1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
--------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-12374
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ALUMAX INC. [LOGO]
(Exact name of registrant as specified in its charter)
Delaware 13-2762395
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3424 Peachtree Road, N.E., Suite 2100, Atlanta, Georgia 30326
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (404) 846-4600
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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
--- ---
Number of shares of common stock of registrant outstanding at October 31, 1997:
54,805,449
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Part I. Financial Information
Item 1. Financial Statements
ALUMAX INC.
CONDENSED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(In Millions, Except Per Share Amounts)
NET SALES ........................................... $ 717.1 $ 809.1 $2,149.8 $ 2,463.1
--------- --------- --------- ---------
Cost and expenses:
Cost of goods sold ............................. 544.4 657.7 1,649.9 1,969.7
Selling and general ............................ 65.7 70.3 189.0 203.9
Depreciation and amortization................... 40.4 36.7 115.1 105.7
--------- --------- --------- ---------
650.5 764.7 1,954.0 2,279.3
--------- --------- --------- ---------
EARNINGS FROM OPERATIONS ............................ 66.6 44.4 195.8 183.8
Gain on sales of assets ............................. -- 71.7 -- 242.9
Other income (expense), net ......................... 1.1 (1.9) 3.5 13.0
Interest expense, net ............................... (13.5) (15.8) (40.8) (49.9)
--------- --------- --------- ---------
EARNINGS BEFORE INCOME TAXES ........................ 54.2 98.4 158.5 389.8
Income tax provision ................................ (130.2) (46.0) (172.0) (158.9)
--------- --------- --------- ---------
NET EARNINGS (LOSS) ................................. (76.0) 52.4 (13.5) 230.9
Preferred dividends ................................. -- (2.3) -- (7.0)
--------- --------- --------- ---------
EARNINGS (LOSS) APPLICABLE TO COMMON SHARES ......... $ (76.0) $ 50.1 $ (13.5) $ 223.9
========= ========= ========= =========
Primary earnings (loss) per common share ............ $ (1.38) $ 1.10 $ (0.25) $ 4.91
========= ========= ========= =========
Fully diluted earnings per common share ............. $ .95 $ 4.18
========= =========
Weighted average primary shares outstanding ......... 55.1 45.6 55.0 45.6
========= ========= ========= =========
Weighted average fully diluted shares outstanding.... 55.2 55.2
========= =========
The accompanying notes are an integral part of these financial statements.
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ALUMAX INC.
CONDENSED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED)
September 30, December 31,
1997 1996
------------- ------------
(Millions of Dollars,
Except per Share Amounts)
ASSETS
Current Assets:
Cash and equivalents .......................................... $ 59.9 $ 34.6
Accounts receivable, less allowance for doubtful accounts
(1997-$14.4; 1996-$16.6) ................................... 460.7 439.1
Inventories ................................................... 555.4 519.9
Other current assets .......................................... 86.3 92.2
-------- --------
Total current assets ....................................... 1,162.3 1,085.8
-------- --------
Noncurrent Assets:
Property, plant and equipment at cost, less accumulated
depreciation and amortization (1997-$1,115.7; 1996-$1,036.8) 2,020.1 2,027.4
Other assets .................................................. 265.0 185.5
-------- --------
Total noncurrent assets .................................... 2,285.1 2,212.9
-------- --------
TOTAL ASSETS ....................................................... $3,447.4 $3,298.7
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable .............................................. $ 135.1 $ 162.6
Accrued liabilities ........................................... 210.1 224.2
Current maturities of long-term debt .......................... 46.4 38.4
-------- --------
Total current liabilities .................................. 391.6 425.2
-------- --------
Noncurrent Liabilities:
Long-term debt ................................................ 626.5 672.0
Other noncurrent liabilities .................................. 798.7 560.7
-------- --------
Total noncurrent liabilities ............................... 1,425.2 1,232.7
-------- --------
Commitments and Contingencies
Stockholders' Equity:
Common stock of $.01 par value ................................ .6 .5
Paid-in capital ............................................... 933.3 920.2
Retained earnings ............................................. 710.8 724.3
Cumulative foreign currency translation adjustment ............ (14.1) (4.2)
-------- --------
Total stockholders' equity ................................. 1,630.6 1,640.8
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......................... $3,447.4 $3,298.7
======== ========
The accompanying notes are an integral part of these financial statements.
