liabilities to be reflected in the
accompanying interim consolidated financial statements, the
Company has based its accruals on the terms of the previously
existing (expired) USWA contract. Any differences between any
amounts accrued and any amounts ultimately agreed to during the
collective bargaining process will be reflected in future results
during the term of any new contract.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standard Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 133 requires companies to recognize
all derivative instruments as assets or liabilities in the
balance sheet and to measure those instruments at fair value.
Under SFAS No. 133, the Company will be required to "mark-to-
market" its hedging positions at each period-end in advance of
recording the physical transactions to which the hedges relate.
Changes in the fair value of the Company's open hedging positions
will be reflected as an increase or reduction in stockholders'
equity through comprehensive income. The impact of the changes
in fair value of the Company's hedging positions will reverse out
of comprehensive income (net of any fluctuations in other "open"
positions) and will be reflected in traditional net income when
the subsequent physical transactions occur. Currently, the
dollar amount of the Company's comprehensive income adjustments
is not significant so there is not a significant difference
between "traditional" net income and comprehensive income.
However, differences between comprehensive income and traditional
net income may become significant in future periods as SFAS No.
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. This result is contrary to the intent of the
Company's hedging program, which is to "lock-in" a price (or
range of prices) for products sold/used so that earnings and cash
flows are subject to reduced risk of volatility.
Adoption of SFAS No. 133 was initially required on or before
January 1, 2000. However, in June 1999, the FASB issued SFAS No.
137 which delayed the required implementation date of SFAS No.
133 to no later than January 1, 2001. The Company is currently
evaluating how and when to implement SFAS No. 133.
2. INVENTORIES
The classification of inventories is as follows:
June 30, December 31,
1999 1998
------------------------------
Finished fabricated aluminum products $ 118.2 $ 112.4
Primary aluminum and work in process 171.6 205.6
Bauxite and alumina 118.9 109.5
Operating supplies and repair and maintenance parts 116.0 116.0
------------------------------
Total $ 524.7 $ 543.5
==============================
Substantially all product inventories are stated at last-in,
first-out (LIFO) cost, not in excess of market. Replacement cost
is not in excess of LIFO cost.
3. CONTINGENCIES
ENVIRONMENTAL CONTINGENCIES
The Company is subject to a number of environmental laws, to
fines or penalties assessed for alleged breaches of such
environmental laws, and to claims and litigation based upon such
laws. The Company currently is subject to a number of claims
under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended by the Superfund Amendments
Reauthorization Act of 1986 ("CERCLA"), and, along with certain
other entities, has been named as a potentially responsible party
for remedial costs at certain third-party sites listed on the
National Priorities List under CERCLA.
Based on the Company's evaluation of these and other
environmental matters, the Company has established environmental
accruals primarily related to potential solid waste disposal and
soil and groundwater remediation matters. At June 30, 1999, the
balance of such accruals, which are primarily included in Long-
term liabilities, was $50.1. These environmental accruals
represent the Company's estimate of costs reasonably expected to
be incurred based on presently enacted laws and regulations,
currently available facts, existing technology, and the Company's
assessment of the likely remediation actions to be taken. The
Company expects that these remediation actions will be taken over
the next several years and estimates that annual expenditures to
be charged to these environmental accruals will be approximately
$3.0 to $8.0 for the years 1999 through 2003 and an aggregate of
approximately $30.0 thereafter.
As additional facts are developed and definitive remediation
plans and necessary regulatory approvals for implementation of
remediation are established or alternative technologies are
developed, changes in these and other factors may result in
actual costs exceeding the current environmental accruals. As
the resolution of these matters is subject to further regulatory
review and approval, no specific assurance can be given as to
when the factors upon which a substantial portion of this
estimate is based can be expected to be resolved. However, the
Company is currently working to resolve certain of these matters.
The Company believes that it has insurance coverage
available to recover certain incurred and future environmental
costs and is actively pursuing claims in this regard. No
assurances can be given that the Company will be successful in
attempts to recover incurred or future costs from insurers or
that the amount of recoveries received will ultimately be
adequate to cover costs incurred.
While uncertainties are inherent in the final outcome of
these environmental matters, and it is presently impossible to
determine the actual costs that ultimately may be incurred,
management currently believes that the resolution of such
uncertainties should not have a material adverse effect on the
Company's consolidated financial position, results of operations,
or liquidity.
ASBESTOS CONTINGENCIES
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
sold for at least 20 years. At June 30, 1999, the number of such
claims pending was approximately 94,700, as compared with 86,400
at December 31, 1998. In 1998, approximately 22,900 of such
claims were received and 13,900 were settled or dismissed.
During the quarter and six-month periods ended June 30, 1999,
approximately 7,000 and 16,300 of such claims were received and
3,600 and 8,000 of such claims were settled or dismissed.
However, the foregoing claim and settlement figures as of and for
the quarter and six-month periods ended June 30, 1999, do not
reflect the fact that as of June 30, 1999, the Company has
reached agreements under which it will settle approximately
27,000 of the pending asbestos-related claims over an extended
period.
The Company maintains a liability for estimated asbestos-
related costs for claims filed to date and an estimate of claims
expected to be filed over a 10 year period (i.e., through 2009).
