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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1997
Commission file number 1-82
PHELPS DODGE CORPORATION
(a New York corporation)
13-1808503
(I.R.S. Employer Identification No.)
2600 N. Central Avenue, Phoenix, AZ 85004-3089
Registrant's telephone number: (602) 234-8100
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 Common Shares outstanding at August 7, 1997: 60,391,156 shares.
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PHELPS DODGE CORPORATION
Quarterly Report on Form 10-Q
For the Quarter Ended June 30, 1997
Table of Contents
-----------------
Part I. Financial Information
Item 1. Financial Statements
Statement of Consolidated Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Common Shareholders' Equity
Notes to Consolidated Financial Information
Review by Independent Accountants
Report of Independent Accountants on Review of Interim Financial
Information
Item 2. Management's Discussion and Analysis
Results of Operations
Results of Phelps Dodge Mining Company
Results of Phelps Dodge Industries
Other Matters Relating to the Statement of Consolidated Income
Changes in Financial Condition
Part II. Other Information
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
Index to Exhibits
PHELPS DODGE CORPORATION AND SUBSIDIARIES
Part I. Financial Information
Item 1. Financial Statements
- ----------------------------
STATEMENT OF CONSOLIDATED INCOME
- --------------------------------
(Unaudited; in millions except per share data)
Second Quarter First Six Months
-------------- ----------------
1997 1996 1997 1996
------ ------ ------ ------
SALES AND OTHER OPERATING REVENUES .......... $1,065.0 957.7 2,086.7 1,962.4
-------- ----- ------- -------
OPERATING COSTS AND EXPENSES
Cost of products sold ..................... 742.9 646.9 1,438.8 1,311.4
Depreciation, depletion and amortization .. 69.7 62.7 138.6 123.9
Selling and general administrative expense 35.2 31.2 68.9 61.7
Exploration and research expense .......... 26.5 21.4 43.7 40.1
-------- ----- ------- -------
874.3 762.2 1,690.0 1,537.1
-------- ----- ------- -------
OPERATING INCOME ............................ 190.7 195.5 396.7 425.3
Interest expense .......................... (16.4) (10.3) (32.8) (27.5)
Capitalized interest ...................... 3.7 0.3 6.2 0.5
Miscellaneous income and expense, net ..... 15.0 2.2 24.9 17.2
-------- ----- ------- -------
INCOME BEFORE TAXES, MINORITY INTERESTS
AND EQUITY IN NET EARNINGS OF AFFILIATED
COMPANIES .................................. 193.0 187.7 395.0 415.5
Provision for taxes on income ............. (57.8) (62.2) (122.4) (135.1)
Minority interests in consolidated
subsidiaries ............................. (2.8) (3.0) (5.1) (6.4)
Equity in net earnings of affiliated
companies ................................ 2.4 3.8 4.8 5.4
-------- ----- ------- -------
NET INCOME .................................. $ 134.8 126.3 272.3 279.4
======== ===== ======= =======
EARNINGS PER SHARE .......................... $ 2.16 1.90 4.28 4.16
======== ===== ======= =======
AVERAGE NUMBER OF SHARES OUTSTANDING ........ 62.4 66.6 63.7 67.1
See Notes to Consolidated Financial Information.
BUSINESS SEGMENTS
- -----------------
(Unaudited; in millions)
Second Quarter First Six Months
-------------- ----------------
1997 1996 1997 1996
------ ------ ------ ------
SALES AND OTHER OPERATING REVENUES
Phelps Dodge Mining Company ............... $ 603.8 529.3 1,194.1 1,113.9
Phelps Dodge Industries ................... 461.2 428.4 892.6 848.5
-------- ----- ------- -------
$1,065.0 957.7 2,086.7 1,962.4
======== ===== ======= =======
OPERATING INCOME (LOSS)
Phelps Dodge Mining Company ............... $ 142.4 146.3 314.2 330.9
Phelps Dodge Industries ................... 59.9 60.1 105.2 114.5
Corporate and other ....................... (11.6) (10.9) (22.7) (20.1)
-------- ----- ------- -------
$ 190.7 195.5 396.7 425.3
======== ===== ======= =======
See Notes to Consolidated Financial Information.