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ALUMAX INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended
September 30,
-------------------------
1997 1996
---------- ----------
(Millions of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) ....................................... $(13.5) $230.9
Reconciliation of net earnings (loss) to net cash provided
by operating activities:
Depreciation and amortization .......................... 115.1 105.7
Provision for doubtful accounts ........................ 1.0 4.9
Gain on sales of assets ................................ (2.1) (242.9)
Provision for tax assessment............................ 108.6 --
Deferred income taxes .................................. (26.9) (1.1)
Other noncash items .................................... 13.2 6.2
Changes in working capital, net of effects
of acquisition/disposition .......................... (93.8) 37.5
Net change in other noncurrent assets and liabilities... 65.0 14.2
------ ------
Net cash provided by operating activities ........... 166.6 155.4
------ ------
INVESTING ACTIVITIES:
Dispositions, net of cash sold ............................ 3.6 497.0
Acquisition, net of cash acquired ......................... -- (436.5)
Capital expenditures ...................................... (107.4) (171.1)
------ ------
Net cash used in investing activities .................. (103.8) (110.6)
------ ------
FINANCING ACTIVITIES:
Repayments of long-term and short-term debt ............... (37.5) (550.6)
Proceeds from long-term and short-term debt ............... -- 375.0
Dividends paid on preferred stock ......................... -- (7.0)
------ ------
Net cash used in financing activities ............... (37.5) (182.6)
------ ------
Net increase (decrease) in cash and equivalents ................ 25.3 (137.8)
Cash and equivalents at beginning of year ...................... 34.6 205.9
------ ------
Cash and equivalents at end of period .......................... $ 59.9 $ 68.1
====== ======
Supplemental Cash Flow Information:
Income tax payments ....................................... $ 27.9 $ 57.9
Interest paid, net of amounts capitalized ................. $ 42.5 $ 53.1
The accompanying notes are an integral part of these financial statements.
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ALUMAX INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 1. PRESENTATION
These unaudited interim condensed financial statements of Alumax Inc. ("Alumax"
or the "Company") should be read in conjunction with the audited financial
statements for the year ended December 31, 1996. In Management's opinion, all
adjustments necessary for a fair presentation are reflected in the interim
periods presented. Certain reclassifications have been made to the prior year's
financial statements to conform with the 1997 presentation.
NOTE 2. FINANCIAL INSTRUMENTS ACCOUNTING POLICY
The Company may, from time to time, utilize certain financial instruments in
connection with risk management. The fair value of financial instruments is
determined by reference to market value quotes, where available, and other
valuation techniques, as appropriate. Amounts to be paid or received on interest
rate swaps and caps are included in interest expense on an accrual basis, as
they effectively limit the interest rate exposure of the Company's debt
commitments.
Certain of the Company's foreign operating expenditures are denominated in
currencies other than the operations' functional currencies, which expose the
Company to exchange rate risks. In order to mitigate its exposure to exchange
rate risk where conditions exist, the Company may utilize forward foreign
currency contracts. Amounts paid or received on settlement of forward foreign
currency contracts are deferred and included in the measurement of the related
foreign denominated transactions.
The Company's results of operations and financial condition depend to a large
degree on primary aluminum prices. In order to reduce this exposure, the Company
may enter into future, forward and option contracts. Amounts paid or received on
settlement of future, forward and option contracts, including any cost to
purchase the contracts, are deferred and recognized as a component of the
related transaction and included in costs and expenses, except for amounts paid
or received on settlement of aluminum contracts by the primary reduction
facilities, which are included in net sales.
All of the Company's financial instruments have been designated as hedges and
are closely monitored to ensure that correlation between changes in the fair
value of financial instruments and changes in the fair value associated with the
underlying hedged items exists to such a degree that they substantially offset.
In the event a high degree of correlation is not maintained, or anticipated
transactions do not occur, deferred gains or losses on the affected financial
instruments are recognized in earnings immediately. At September 30, 1997 all of
the Company's financial instruments qualified for deferral accounting treatment.
NOTE 3. STRATEGIC TRANSACTIONS
On January 26, 1996, the Company sold a 23 percent undivided interest in its Mt.
Holly primary aluminum reduction facility for $89.3. The Company recorded a gain
of $78.4 ($48.6 after tax) in connection with this transaction. This transaction
reduced the Company's ownership in the Mt. Holly facility to 50.33 percent.
On January 31, 1996, the Company purchased all of the common shares of privately
held Cressona Aluminum Company ("Cressona") for a cash cost, including expenses,
of $436.5, net of $3.1 of cash acquired. In conjunction with the acquisition,
liabilities of $87.4 were acquired. Cressona is a leading manufacturer of
extruded aluminum products.
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ALUMAX INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
The acquisition was accounted for as a purchase and the results of operations of
Cressona have been included in the consolidated financial statements since
January 31, 1996. The acquisition was financed with cash on hand and $375.0 of
borrowings obtained under available credit facilities. All of these borrowings
were repaid in 1996.
In June 1996, the Company sold its investment in mining interests for $160.0 in
cash. The Company recorded an after-tax gain of $55.1, net of a $37.7 tax
provision, in the second quarter of 1996.
On September 25, 1996, the Company sold certain Fabricated Products businesses
in Western Europe and in the United States for $246.6 in cash, net of cash sold
of $5.4. The Company recorded an after-tax gain of $36.7, net of a $35.0 tax
provision, in the third quarter of 1996 in connection with the sale.
Pro Forma Information
The following summary presents Alumax's unaudited pro forma consolidated net
sales, net earnings and primary earnings per common share for the three and nine
months ended September 30, 1996, as if the acquisition of Cressona and the sale
of the Fabricated Products businesses each occurred on January 1, 1996. The pro
forma adjustments for the three and nine months ended September 30, 1996,
include the addition of Cressona's operating results for the month of January
1996. Since the acquisition occurred on January 31, 1996, the Company's actual
results include Cressona from February 1, 1996 through September 30, 1996.