The Company's estimate is based on the Company's view, at each
balance sheet date, of the current and anticipated number of
asbestos-related claims, the timing and amounts of asbestos-
related payments, and the advice of Wharton Levin Ehrmantraut
Klein & Nash, P.A., with respect to the current state of the law
related to asbestos claims. However, there are inherent
uncertainties involved in estimating asbestos-related costs and
the Company's actual costs could exceed the Company's estimates
due to changes in facts and circumstances after the date of each
estimate. Further, while the Company does not presently believe
there is a reasonable basis for estimating asbestos-related costs
beyond 2009 and, accordingly, no accrual has been recorded for
any costs which may be incurred beyond 2009, there is a
reasonable possibility that such costs may continue beyond 2009,
and that such costs could be substantial. As of June 30, 1999,
an estimated asbestos-related cost accrual of $337.5, before
consideration of insurance recoveries, has been reflected in the
accompanying financial statements primarily in Long-term
liabilities. The Company estimates that annual future cash
payments for asbestos-related costs will be approximately $37.0
to $54.0 for each of the years 1999 through 2003, and an
aggregate of approximately $123.0 thereafter.
The Company believes that it has insurance coverage
available to recover a substantial portion of its asbestos-
related costs. Although the Company has settled asbestos-related
coverage matters with certain of its insurance carriers, other
carriers have not yet agreed to settlements. The timing and
amount of future recoveries from these insurance 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. The Company believes that substantial
recoveries from the insurance carriers are probable. The Company
reached this conclusion after considering its prior insurance-
related recoveries in respect of asbestos-related claims;
existing insurance policies; and the advice of Heller Ehrman
White & McAuliffe with respect to applicable insurance coverage
law relating to the terms and conditions of those policies.
Accordingly, an estimated aggregate insurance recovery of $272.5,
determined on the same basis as the asbestos-related cost
accrual, is recorded primarily in Other assets at June 30, 1999.
Management continues to monitor claims activity, the status
of lawsuits (including settlement initiatives), legislative
developments, and costs incurred in order to ascertain whether an
adjustment to the existing accruals should be made to the extent
that historical experience may differ significantly from the
Company's underlying assumptions. In the second quarter of 1999,
this process resulted in the Company reflecting a $38.0 charge
(included in Other income(expense)) for asbestos-related claims,
net of expected insurance recoveries, based on recent cost and
other trends experienced by the Company and other companies.
While uncertainties are inherent in the final outcome of these
asbestos matters and it is presently impossible to determine the
actual costs that ultimately may be incurred and insurance
recoveries that will be received, management currently believes
that, based on the factors discussed in the preceding paragraphs,
the resolution of asbestos-related uncertainties and the
incurrence of asbestos-related costs net of related insurance
recoveries should not have a material adverse effect on the
Company's consolidated financial position or liquidity. However,
as the Company's estimates are periodically re-evaluated,
additional charges may be necessary and such charges could be
material to the results of the period in which they are recorded.
LABOR MATTERS
In connection with the USWA strike and subsequent lock-out
by the Company, certain allegations of unfair labor practices
("ULPs") were filed with the National Labor Relations Board
("NLRB") by the USWA. As previously disclosed, the Company
responded to all such allegations and believed that they were
without merit. In July 1999, all material charges were dismissed
by the NLRB's Regional Director. The USWA has announced its
intention to appeal the dismissal. If the allegations are
sustained on appeal, 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 effect on the Company's consolidated financial position,
results of operations, or liquidity.
OTHER CONTINGENCIES
The Company is involved in various other claims, lawsuits,
and other proceedings relating to a wide variety of matters.
While uncertainties are inherent in the final outcome of such
matters, and it is presently impossible to determine the actual
costs that ultimately may be incurred, management currently
believes that the resolution of such uncertainties and the
incurrence of such costs should not have a material adverse
effect on the Company's consolidated financial position, results
of operations, or liquidity.
See Note 10 of Notes to Consolidated Financial Statements
for the year ended December 31, 1998, for additional information
on commitments and contingencies.
4. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING
PROGRAMS
At June 30, 1999, the net unrealized loss on the Company's
position in aluminum forward sales and option contracts
(excluding the impact of those contracts discussed below which
have been marked to market), energy forward purchase and option
contracts, and forward foreign exchange contracts was
approximately $15.5 (based on comparisons to applicable quarter-
end published market prices). As the Company's hedging
activities are generally designed to lock-in a specified price or
range of prices, gains or losses on the derivative contracts
utilized in these hedging activities will generally be offset by
losses or gains, respectively, on the transactions being hedged.
ALUMINA AND ALUMINUM
The Company's earnings are sensitive to changes in the
prices of alumina, primary aluminum and fabricated aluminum
products, and also depend to a significant degree upon the volume
and mix of all products sold. Primary aluminum prices have
historically been subject to significant cyclical price
fluctuations. Alumina prices as well as fabricated aluminum
product prices (which vary considerably among products) are
significantly influenced by changes in the price of primary
aluminum but generally lag behind primary aluminum price changes
by up to three months. Since 1993, the Average Midwest United
States transaction price for primary aluminum has ranged from
approximately $.50 to $1.00 per pound.
From time to time in the ordinary course of business, the
Company enters into hedging transactions to provide price risk
management in respect of the net exposure of earnings and cash
flows resulting from (i) anticipated sales of alumina, primary
aluminum and fabricated aluminum products, less (ii) expected
purchases of certain items, such as aluminum scrap, rolling
ingot, and bauxite, whose prices fluctuate with the price of
primary aluminum. Forward sales contracts are used by the
Company to effectively 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 the Company's
anticipated sales, and/or (iii) to permit the Company to realize
possible upside price movements. As of June 30, 1999, the
Company had sold forward, at fixed prices, approximately 12,000
tons* of primary aluminum with respect to 1999. As of June 30,
1999, the Company had also entered into option contracts that
established a price range for an additional 130,000, 353,000 and
124,000 tons of primary aluminum for 1999, 2000 and 2001,
respectively.