Three Months Ended Nine Months Ended
September 30, 1996 September 30, 1996
------------------ ------------------
Net sales............................... $686.2 $2,134.1
Net earnings............................ $ 46.2 $ 220.2
Primary earnings per common share....... $ .96 $ 4.67
The pro forma results are based upon certain assumptions and estimates, which
the Company believes are reasonable. The pro forma results do not purport to be
indicative of results that actually would have been obtained had these
transactions occurred on January 1, 1996, nor are they intended to be a
projection of future results.
NOTE 4. INVENTORIES
Components of inventories at September 30, 1997 and December 31, 1996 are:
1997 1996
------ ------
Raw materials ........................ $299.5 $323.7
Work in process....................... 137.9 87.3
Finished products..................... 118.0 108.9
------ ------
Total.............................. $555.4 $519.9
====== ======
Approximately 81 percent and 78 percent of inventory at September 30, 1997 and
December 31, 1996, respectively, have been determined on the LIFO cost basis.
The excess of replacement cost over the LIFO basis of such inventory is
approximately $94.7 and $74.0 at September 30, 1997 and December 31, 1996,
respectively.
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ALUMAX INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. DEBT
On May 30, 1997, the Company amended its existing $400 revolving credit
facility, increasing the total amount available under the facility to $500 and
extending the term of the facility to May 2002. The terms and covenants that
govern the facility were not substantially changed with the amendment.
In October 1997, the Company amended its then existing $500 revolving credit
facility, increasing the total amount available under the facility to $800 and
extending the term of the facility to October 2002. The terms and covenants
that govern the facility were not substantially changed with the amendment. At
September 30, 1997, the entire amount of the facility was available to the
Company.
On October 27, 1997, the Company borrowed $355 under the revolving credit
facility to pay the amounts owed to the Internal Revenue Service (the "IRS")
based on the United States Tax Court ruling. See also Note 6 - Income Tax
Provision.
NOTE 6. INCOME TAX PROVISION
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ --------------------
1997 1996 1997 1996
------ ------ ------ ------
Federal........................... $125.9 $ 36.3 $160.4 $111.6
Foreign........................... 2.1 7.4 5.1 35.0
State............................. 2.2 2.3 6.5 12.3
------ ------ ------ ------
Total........................... $130.2 $ 46.0 $172.0 $158.9
====== ====== ====== ======
The effective tax rates for these periods differ from statutory rates because
of provisions for state and foreign taxes and a charge related to an alleged
income tax deficiency.
The IRS asserted that Alumax and certain of its subsidiaries were improperly
included in the 1984, 1985 and 1986 consolidated income tax returns of AMAX
Inc. and on that basis has assessed a federal income tax deficiency against
Alumax of $129. In response to the IRS' notice of deficiency, the Company filed
a petition in the United States Tax Court (the "Court") seeking a
redetermination in respect of the purported deficiency. The parties waived
their rights to a trial and the matter was submitted to the Court for decision
based upon the pleadings, stipulations, memoranda and other documents submitted
to the Court by the parties. On September 30, 1997, the Court entered a
decision in favor of the IRS opining that AMAX Inc. did not have the 80 percent
control necessary to consolidate. As a result of the ruling, the Company
recorded a charge of $108.6 in the third quarter of 1997. The expected
deficiency and accrued interest was recorded as a noncurrent liability in the
Company's September 30, 1997 financial statements. On October 27, 1997, the
Company paid an aggregate of $411 to the IRS, representing the expected
deficiency and accrued interest. The payment was funded from cash on hand and
borrowings of $355 under the Company's revolving credit facility. The Company
intends to appeal the decision of the Court to the United States Court of
Appeals.
The three and nine months ended September 30, 1996 include a provision for prior
years and the effect of the repatriation of foreign earnings associated with the
sale of certain Fabricated Products businesses in Western Europe which
contribute to an effective tax rate higher than the statutory rate. In addition,
the nine months ended September 30, 1996 includes $6.2 of foreign tax credits
which substantially offset the federal tax related to the first quarter 1996
dividend from investments in mining operations.
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ALUMAX INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. OTHER INCOME
The nine months ended September 30, 1996, includes $18.6 of dividend income
received from investments in mining operations. These investments were sold
during the second quarter of 1996.
NOTE 8. EARNINGS (LOSS) PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128" or the
"Statement"). This Statement simplifies the standards for computing earnings per
share currently required by APB Opinion No. 15 ("Opinion 15") and replaces the
presentation of primary earnings per share with a presentation of basic earnings
per share. Basic earnings per share is computed by dividing net income available
to common stockholders by the weighted-average number of common shares
outstanding during the period. This statement also requires presentation of
diluted earnings per share. Diluted earnings per share reflects the potential
dilution that could occur if options or warrants were exercised or convertible
securities were converted into common stock. Diluted earnings per share is
computed similarly to fully-diluted earnings per share under Opinion 15. The
following pro forma schedule illustrates the earnings per share the Company
would have reported under the provisions of FAS 128 for the three and nine
months ended September 30, 1997 and 1996:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
------ ----- ------ ------
Pro forma basic earnings (loss) per share....... $(1.38) $1.11 $(0.25) $ 4.99
Pro forma diluted earnings per share............ 0.95 4.18
Weighted average shares outstanding............. 55.1 44.9 55.0 44.9
Weighted average diluted shares outstanding..... 55.2 55.2
As required by the Statement, the Company will adopt FAS 128 in the fourth
quarter of 1997.