Additionally, through June 30, 1999, the Company had entered
a series of transactions with a counterparty that will provide
the Company with a premium over the forward market prices at the
date of the transaction for 4,000 tons of primary aluminum per
month during the period July 1999 through June 2001. The Company
also contracted with the counterparty to receive certain fixed
prices (also above the forward market prices at the date of the
transaction) on 8,000 tons of primary aluminum per month over a
three year period commencing October 2001, unless market prices
during certain periods decline below a stipulated "floor" price,
in which case, the fixed price sales portion of the transactions
terminate. The price at which the October 2001 and later
transactions terminate is well below current market prices. While
the Company believes that the October 2001 and later transactions
are consistent with its stated hedging objectives, these
positions do not qualify for treatment as a "hedge" under current
accounting guidelines. Accordingly, these positions are "marked
to market" each period. For the quarter and six-month periods
ended June 30, 1999, the Company recorded mark-to-market charges
of $13.5 and $14.1 in Other income (expense) associated with the
above transactions.
---------------
* All references to tons in this report refer to metric tons of
2,204.6 pounds.
As of June 30, 1999, the Company had sold forward virtually
all of the alumina available to it in excess of its projected
internal smelting requirements for 1999, 2000 and 2001 at prices
indexed to future prices of primary aluminum.
ENERGY
The Company is exposed to energy price risk from fluctuating
prices for fuel oil, diesel fuel and natural gas consumed in the
production process. Accordingly, the Company from time to time
in the ordinary course of business enters into hedging
transactions with major suppliers of energy and energy related
financial instruments. As of June 30, 1999, the Company had a
combination of fixed price purchase and option contracts for the
purchase of approximately 27,000 MMBtu of natural gas per day
during the remainder of 1999. As of June 30, 1999, the Company
also held a combination of fixed price purchase and option
contracts for an average of 249,000 and 232,000 barrels per month
of fuel oil and diesel fuel for 1999 and 2000, respectively.
FOREIGN CURRENCY
The Company enters into forward exchange contracts to hedge
material cash commitments to foreign subsidiaries or affiliates.
At June 30, 1999, the Company had net forward foreign exchange
contracts totaling approximately $138.9 for the purchase of 208.7
Australian dollars from July 1999 through May 2001, in respect of
its Australian dollar-denominated commitments for the remainder
of 1999 through May 2001.
See Note 1 of the Notes to Consolidated Financial Statements
for the year ended December 31, 1998, for additional information
concerning the use of derivative financial instruments.
5. SIGNIFICANT ACQUISITIONS AND DISPOSITIONS
In February 1999, the Company, through a subsidiary,
completed the acquisition of its joint venture partner's 45%
interest in Kaiser LaRoche Hydrate Partners ("KLHP") for a cash
purchase price of approximately $10.0. As the Company already
owned 55% of KLHP, the results of KLHP were already included in
the Company's consolidated financial statements.
On April 1, 1999, the Company completed the previously
announced sale of its 50% interest in AKW L.P. ("AKW"), an
aluminum wheels joint venture, to its partner, Accuride
Corporation for $70.4. The sale resulted in the Company
recognizing a net pre-tax gain of $50.5 in the second quarter of
1999. The Company's equity in income of AKW for the quarter
ended March 31, 1999, was $2.5. The Company's equity in income
of AKW for the quarter and six-month periods ended June 30, 1998,
was $2.3 and $3.4, respectively.
6. INTERIM OPERATING SEGMENT INFORMATION
The Company uses a portion of its bauxite, alumina and
primary aluminum production for additional processing at its
downstream facilities. Transfers between business units are made
at estimated market prices. The accounting policies of the
segments are the same as those described in Note 1 of Notes to
Consolidated Financial Statements for the year ended December 31,
1998. Business unit results are evaluated internally by
management before any allocation of corporate overhead and
without any charge for income taxes or interest expense. See
Note 12 of Notes to Consolidated Financial Statements for the
year ended December 31, 1998, for additional information
regarding the Company's segments.
Financial information by operating segment for the quarters and
six months ended June 30, 1999 and 1998 is as follows:
Quarter Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------------------------------------------------------------------------- -----------------------------
Net Sales:
Bauxite and Alumina:
Net sales to unaffiliated customers $ 110.8 $ 136.9 $ 200.5 $ 230.2
Intersegment sales 29.6 36.1 52.6 78.3
----------------------------- -----------------------------
140.4 173.0 253.1 308.5
----------------------------- -----------------------------
Primary Aluminum:
Net sales to unaffiliated customers 100.5 105.8 189.6 232.0
Intersegment sales 63.1 61.0 112.2 127.8
----------------------------- -----------------------------
163.6 166.8 301.8 359.8
----------------------------- -----------------------------
Flat-Rolled Products 155.3 197.0 303.6 391.3
Engineered Products 137.8 156.0 271.3 318.6
Minority interests 20.6 19.2 39.4 39.8
Eliminations (92.7) (97.2) (164.8) (206.2)
----------------------------- -----------------------------
$ 525.0 $ 614.8 $ 1,004.4 $ 1,211.8
============================= =============================
Operating income (loss):
Bauxite and Alumina $ (3.5) $ 17.8 $ (11.3) $ 29.4
Primary Aluminum (1) 1.6 22.1 (20.5) 42.2
Flat-Rolled Products 7.5 23.2 14.9 39.5
Engineered Products 10.7 15.2 17.6 31.5
Micromill (3.0) (4.7) (6.3) (9.9)
Eliminations 1.9 (.7) 5.5 2.4
Corporate and Other (14.4) (17.5) (32.0) (34.7)
----------------------------- -----------------------------
$ .8 $ 55.4 $ (32.1) $ 100.4
============================= =============================
Depreciation and amortization:
Bauxite and Alumina $ 8.9 $ 9.0 $ 17.8 $ 18.6
Primary Aluminum 7.0 7.5 14.3 15.0
Flat-Rolled Products 4.1 4.0 8.2 8.1
Engineered Products 2.6 2.7 5.3 5.4
Micromill .7 .8 1.4 1.5
Corporate and Other .8 .9 1.5 1.7
----------------------------- -----------------------------
$ 24.1 $ 24.9 $ 48.5 $ 50.3
============================= =============================
(1) Includes potline preparation and restart costs of $2.5 and
$9.6 for the quarter and six-month periods ended June 30,
1999, respectively.