NOTE 9. COMMITMENTS AND CONTINGENCIES
The Company has been named as a defendant or identified as a potentially
responsible party under the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA") and similar state laws by governmental agencies and
private parties at 37 pending waste disposal sites which, in most instances,
were owned and operated by third parties. Management periodically evaluates such
matters and records or adjusts liability reserves for remediation and other
costs and potential damages when expenditures are considered probable and can be
reasonably estimated.
The Company's ultimate liability in connection with present and future
environmental claims will depend on many factors, including its volumetric share
of the waste at a given site, the remedial action required, the total cost of
remediation and the financial viability and participation of the other entities
which also sent waste to the site. Based upon current law and information known
to the Company concerning the size of the sites known to it, anticipated costs
of remediation, their years of operation, and the number of other potentially
responsible parties, Management believes that it has adequate reserves for the
Company's probable share of the estimated aggregate liability for the costs of
remedial actions and related costs and expenses and that such liability and
related costs and expenses should not have a material adverse effect on the
financial condition or results of operations of the Company. In addition, the
Company establishes reserves for remedial measures required from time to time at
its own facilities. Any expenditures for remediation programs it may be required
to undertake, either individually or in the aggregate, are not expected to have
a material adverse effect on the financial condition or results of operations of
the Company. The Company's environmental reserves totaled $29.7 at September 30,
1997 and $29.6 at December 31, 1996.
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ALUMAX INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Management does not anticipate that commitments, operating expenses or capital
expenditures for environmental compliance through and including the next fiscal
year will have a material adverse effect on the Company's financial condition or
results of operations. Based on historical trends toward stricter environmental
standards, however, it appears likely that the Company will incur additional
expenditures to remain in compliance with federal and state environmental laws.
For information regarding additional commitments and contingencies, see Note 9
to the Financial Statements in the Company's 1996 Annual Report on Form 10-K.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Unaudited; millions of dollars, except per share and per
tonne and per pound amounts)
INTRODUCTION
Net losses totalled $76.0 and $13.5, or $(1.38) and $(0.25) per common share,
for the three and nine months ended September 30, 1997, respectively, compared
with net earnings of $52.4 and $230.9, or $1.10 and $4.91 per common share, in
the three and nine months ended September 30, 1996. The 1997 results include a
$108.6 provision associated with a United States Tax Court decision concerning
an alleged income tax deficiency and a $6.1 after-tax charge associated with
consolidation efforts at the Company's semi-solid forging business. The 1996
results included after-tax gains of $36.7 in the third quarter on the sale of
certain Fabricated Products businesses, $55.1 in the second quarter on the sale
of mining interests and $48.6 in the first quarter on the sale of a 23 percent
interest in the Mt. Holly primary aluminum reduction facility. After-tax
dividend income of $18.3 received from investments in mining operations was
also included in the first quarter 1996 results.
RESULTS OF OPERATIONS
Earnings from operations for the three and nine months ended September 30, 1997
totalled $66.6 and $195.8, respectively, compared with operating earnings of
$44.4 and $183.8 for the comparable 1996 periods.
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
NET SALES
Primary aluminum products .................... $ 127.5 $ 140.2 $ 388.0 $ 501.8
Semi-fabricated products ..................... 456.0 418.0 1,369.3 1,237.1
Fabricated products .......................... 133.6 250.9 392.5 724.2
--------- --------- --------- ---------
$ 717.1 $ 809.1 $ 2,149.8 $ 2,463.1
========= ========= ========= =========
EARNINGS FROM OPERATIONS
Aluminum processing .......................... $ 80.5 $ 55.1 $ 233.9 $ 215.0
Corporate .................................... (13.9) (10.7) (38.1) (31.2)
--------- --------- --------- ---------
$ 66.6 $ 44.4 $ 195.8 $ 183.8
========= ========= ========= =========
PRODUCTION AND SHIPMENTS (THOUSANDS OF TONNES)
Sources of metal
Primary aluminum production .................. 177.6 162.9 530.3 506.1
Aluminum purchases ........................... 81.9 107.7 272.8 337.3
--------- --------- --------- ---------
259.5 270.6 803.1 843.4
========= ========= ========= =========
Metal shipments
Aluminum processing (including tolling)
Primary aluminum products .................... 69.5 78.7 212.1 285.9
Semi-fabricated products ..................... 156.5 147.6 472.8 429.0
Fabricated products(1) ....................... 22.6 35.6 75.8 104.6
--------- --------- --------- ---------
248.6 261.9 760.7 819.5
========= ========= ========= =========
DERIVED PRICES (DOLLARS/LB.)(2)
Primary aluminum products .................... $ 0.83 $ 0.81 $ 0.83 $ 0.80
Semi-fabricated products ..................... $ 1.32 $ 1.28 $ 1.31 $ 1.31
Fabricated products(1) ....................... $ 2.68 $ 3.20 $ 2.35 $ 3.14
(1) Included in Fabricated products' metal shipments for the three and nine
months ended September 30, 1997, were billet shipments of 7.4 and 28.0
thousand tonnes, respectively, compared with 4.7 and 15.5 thousand
tonnes in the same 1996 periods.
(2) Derived prices were calculated by dividing net sales by pounds shipped
(one tonne equals 2,204.6 pounds).
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NET SALES AND SHIPMENTS
The Company generated quarterly sales of $717.1 on aluminum shipments of 248,600
tonnes in the third quarter of 1997 compared with sales of $809.1 on aluminum
shipments of 261,900 tonnes in the third quarter of 1996. For the first nine
months of 1997, the Company generated sales of $2,149.8 on aluminum shipments of
760,700 tonnes compared with sales of $2,463.1 on aluminum shipments of 819,500
tonnes in the first nine months of 1996. The decreases in net sales were
principally a result of decreased shipments.
The London Metals Exchange (the "LME") cash price averaged $1,638 and $1,606 per
tonne during the three and nine months ended September 30, 1997, respectively,
compared with $1,440 and $1,530 per tonne in the comparable 1996 periods. The
Company's net sales are sensitive to changes in the world pricing of primary
aluminum. This price sensitivity impacts substantially all of the Company's
products to varying degrees, with less impact on the more specialized and
value-added products.
Primary products' net sales for the three and nine months ended September 30,
1997, decreased 9 percent and 23 percent, respectively. Substantially all of the
decreases were due to declines in external shipments, resulting from higher
internal consumption. Internal consumption of primary products grew by 24
percent in the first three quarters of 1997 compared with the first three
quarters of 1996. The increase in internal consumption was driven by the
integration of the Company's expanded extrusion operations. The January 31, 1996
acquisition of Cressona Aluminum Company ("Cressona") more than doubled the
capacity of the Company's extrusion operations. The Company's total primary
aluminum production in the first three quarters of 1997 increased approximately
5 percent over 1996.
Semi-fabricated products' net sales for the three and nine months ended
September 30, 1997, increased 9 percent and 11 percent, respectively, on
increased shipments. The increase in shipments was related primarily to the
January 1996 acquisition of Cressona and continued growth in the Company's
extrusions operations in the transportation and service center businesses.
Fabricated Products' net sales for the three and nine months ended September 30,
1997, decreased 47 percent and 46 percent, respectively, principally due to the
sale of certain fabricated products operations in Western Europe and in the
United States ("Fab Products"). Increased sales in the Company's European
secondary aluminum operation were more than offset by the effects of the
September 1996 sale of Fab Products, which had sales of $124.1 and $363.3 in the
three and nine months ended September 30, 1996.
COSTS AND EXPENSES
The Company's costs and expenses were $650.5 and $1,954.0 for the three and nine
months ended September 30, 1997, respectively, compared with costs and expenses
of $764.7 and $2,279.3 for the three and nine months ended September 30, 1996,
respectively. The decreases were largely attributable to lower volumes resulting
from the sale of Fab Products and decreases in external purchases of aluminum.
Cost of goods sold decreased 17 percent and 16 percent in the three and nine
months ended September 30, 1997, respectively. The decreases were the result of
the sale of Fab Products and lower external aluminum purchases from the
integration of the downstream operations partially offset by higher shipments
from the extrusion and mill businesses, as well as increased year-to-date
shipments from the Company's European secondary aluminum businesses.
In July 1997, the Company announced a consolidation and action plan related to
its semi-solid forging manufacturing operations. The year to date pretax cost of
this consolidation is $10.3, $6.1 after tax.
Selling and general expenses decreased by 7 percent in both the three and nine
months ended September 30, 1997, respectively, due primarily to the sale of Fab
Products offset partially by the growth in the Company's extrusion business and
increased international development activity. The third quarter and
year-to-date increase in Corporate selling and general expenses includes
non-recurring personnel costs and international development expenses.
Depreciation and amortization increased 10 percent and
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9 percent in the three and nine month periods ended September 30, 1997,
respectively. These increases were commensurate with the Company's level of
capital spending.
OTHER ITEMS AFFECTING NET EARNINGS
Other Income (Expense), Net
Other income (expense), net for the three and nine months ended September 30,
1997, was $1.1 and $3.5, respectively, compared with $(1.9) and $13.0 for the
same periods in 1996. The nine months ended September 30, 1996 included $18.6 of
dividend income received from investments in mining operations. This investment
was sold during the second quarter of 1996.
Interest Expense, Net
Gross interest expense was $14.3 and $44.1 for the three and nine months ended
September 30, 1997, respectively, a decrease of $3.9 and $14.5 from the
comparable periods in 1996. These decreases were a result of lower average
borrowings. Interest income was $2.0 for the nine months ended September 30,
1997, compared with $3.0 for the same period in 1996. Capitalized interest was
$1.3 for the nine months ended September 30, 1997, compared with $5.7 for the
same period in 1996.
Income Taxes
The income tax provision for the three and nine months ended September 30, 1997,
was $130.2 and $172.0, respectively, compared with $46.0 and $158.9 for the same
1996 periods. The effective tax rates for these periods differ from statutory
rates because of provisions for state and foreign taxes and a charge related to
an alleged income tax deficiency.