Excluding the February 1999 purchase of the remaining
interest in KLHP, which affected the Bauxite and Alumina segment,
and the April 1999 sale of the Company's interest in AKW, which
affected the Engineered Products segment, there were no material
changes in segment assets since December 31, 1998. Capital
expenditures made during the first half of 1999 (other than the
acquisition of the interest in KLHP) were incurred on a
relatively ratable basis among the Company's four primary
operating business segments.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
This section should be read in conjunction with the response
to Item 1, Part I, of this Report.
This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements appear in a
number of places in this section (see, for example, "Recent
Events and Developments," "Results of Operations," and "Liquidity
and Capital Resources"). Such statements can be identified by
the use of forward-looking terminology such as "believes,"
"expects," "may," "estimates," "will," "should," "plans" or
"anticipates" or the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy.
Readers are cautioned that any such forward-looking statements
are not guarantees of future performance and involve significant
risks and uncertainties, and that actual results may vary
materially from those in the forward-looking statements as a
result of various factors. These factors include the
effectiveness of management's strategies and decisions, general
economic and business conditions, developments in technology,
year 2000 technology issues, new or modified statutory or
regulatory requirements, and changing prices and market
conditions. This section and the Company's Annual Report on Form
10-K for the year ended December 31, 1998, each identify other
factors that could cause such differences. No assurance can be
given that these are all of the factors that could cause actual
results to vary materially from the forward-looking statements.
RECENT EVENTS AND DEVELOPMENTS
INCIDENT AT GRAMERCY FACILITY
On July 5, 1999, the Company's Gramercy, Louisiana alumina
refinery was extensively damaged by an explosion in the digestion
area of the plant. Approximately 24 employees were injured in the
incident, several of them severely.
The cause of the incident is under investigation by the Company
and governmental agencies. The Company's continuing investigation
suggests that the incident was caused by a power distribution
interruption involving the plant's on-site power house that caused
process flow pumps to cease operating. The Company has also
identified certain other conditions that were present at the time
of the incident and continues to investigate these and other
matters.
As previously announced, the Company expects that production
at the plant will be curtailed for many months. The Company has
declared force majeure with respect to certain of its sales and
purchase contracts, but continues to work with customers to
assist them in securing alternative sources of alumina.
More than 30 lawsuits have been filed against the Company
alleging, among other things, property damage and personal injury
as a result of the incident. In addition, a claim for alleged
business interruption losses has been made by a neighboring
business. The aggregate amount of damages sought in the lawsuits
and other claims cannot be determined at this time.
The Company has significant amounts of property damage,
business interruption, liability and workers compensation
insurance coverage relating to the Gramercy incident.
Deductibles and self-retention provisions under the insurance
coverage for the Gramercy incident total $5.0 million.
The incident will cause the Company to incur incremental
costs for clean-up and other activities in the second half of
1999 and will cause the affected operations to incur certain
operating losses until production can be restored. Further,
depending on the outcome of the ongoing investigations by various
regulatory agencies, the Company could also be subject to certain
fines or penalties, which may not be covered by insurance.
However, based on what is known to date, the Company currently
believes that the financial impact of this incident (in excess of
the deductibles and self-retention provisions) will be largely
offset by insurance coverage.
The accompanying consolidated financial statements as of and
for the periods ended June 30, 1999, do not include any provisions
for the Gramercy incident.
The Company has announced that its intention is to rebuild
the Gramercy facility assuming that it is able to reach
acceptable agreements with the various stakeholders to ensure the
plant's competitive future. The Company hopes to have the plant
operating at a reduced production level in mid-2000 and to have
the plant completely operational by the end of 2000. However,
there can be no assurance that the Gramercy facility will be made
operational on this schedule.
LABOR MATTERS
Substantially all of the Company's hourly workforce at its
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.
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
(representing approximately 70,000 tons per year of production
capacity out of a total combined production capacity of 273,000
tons per year at the facilities.) The first of the two Mead
potline restarts began in March 1999 and was completed during the
second quarter of 1999. Restart activities on the second of the
two Mead potlines commenced during the second quarter of 1999,
and the Company expects the line to be fully operational before
the end of the third quarter of 1999. The timing for any restart
of the Tacoma potline has yet to be determined and will depend
upon market conditions and other factors.
While the Company initially experienced an adverse strike-
related impact on its profitability, 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 effect of the incremental costs
associated with operating the affected plants during the dispute
was 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.
The Company and the USWA continue to communicate. A series
of bargaining sessions are scheduled for August 1999. 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.
STRATEGIC INITIATIVES
The Company has previously disclosed that it believes it had
met, and exceeded, its goal of achieving $120.0 million of pre-
tax cost reductions and other profit improvements, independent of
metal price changes, measured against 1996 results prior to the
end of the third quarter of 1998, when the impact of such items
as smelter operating levels, the USWA strike and changes in
foreign currency exchange rates are excluded from the analysis.