The Internal Revenue Service (the "IRS") asserted that Alumax and certain of
its subsidiaries were improperly included in the 1984, 1985 and 1986
consolidated income tax returns of AMAX Inc. and on that basis has assessed a
federal income tax deficiency against Alumax of $129. In response to the IRS'
notice of deficiency, the Company filed a petition in the United States Tax
Court (the "Court") seeking a redetermination in respect of the purported
deficiency. The parties waived their rights to a trial and the matter was
submitted to the Court for decision based upon the pleadings, stipulations,
memoranda and other documents submitted to the Court by the parties. On
September 30, 1997, the Court entered a decision in favor of the IRS opining
that AMAX Inc. did not have the 80 percent control necessary to consolidate. As
a result of the ruling, the Company recorded a charge of $108.6 in the third
quarter of 1997. The expected deficiency and accrued interest was recorded as a
noncurrent liability in the Company's September 30, 1997 financial statements.
On October 27, 1997, the Company paid an aggregate of $411 to the IRS,
representing the expected deficiency and accrued interest. The payment was
funded from cash on hand and borrowings of $355 under the Company's revolving
credit facility. The Company intends to appeal the decision of the Court to the
United States Court of Appeals.
The three and nine months ended September 30, 1996 include a provision for
prior years and the effect of the repatriation of foreign earnings associated
with the sale of certain Fabricated Products businesses in Western Europe which
contributed to an effective tax rate higher than the statutory rate. In
addition, the nine months ended September 30, 1996 includes $6.2 of foreign tax
credits which substantially offset the federal tax related to the first quarter
1996 dividend from investments in mining operations.
STRATEGIC TRANSACTIONS
On January 26, 1996, the Company sold a 23 percent undivided interest in its Mt.
Holly primary aluminum reduction facility for $89.3. The Company recorded a gain
of $78.4 ($48.6 after tax) in connection with this transaction. This transaction
reduced the Company's ownership in the Mt. Holly facility to 50.33 percent.
On January 31, 1996, the Company purchased all of the common shares of privately
held Cressona for a cash cost, including expenses, of $436.5, net of $3.1 of
cash acquired. In conjunction with the acquisition, liabilities of $87.4 were
acquired. Cressona is a leading manufacturer of extruded aluminum products.
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The acquisition was accounted for as a purchase and the results of operations of
Cressona have been included in the consolidated financial statements since
January 31, 1996. The acquisition was financed with cash on hand and $375 of
borrowings obtained under available credit facilities. All of these borrowings
were repaid in 1996.
In June 1996, the Company sold its investment in mining interests for $160 in
cash. The Company recorded an after-tax gain of $55.1, net of a $37.7 tax
provision, in the second quarter of 1996.
On September 25, 1996, the Company sold Fab Products for $246.6 in cash, net of
cash sold of $5.4. The Company recorded an after-tax gain of $36.7, net of a
$35.0 tax provision, in the third quarter of 1996 in connection with the sale.
Pro Forma Information
The following summary presents Alumax's unaudited pro forma consolidated net
sales, net earnings, and primary earnings per common share for the three and
nine months ended September 30, 1996, as if the acquisition of Cressona and the
sale of the Fabricated Products businesses each occurred on January 1, 1996. The
pro forma adjustments for the three and nine months ended September 30, 1996
include the addition of Cressona's operating results for the month of January
1996. Since the acquisition occurred on January 31, 1996, the Company's actual
results include Cressona from February 1, 1996 through September 30, 1996.
Three Months Ended Nine Months Ended
September 30, 1996 September 30, 1996
------------------ ------------------
Net sales................................. $686.2 $2,134.1
Net earnings.............................. $ 46.2 $ 220.2
Primary earnings per common share......... $ .96 $ 4.67
The pro forma results are based upon certain assumptions and estimates, which
the Company believes are reasonable. The pro forma results do not purport to be
indicative of results that actually would have been obtained had these
transactions occurred on January 1, 1996, nor are they intended to be a
projection of future results.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Operations provided $166.6 and $155.4 of cash during the first nine months of
1997 and 1996, respectively. Increased cash flows were directly related to the
increase in earnings from operations during the 1997 period. Additionally, cash
provided by operations included the 1996 receipt of dividends from mining
interests of $18.6.
Investing Activities
Cash used by investing activities was $103.8 for the nine months ended September
30, 1997, compared with $110.6 of cash used in the first nine months of 1996,
which included the acquisition of Cressona for $436.5 (net of cash acquired) and
proceeds of $497.0 from the sale of nonstrategic assets. Capital expenditures
were $107.4 during the first nine months of 1997 compared with $171.1 in the
first nine months of 1996.
In September 1996, the Company, through its subsidiary, Alumax Mill Products,
Inc., exercised its option to purchase its leased Texarkana rolling mill
facility in November 1997 for approximately $97 in cash. The Company is
exploring the possibility of entering into a new operating lease in lieu of
this purchase. Additionally, during 1996, the Company entered into a joint
venture with Yunnan Aluminum Processing Factory in Kunming, China, for the
annual production of 8,000 to 10,000 tonnes of light-gauge aluminum foil for
China's packaging market. Alumax will invest $38 of cash in the joint venture
to develop a continuous cast foil operation. As of September 30, 1997, the
Company had invested $28 of cash in the joint venture. The Company intends to
invest the remainder of the total obligation by the first quarter of 1998.
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Total capital spending in 1997 is expected to be approximately $185, excluding
the buyout of the Texarkana lease.