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"), the rationalization of certain of the Company's
Engineered Products operations, the Company's investment to
expand its production capacity for heat treat flat-rolled
products at its Trentwood, Washington, rolling mill, and the
Company's fourth quarter 1998 decision to seek a strategic
partner for further development and deployment of the Company's
Micromill(TM) technology. This process has continued in 1999.
In February 1999, the Company completed the acquisition of the
remaining 45% interest in Kaiser LaRoche Hydrate Partners
("KLHP"), an alumina marketing venture, from its joint venture
partner for a cash purchase price of approximately $10.0 million.
Additionally, in April 1999, the Company completed the sale of
its interest in AKW L.P., an aluminum wheel joint venture, to its
partner, Accuride Corporation for $70.4 million. The cash sale
represents a continuation of the Company's strategy to focus its
resources and efforts in industry segments that are considered
most attractive and in which it believes it is well positioned to
capture value.
Another area of emphasis has been a continuing focus on
managing the Company's legacy liabilities, including the
Company's active pursuit of claims in respect of insurance
coverage for certain incurred and future environmental costs, as
evidenced by the Company's fourth quarter 1998, receipt of
recoveries totaling approximately $35.0 million related to
current and future claims against certain of its insurers. See
Note 10 of Notes to Consolidated Financial Statements for the
year ended December 31, 1998, for additional information
regarding insurance recoveries.
Additional portfolio analysis and initiatives are
continuing.
VALCO OPERATING LEVEL
The Company's 90%-owned Volta Aluminium Company Limited
("Valco") smelter in Ghana operated only one of its five potlines
during most of 1998. Each of Valco's potlines is capable of
producing approximately 40,000 tons per year of primary aluminum.
Valco earned compensation in 1998 (in the form of energy credits
to be utilized over the last half of 1998 and during 1999) from
the Volta River Authority ("VRA") in lieu of the power necessary
to run two of the potlines that were curtailed during 1998. The
compensation substantially mitigated the financial impact in 1998
of the curtailment of such lines. However, Valco did not receive
any compensation from the VRA for one additional potline which
was curtailed in January 1998. Valco currently expects to
operate an average of three lines during 1999, an operating rate
that it reached during the second quarter of 1999.
Valco has notified the VRA that it believes it had the
contractual rights at the beginning of 1998 and 1999 to
sufficient energy to run four and one-half potlines for the
balance of both years. Valco continues to seek compensation from
the VRA with respect to the 1998 and 1999 reductions in its power
allocation. Valco and the VRA also are in continuing discussions
concerning other matters, including steps that might be taken to
reduce the likelihood of power curtailments in the future. No
assurances can be given as to the success of these discussions.
RESULTS OF OPERATIONS
As an integrated aluminum producer, the Company uses a
portion of its bauxite, alumina, and primary aluminum production
for additional processing at certain of its downstream
facilities. Intersegment transfers are valued at estimated
market prices. The following table provides selected operational
and financial information on a consolidated basis with respect to
the Company for the quarters ended June 30, 1999 and 1998. The
following data should be read in conjunction with the Company's
interim consolidated financial statements and the notes thereto,
contained elsewhere herein. See Note 12 of Notes to Consolidated
Financial Statements for the year ended December 31, 1998, for
further information regarding segments.
Interim results are not necessarily indicative of those for
a full year.
SELECTED OPERATIONAL AND FINANCIAL INFORMATION
(Unaudited)
(In millions of dollars, except shipments and prices)
Quarter Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------------------------------------------------------------------------- -----------------------------
Shipments: (000 tons)
Alumina
Third Party 611.4 652.5 1,098.4 1,077.1
Intersegment 189.3 196.6 339.6 412.4
----------------------------- -----------------------------
Total Alumina 800.7 849.1 1,438.0 1,489.5
----------------------------- -----------------------------
Primary Aluminum
Third Party 69.0 68.3 131.9 148.8
Intersegment 46.3 42.5 85.8 86.1
----------------------------- -----------------------------
Total Primary Aluminum 115.3 110.8 217.7 234.9
----------------------------- -----------------------------
Flat-Rolled Products 59.0 63.6 111.5 123.3
----------------------------- -----------------------------
Engineered Products 43.5 44.2 84.9 90.0
----------------------------- -----------------------------
Average Realized Third Party Sales Price: (1)
Alumina (per ton) $ 170 $ 197 $ 171 $ 198
Primary Aluminum (per pound) $ .66 $ .70 $ .65 $ .71
Net Sales:
Bauxite and Alumina
Third Party (includes net sales of $ 110.8 $ 136.9 $ 200.5 $ 230.2
bauxite)
Intersegment 29.6 36.1 52.6 78.3
----------------------------- -----------------------------
Total Bauxite & Alumina 140.4 173.0 253.1 308.5
----------------------------- -----------------------------
Primary Aluminum
Third Party 100.5 105.8 189.6 232.0
Intersegment 63.1 61.0 112.2 127.8
----------------------------- -----------------------------
Total Primary Aluminum 163.6 166.8 301.8 359.8
----------------------------- -----------------------------
Flat-Rolled Products 155.3 197.0 303.6 391.3
Engineered Products 137.8 156.0 271.3 318.6
Minority Interests 20.6 19.2 39.4 39.8
Eliminations (92.7) (97.2) (164.8) (206.2)
----------------------------- -----------------------------
Total Net Sales $ 525.0 $ 614.8 $ 1,004.4 $ 1,211.8
============================= =============================
Operating Income (Loss):
Bauxite & Alumina $ (3.5) $ 17.8 $ (11.3) $ 29.4
Primary Aluminum (2) 1.6 22.1 (20.5) 42.2
Flat-Rolled Products 7.5 23.2 14.9 39.5
Engineered Products 10.7 15.2 17.6 31.5
Micromill(TM) (3.0) (4.7) (6.3) (9.9)
Eliminations 1.9 (.7) 5.5 2.4
Corporate (14.4) (17.5) (32.0) (34.7)
----------------------------- -----------------------------
Total Operating Income (Loss) $ .8 $ 55.4 $ (32.1) $ 100.4
============================= =============================
Net Income (Loss) $ (15.3) $ 17.4 $ (53.0) $ 29.8
============================= =============================
Capital Expenditures $ 13.8 $ 23.0 $ 30.3 $ 36.7
============================= =============================
(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) Results for the Primary aluminum segment include potline
restart costs of $2.5 and $9.6 for the quarter and six-month
periods ended June 30, 1999, respectively.
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 Note 4
of Notes to Interim 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 the
first quarter of 1999, the AMT Price for primary aluminum was in
the $.57 to $.59 per pound range most of the quarter, but
increased in March 1999 and ended the second quarter at
approximately $.67. The AMT Price for primary aluminum for the
week ended July 30, 1999, was approximately $.68 per pound.
QUARTER AND SIX MONTHS ENDED JUNE 30, 1999, COMPARED TO QUARTER
AND SIX MONTHS ENDED JUNE 30, 1998
SUMMARY
The Company reported a net loss of $15.3 million for the
second quarter of 1999, compared to a net income of $17.4 million
for the same period of 1998. Results for the quarter ended June
30, 1999, included a pre-tax gain of $50.5 million on the sale of
the Company's interests in AKW. The gain was offset by a non-
cash pre-tax charge of $38.0 million for asbestos-related claims
and a pre-tax charge of $13.5 million to reflect a mark-to-market
adjustment on certain primary aluminum hedging transactions.
Results for the quarter ended June 30, 1998, included charges
related to additional litigation reserves of $3.9 million.
For the six-month period ended June 30, 1999, the Company
reported a net loss of $53.0 million compared to net income of
$29.8 million for the six-month period ended June 30, 1998.
Net sales for the second quarter of 1999 totaled $525.0
million compared to $614.8 million in the second quarter of 1998.
Net sales for the six-month period ended June 30, 1999, were
$1,004.4 million compared to $1,211.8 for the first six months of
1998.
BAUXITE AND ALUMINA
Third party net sales of alumina declined 19% for the
quarter ended June 30, 1999, as compared to the same period in
1998 as a result of a 14% decline in third party average realized
price and a 6% decline in third party alumina shipments. The
decline in 1999 third party average realized prices resulted from
lower first quarter 1999 market prices for primary aluminum on
the Company's alumina sales contracts, substantially all of which
are linked (on a lagged basis of up to three months) to changes
in primary aluminum market prices. Although market prices for
primary aluminum recovered somewhat during the second quarter of
1999, the beneficial impacts of these price increases on the
segment's operating income will not be fully realized until the
third quarter of 1999. The impact of lower prices for primary
aluminum in 1999 on the Company's third party average realized
prices was partially offset by allocated net gains from the
Company's hedging activities. The decline in third party
shipments of alumina between the second quarter of 1999 and 1998
resulted primarily from differences in the timing of shipments
rather than any specific operating trend.
Intersegment net sales for the second quarter of 1999
declined by 22% as compared to the same period in 1998. The
decline in net sales was primarily due to a 14% decline in
intersegment average realized price due to lower primary aluminum
prices as well as a decline in intersegment shipments, resulting
from potline curtailments at the Company's Washington smelters
and Valco.
For the six-month period ended June 30, 1999, third party
net sales of alumina were 12% lower than the comparable period in
1998 as a 14% decline in average realized prices was only
partially offset by a 2% increase in third party shipments. The
decline in average realized prices during the first six months of
1999 as compared to 1998 was attributable to the linkage of third
party sales contracts to primary aluminum prices as more fully
described above, offset by allocated net gains from the Company's
hedging activities. The increase in year-over-year shipments was
the result of the timing of individual shipments, rather than a
specific operating trend.
Intersegment net sales for the six-month period ended June
30, 1999, declined by 33% as compared to the same period in 1998.
The decline in net sales was primarily due to the 14% decline in
intersegment average realized price due to lower primary aluminum
prices as well as reduced intersegment shipments, resulting from
potline curtailments at the Company's Washington smelters and
Valco.
Segment operating income for the quarter and six-month
periods ended June 30, 1999, were down significantly from the
comparable periods of 1998 primarily as a result of the price
and, to a lesser extent, the volume factors discussed above.
PRIMARY ALUMINUM
Third party net sales of primary aluminum for the second
quarter of 1999 were down 5% as compared to the same period in
1998 primarily as a result of a 6% decrease in average realized
third party sales prices, reflecting lower market prices offset,
in part, by allocated net gains from the Company's hedging
activities. Partially offsetting the decline in average realized
price was a 1% increase in third party shipments. Intersegment
net sales in the second quarter of 1999 were up approximately 4%
over 1998. Intersegment shipments increased 9% from the
comparable prior year period while average realized price dropped
by 5%. The decline in average realized price resulted from lower
market prices for primary aluminum in 1999. The increase in
intersegment shipments between 1999 and 1998 was due to the
timing of shipments to the Company's fabricated business units,
as on a year-to-date basis intersegment shipments were
essentially flat.
For the six-month period ended June 30, 1999, third party
net sales of primary aluminum declined approximately 16% from the
comparable period in 1998, reflecting a 8% decline in third party
average realized prices and an 11% reduction in third party
shipments. The decline in third party average realized price
reflects lower 1999 market prices for primary aluminum offset, in
part, by allocated net gains from the Company's hedging
activities. The reduction in third party shipments reflects the
impact of the potline curtailments at the Company's Washington
smelters. Intersegment net sales for the first half of 1999 were
down 12% as compared to the same period in 1998. Intersegment
average realized prices were down 12% reflecting lower market
prices for aluminum. Intersegment shipments were essentially
flat.