Financing Activities
Cash used in financing activities was $37.5 in the first nine months of 1997
compared with cash used of $182.6 in the first nine months of 1996. At September
30, 1997, the Company's total debt to capital ratio was 29.2 percent, down from
30.2 percent at December 31, 1996 and 30.4 percent at September 30, 1996. This
improvement was attributable to debt repayments of $37.5. In the first half of
1996, the Company borrowed $375 under available credit facilities to finance the
acquisition of Cressona. All of these borrowings were subsequently repaid during
1996. Debt repayments of $550.6 in the first nine months of 1996 included the
early retirements of $39.3 of Cressona debt acquired and a $90.7 promissory note
due in May 1996. (See Note 6 to the Financial Statements in the Company's 1996
Annual Report on Form 10-K).
On May 30, 1997, the Company amended its existing $400 revolving credit
facility, increasing the total amount available under the facility to $500 and
extending the term of the facility to May 2002. The terms and covenants that
govern the facility were not substantially changed with the amendment.
In October 1997, the Company amended its then existing $500 revolving credit
facility, increasing the total amount available under the facility to $800 and
extending the term of the facility to October 2002. The terms and covenants
that govern the facility were not substantially changed with the amendment. At
September 30, 1997, the entire amount of the facility was available to the
Company.
On October 27, 1997, the Company borrowed $355 under the revolving credit
facility to pay the amounts owed to the IRS based on the United States Tax Court
ruling.
Additionally, $7.0 in dividends were paid to holders of Alumax $4.00 Series A
Convertible Preferred Stock in the first nine months of 1996. In December 1996,
the outstanding shares of Preferred Stock were converted into approximately 9.6
million shares of Alumax Common Stock.
Subsequent to September 30, 1997, the Company began acquiring shares of its
common stock in connection with a stock repurchase program announced in July
1996. That program authorizes the Company to purchase up to 2.5 million common
shares on the open market from time to time at price levels the Company deems
desirable or pursuant to negotiated transactions. The Company anticipates
expending an amount up to approximately $35 during the fourth quarter of 1997
repurchasing its common shares. The purpose of the stock repurchase program
is to help the Company achieve its long-term goal of enhancing stockholder
value.
Risk Management
The Company utilizes certain financial instruments in connection with its risk
management. The risk of loss related to counterparty nonperformance under
financial instrument agreements at September 30, 1997 is not significant.
The Company enters into forward fixed price arrangements that are required by
certain customers and suppliers. The Company may utilize futures contracts or
options to hedge risks associated with forward fixed price arrangements. The
Company may also utilize futures contracts or options to manage price risk
associated with changes in inventory levels. The net amount of such contracts
was approximately 158,825 tonnes at September 30, 1997, and included varying
maturity dates through 2003. Gains or losses with respect to these positions
are reflected in earnings concurrent with consummation of underlying fixed
price transactions. Periodic value fluctuations of the futures contracts
approximately offset the value fluctuations of underlying fixed price
transactions.
The Company also may, from time to time, establish a floor selling price for
varying quantities of future production. This may be accomplished by entering
into forward sales of primary aluminum, purchasing put options, or by entering
into forward sales of primary aluminum, and purchases of call options, which
together provide the same price protection as purchasing put options in a manner
which correlates with the Company's production and sales of primary aluminum.
This strategy may be modified from time to time. At September 30, 1997, the net
amount of the Company's commitments with respect to these financial instruments
covered 257,025 tonnes of future production. The book value and market value of
these financial instruments were $9.3 and $3.5, respectively, at September 30,
1997.
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Certain of the Company's foreign operating expenditures are denominated in
currencies other than the operations' functional currencies, which expose the
Company to exchange rate risks. In order to mitigate its exposure to exchange
rate risk where these conditions exist, the Company may utilize forward foreign
currency contracts. At September 30, 1997, the Company had outstanding $120.5 in
forward foreign currency contracts which mature at various dates through
December 1998. The gains or losses related to these contracts are deferred and
included in the measurement of the related foreign currency denominated
transactions. If these contracts had been terminated at September 30, 1997, the
Company would have paid approximately $2.0.
The Company's debt instruments and related interest rate hedges are susceptible
to market fluctuations based on changes in the cost of borrowing. At September
30, 1997, the fair value of total debt approximated book value. The Lauralco
credit facility, which has a variable interest rate, required the Company to
establish facilities to effectively limit the interest rate exposure of the
commitment. To meet this requirement, the Company has obtained interest rate
swaps with a notional amount of $400 through October 26, 2000 and interest rate
caps having a notional amount of $150 through October 26, 1998. The Company
would have paid approximately $35.0 to terminate these agreements at September
30, 1997.
The Company also purchases natural gas for its operations and enters into
forward contracts to eliminate volatility in prices. At September 30, 1997,
none of these contracts was material.
For further information regarding the Company's risk management, see
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 15 to the Financial Statements in the Company's 1996 Annual
Report on Form 10-K.
Environmental Matters
The Company has been named as a defendant or identified as a potentially
responsible party under the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA") and similar state laws by governmental agencies and
private parties at 37 pending waste disposal sites which, in most instances,
were owned and operated by third parties. Management periodically evaluates such
matters and records or adjusts liability reserves for remediation and other
costs and potential damages when expenditures are considered probable and can be
reasonably estimated.