Segment operating income for the quarter and six-month
periods ended June 30, 1999, was down significantly from the
comparable periods of 1998. The most significant component of
this decline was the reduction in average realized prices
discussed above. However, also included in 1999 results were the
adverse impact of the Valco and Washington smelter potline
curtailments (including the fact that there is no mitigating
compensation being earned in 1999 for the Valco potline
curtailments) and costs of approximately $2.5 and $9.6 for the
quarter and six-month periods ended June 30, 1999, respectively,
associated with preparing and restarting potlines at Valco and
the Washington smelters.
FLAT-ROLLED PRODUCTS
Net sales of flat-rolled products for the second quarter of
1999 declined by 21% compared to the second quarter of 1998 as a
result of a 14% decline in average realized prices and a 7%
decline in shipments. The reduction in shipments was due to
reduced demand in 1999 for aerospace heat treat products offset,
in small part, by increased shipments of general engineering
products. The decline in 1999 average realized prices resulted
from a shift of product mix (from aerospace products, which have
a higher price and operating margin, to other products) as well
as the impact of lower market prices for primary aluminum.
For the six-month period ended June 30, 1999, net sales of
flat rolled products declined by 22% from the comparable period
in 1998 as a result of a 14% decline in average realize price and
a 10% decline in product shipments. The declines in year-to-date
1999 prices and shipments as compared to 1998 were attributable
to the same factors described above for the second quarter of
1999 and were also responsible for the significant decline in
segment operating income both for the second quarter and year-to-
date periods.
ENGINEERED PRODUCTS
Second quarter 1999 net sales of engineered products
declined by approximately 12% compared to the second quarter of
1998, reflecting a 10% decline in average realized prices and a
2% decline in product shipments. The decline in quarterly
shipments was due to reduced demand in 1999 for aerospace
products offset almost entirely by a strong increase in 1999
demand for ground transportation products. The reduction in
average realized price between periods was attributable to the
change in product mix (lower aerospace shipments offset by higher
ground transportation shipments) as well as lower 1999 market
prices for primary aluminum. For the six-month period ended June
30, 1999, net sales of engineered products declined by
approximately 15% from the comparable period in 1998, as a result
of a 10% decline in average realized prices and a 6% declined in
product shipments. The reasons for the year-to-date price and
volume declines were the same as the factors that affected the
second quarter of 1999.
Segment operating income for the 1999 quarter and year-to-
date periods declined from the comparable periods in 1998 as a
result of the reduced equity in earnings from AKW as well as the
product mix shift discussed above.
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 included corporate general and
administrative expenses which were not allocated to the Company's
business segments.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
At June 30, 1999, the Company had working capital of $417.1
million, compared with working capital of $476.4 million at
December 31, 1998. The decrease in working capital primarily
resulted from a decrease in Cash and cash equivalents. Increases
in Prepaid expenses and other current assets, primarily resulting
from increased insurance deposits, were generally offset by an
increase in Other accrued liabilities resulting primarily from an
increase in expected payments for asbestos-related costs.
Changes in Receivables, Inventories and Accounts payable reflect
reduced metal prices in 1999 as well as other factors described
in "Results of Operations."
INVESTING ACTIVITIES
Capital expenditures during the six months ended June 30,
1999, were $30.3 million. The only significant expenditure was
the purchase of the remaining 45% interest in KLHP for
approximately $10.0 million. The remainder of the year-to-date
1999 capital expenditures were primarily used to improve
production efficiency and reduce operating costs.
Total consolidated capital expenditures (of which
approximately 8% is expected to be funded by the Company's
minority partners in certain foreign joint ventures) are expected
to be between $70 and $90 million per annum in each of 1999
through 2001, prior to any consideration of plans to rebuild the
Gramercy facility. 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.
FINANCING ACTIVITIES AND LIQUIDITY
At June 30, 1999, the Company had long-term debt of $962.7
million, compared with $963.0 million at December 31, 1998.
At June 30, 1999, $273.7 million (of which $73.7 million
could have been used for letters of credit) was available to the
Company under the Credit Agreement and no amounts were
outstanding under the revolving credit facility. Loans under the
Credit Agreement bear interest at a spread (which varies based on
the results of a financial test) over either a base rate or LIBOR
at the Company's option. The Credit Agreement does not permit
the Company or Kaiser to pay any dividends on their common stock.
Management believes that the Company's existing cash
resources, together with cash flows from operations and
borrowings under the Credit Agreement, will be sufficient to meet
its working capital and capital expenditure requirements for the
next year. Additionally, with respect to long-term liquidity,
management believes that operating cash flow, together with the
ability to obtain both short and long-term financing, should
provide sufficient funds to meet the Company's working capital
and capital expenditure requirements.
OTHER MATTERS
YEAR 2000 READINESS DISCLOSURE
The Company utilizes software and related technologies
throughout its business that will be affected by the date change
to the year 2000. There may also be technology embedded in
certain of the equipment owned or used by the Company that is
susceptible to the year 2000 date change as well. The Company
has implemented a company-wide program to coordinate the year
2000 efforts of its individual business units and to track their
progress. The intent of the program is to make sure that
critical items are identified on a sufficiently timely basis to
assure that the necessary resources can be committed to address
any material risk areas that could prevent the Company's systems
and assets from being able to meet the Company's business needs
and objectives. Year 2000 progress and readiness has also been
the subject of the Company's normal, recurring internal audit
function.
Each of the Company's business units has developed year 2000
plans specifically tailored to its 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. As of June 30, 1999, the Company estimates that
approximately $3 million of year 2000 expenditures are yet to be
incurred. Such remaining amounts are expected to be incurred
over the balance of 1999, primarily in the third quarter of the
year. System modification costs are being expensed as incurred.
Costs associated with new systems are being capitalized and will
be amortized over the life of the system. In total, the Company
believes that its remediation and testing efforts are
approximately 85% complete at July 31, 1999. The balance is
expected to be substantially completed by the end of the third
quarter of the year. The Company plans to commit the necessary
resources for these efforts.
In addition to addressing the Company's internal systems,
the company-wide program involves identification of key
suppliers, customers, and other third-party relationships that
could be impacted by year 2000 issues. A general survey has been
conducted of the Company's supplier and customer base. Direct
contact has been made, or is in progress, with parties which are
deemed to be particularly critical including financial
institutions, power suppliers, and customers, with which the
Company has a material relationship.
Each business unit, including the corporate group, is
developing a contingency plan covering the steps that would be
taken if a year 2000 problem were to occur despite the Company's
best efforts to identify and remediate all critical at-risk
items. Formal contingency plans have been completed for
approximately 75% of the Company's facilities and their
individual systems as of July 31, 1999. Contingency plans for
the remaining facilities and systems are expected to be completed
by October 31, 1999. When complete, 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 prior to the year
2000. If the steps taken by the Company (or critical third
parties) are not made in a timely manner, or are not successful
in identifying and remediating all significant year 2000 issues,
business interruptions or delays could occur and could have a
material adverse impact on the Company's results and financial
condition. However, based on the information the Company has
gathered to date and the Company's expectations of its ability to
remediate problems encountered, the Company currently believes
that significant business interruptions that would have a
material impact on the Company's results or financial condition
will not be encountered.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
-----------------------------------------------------
RISK
----
See Part I, Item 7A. "QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK" in the Company's Form 10-K for the
year ended December 31, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The annual meeting of stockholders of the Company was held
on June 8, 1999, at which meeting the stockholders voted to elect
management's slate of nominees as directors of the Company. The
nominees for election as directors of the Company are listed
below, together with the number of votes cast for, against, and
with held with respect to each such nominees, as well as the
number of abstentions and broker nonvotes with respect to each
such nominee:
Robert J. Cruikshank
Votes For: 46,262,605
Votes Against:
Votes Withheld: 240,416
Abstentions:
Broker Nonvotes:
George T. Haymaker, Jr.
Votes For: 46,250,028
Votes Against:
Votes Withheld: 252,993
Abstentions:
Broker Nonvotes:
Charles E. Hurwitz
Votes For: 46,239,924
Votes Against:
Votes Withheld: 263,097
Abstentions:
Broker Nonvotes:
Ezra G. Levin
Votes For: 46,269,246
Votes Against:
Votes Withheld: 233,775
Abstentions:
Broker Nonvotes:
Raymond J. Milchovich
Votes For: 46,236,800
Votes Against:
Votes Withheld: 266,223
Abstentions:
Broker Nonvotes:
James D. Woods
Votes For: 46,269,173
Votes Against:
Votes Withheld: 233,848
Abstentions:
Broker Nonvotes:
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
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 portion of Note 3 of Notes to Interim Consolidated Financial
Statements contained in this report under the heading "Asbestos
Contingencies" is incorporated herein by reference. See Part I,
Item 3. "LEGAL PROCEEDINGS - Asbestos-related Litigation" in the
Company's Form 10-K for the year ended December 31, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits.
Exhibit No. Exhibit
---------- -------
3.1 Restated Certificate of Incorporation of Kaiser
Aluminum & Chemical Corporation (the "Company" or
"KACC"), dated July 25, 1989 (incorporated by
reference to Exhibit 3.1 to the Registration
Statement on Form S-1, dated August 25, 1989,
filed by KACC, Registration No. 33-30645).
3.2 Certificate of Retirement of KACC, dated February
7, 1990 (incorporated by reference to Exhibit 3.2
to the Report on Form 10-K for the period ended
December 31, 1989, filed by KACC, File No. 1-
3605).
3.3 Amended and Restated Bylaws of KACC, dated October
1, 1997, (incorporated by reference to Exhibit 3.3
to the Report on Form 10-Q to the quarterly period
ended September 30, 1997, filed by KACC, File No.
1- 3605).
*10.1 Employment Agreement, dated as of June 1, 1999,
between the Company and Raymond J. Milchovich.
*10.2 Restated Promissory Note, dated June 14, 1999,
from Raymond J. Milchovich to the Company.
*27 Financial Data Schedule.
(b) Reports on Form 8-K.
No report on Form 8-K was filed by the Company during the
quarter ended June 30, 1999. However, subsequent to June
30, 1999, two Form 8-K's were filed.
A Report on Form 8-K was filed by the Company on July 2,
1999, announcing the expected impact of certain non-operating
adjustments on second quarter 1999 results.
A Report on Form 8-K was filed by the Company on July 9,
1999, announcing that on July 5, 1999, the Company's
Gramercy, Louisiana alumina refinery had been extensively
damaged by an explosion and that production at the plant
would be curtailed for several months.
---------------
* Filed herewith
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized, who
have signed this report on behalf of the registrant as the
principal financial officer and principal accounting officer of
the registrant, respectively.
KAISER ALUMINUM & CHEMICAL
CORPORATION
/s/John T. La Duc
By:---------------------------
John T. La Duc
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/Daniel D. Maddox
By:---------------------------
Daniel D. Maddox
Vice President and Controller
(Principal Accounting Officer)
Dated: August 13, 1999