The Company's ultimate liability in connection with present and future
environmental claims will depend on many factors, including its volumetric share
of the waste at a given site, the remedial action required, the total cost of
remediation and the financial viability and participation of the other entities
which also sent waste to the site. Based upon current law and information known
to the Company concerning the size of the sites known to it, anticipated costs
of remediation, their years of operation, and the number of other potentially
responsible parties, Management believes that it has adequate reserves for the
Company's probable share of the estimated aggregate liability for the costs of
remedial actions and related costs and expenses and that such liability and
related costs and expenses should not have a material adverse effect on the
financial condition or results of operations of the Company. In addition, the
Company establishes reserves for remedial measures required from time to time at
its own facilities. Any expenditures for remediation programs it may be required
to undertake, either individually or in the aggregate, are not expected to have
a material adverse effect on the financial condition or results of operations of
the Company. The Company's environmental reserves totaled $29.7 at September 30,
1997 and $29.6 at December 31, 1996.
Management does not anticipate that commitments, operating expenses or capital
expenditures for environmental compliance through and including the next fiscal
year will have a material adverse effect on the Company's financial condition or
results of operations. Based on historical trends toward stricter environmental
standards, however, it appears likely that the Company will incur additional
expenditures to remain in compliance with federal and state environmental laws.
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Part II. Other Information
Item 1. Legal Proceedings
The Internal Revenue Service (the "IRS") asserted that Alumax and certain of
its subsidiaries were improperly included in the 1984, 1985 and 1986
consolidated income tax returns of AMAX Inc. and on that basis has assessed a
federal income tax deficiency against Alumax of $129. In response to the IRS'
notice of deficiency, the Company filed a petition in the United States Tax
Court (the "Court") seeking a redetermination in respect of the purported
deficiency. The parties waived their rights to a trial and the matter was
submitted to the Court for decision based upon the pleadings, stipulations,
memoranda and other documents submitted to the Court by the parties. On
September 30, 1997, the Court entered a decision in favor of the IRS opining
that AMAX Inc. did not have the 80 percent control necessary to consolidate. As
a result of the ruling, the Company recorded a charge of $108.6 in the third
quarter of 1997. The expected deficiency and accrued interest was recorded as a
noncurrent liability in the Company's September 30, 1997 financial statements.
On October 27, 1997, the Company paid an aggregate of $411 to the IRS,
representing the expected deficiency and accrued interest. The payment was
funded from cash on hand and borrowings of $355 under the Company's revolving
credit facility. The Company intends to appeal the decision of the Court to the
United States Court of Appeals. See "Legal Proceedings - Tax Dispute Regarding
Consolidation with Amax" in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
The Ninth Circuit Court of Appeals has scheduled oral argument for December 3,
1997, on the plaintiff's appeal of orders, entered by the United States District
Court for the Central District of California, granting the Aluminum
Association's motion to dismiss for lack of personal jurisdiction and summary
judgment in favor of the defendant primary aluminum producers as well as the
District Court's order denying the plaintiff's motion for reconsideration. The
plaintiff, a California bicycle manufacturer, filed a purported class action
against the Company and four other primary aluminum producers along with The
Aluminum Association, an industry trade association, in March 1996, alleging
violations of California's antitrust law (the Cartwright Act). See "Legal
Proceedings - Other Legal Proceedings - Antitrust Action" in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
On October 3, 1997, the various defendants in a patent infringement action,
initiated by the Company in August 1995, against Hot Metal Moldings, Inc. and
subsequently expanded to include Ormet Primary Aluminum Corporation and certain
subsidiaries and affiliates of Buhler International AG, filed counterclaims
against the Company alleging violations of Section 1 and 2 of the Sherman Act
and Section 4 of the Clayton Act for which they seek injunctive relief and
treble damages in an unspecified amount. The Company believes these
counterclaims are without merit and intends to vigorously oppose them. See
"Legal Proceedings - Other Legal Proceedings - Patent Infringement Action" in
the Company's Annual Report on Form 10-K for the year ended December 31, 1996.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
4.01 Amended and Restated Credit Agreement, dated as of October
9, 1997, among Alumax Inc., the Banks Signatory thereto,
Royal Bank of Canada, as Agent, Arranger and Letter of Credit
Issuer, and Canadian Imperial Bank of Commerce, as
Administrative Agent.
11.01 Calculation of Earnings per Common Share.
27.01 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
No reports on Form 8-K were filed by Alumax Inc. during the quarter ended
September 30, 1997.
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SIGNATURES
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.
ALUMAX INC.
By /s/ Helen M. Feeney
----------------------------------------
Helen M. Feeney
Vice President and
Corporate Secretary
By /s/ Kevin J. Krakora
----------------------------------------
Kevin J. Krakora
Vice President and Controller
Date: November 13, 1997
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EXHIBIT INDEX
Exhibit
Number Description
4.01 Amended and Restated Credit Agreement, dated as of October
9, 1997, among Alumax Inc., the Banks Signatory thereto,
Royal Bank of Canada, as Agent, Arranger and Letter of Credit
Issuer, and Canadian Imperial Bank of Commerce, as
Administrative Agent.
11.01 Calculation of Earnings per Common Share.
27.01 Financial Data Schedule (for SEC use only).
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