CONSOLIDATED BALANCE SHEET
- --------------------------
(Unaudited; in millions)
June 30, December 31,
1997 1996
-------- -----------
ASSETS
Cash and short-term investments, at cost ............. $ 352.1 470.1
Accounts receivable, net ............................. 515.0 489.1
Inventories .......................................... 308.1 293.0
Supplies ............................................. 117.0 117.0
Prepaid expenses ..................................... 17.4 6.1
Deferred income taxes ................................ 45.1 46.2
-------- -------
Current assets ................................... 1,354.7 1,421.5
Investments and long-term accounts receivable ........ 137.5 86.4
Property, plant and equipment, net ................... 3,163.9 3,020.5
Other assets and deferred charges .................... 287.5 288.0
-------- -------
$4,943.6 4,816.4
======== =======
LIABILITIES
Short-term debt (see Note 4) ......................... $ 195.9 66.5
Current portion of long-term debt .................... 48.5 38.2
Accounts payable and accrued expenses ................ 549.1 564.9
Dividends payable (see Note 5) ....................... 30.6 --
Income taxes ......................................... 18.3 16.3
-------- -------
Current liabilities .............................. 842.4 685.9
Long-term debt (see Note 4) .......................... 602.8 554.6
Deferred income taxes ................................ 457.2 424.9
Other liabilities and deferred credits ............... 315.9 309.6
-------- -------
2,218.3 1,975.0
-------- -------
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES ......... 90.4 85.5
-------- -------
COMMON SHAREHOLDERS' EQUITY
Common shares, 61.1 outstanding (12/31/96 - 64.7) .... 382.1 404.4
Retained earnings .................................... 2,372.2 2,465.0
Cumulative translation adjustments ................... (105.2) (98.8)
Other ................................................ (14.2) (14.7)
-------- -------
2,634.9 2,755.9
-------- -------
$4,943.6 4,816.4
======== =======
See Notes to Consolidated Financial Information.
CONSOLIDATED STATEMENT OF CASH FLOWS
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(Unaudited; in millions)
Six months ended June 30,
-------------------------
1997 1996
------- ------
OPERATING ACTIVITIES
Net income ............................................ $ 272.3 279.4
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization .......... 138.6 123.9
Deferred income taxes ............................. 35.5 43.7
Equity earnings net of dividends received ......... (1.9) (4.9)
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable ..... (29.8) (5.3)
(Increase) decrease in inventories .............. (18.5) (0.6)
(Increase) decrease in supplies ................. 1.3 2.1
(Increase) decrease in prepaid expenses ......... (11.4) (22.3)
(Increase) decrease in deferred income taxes .... 1.0 1.3
Increase (decrease) in interest payable ......... 2.0 0.8
Increase (decrease) in other accounts payable ... (8.4) (7.1)
Increase (decrease) in income taxes ............. 1.9 (1.6)
Increase (decrease) in other accrued expenses ... (6.1) (10.7)
Other adjustments, net ............................ (1.3) 6.8
------- -----
Net cash provided by operating activities . 375.2 405.5
------- -----
INVESTING ACTIVITIES
Capital outlays ....................................... (281.9) (209.0)
Capitalized interest .................................. (6.2) (0.5)
Investment in subsidiaries ............................ (33.7) (30.0)
Proceeds from asset dispositions and other, net ....... (1.3) 2.0
------- -----
Net cash used in investing activities ..... (323.1) (237.5)
------- -----
FINANCING ACTIVITIES
Increase in debt ...................................... 214.3 15.6
Payment of debt ....................................... (24.3) (6.6)
Common dividends ...................................... (63.2) (63.5)
Purchase of common shares ............................. (306.6) (191.3)
Other, net ............................................ 9.7 10.3
------- -----
Net cash used in financing activities ..... (170.1) (235.5)
------- -----
DECREASE IN CASH AND SHORT-TERM INVESTMENTS .............. (118.0) (67.5)
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD ... 470.1 608.5
------- -----
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD ......... $ 352.1 541.0
======= =====
See Notes to Consolidated Financial Information.
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
- -----------------------------------------------------
(Unaudited; in millions)
Common Shares Cumulative
----------------- Translation Common
Number At Par Retained Adjustments Shareholders'
of Shares Value Earnings and Other Equity
--------- ------ -------- --------- ------
BALANCE AT DECEMBER 31, 1996 64.7 $ 404.4 $2,465.0 ($ 113.5) $ 2,755.9
Stock options exercised .. 0.4 2.7 10.3 13.0
Common shares purchased .. (4.0) (25.0) (281.6) (306.6)
Net income ............... 272.3 272.3
Dividends declared on
common shares .......... (93.8) (93.8)
Translation adjustment ... (6.4) (6.4)
Other .................... 0.5 0.5
---- ------- -------- -------- ---------
BALANCE AT JUNE 30, 1997 ... 61.1 $ 382.1 $2,372.2 ($ 119.4) $ 2,634.9
==== ======= ======== ======== =========
See Notes to Consolidated Financial Information.
NOTES TO CONSOLIDATED FINANCIAL INFORMATION
- -------------------------------------------
(Unaudited)
1. The unaudited consolidated financial information presented herein has
been prepared in accordance with the instructions to Form 10-Q and does
not include all of the information and note disclosures required by
generally accepted accounting principles. Therefore, this information
should be read in conjunction with the consolidated financial
statements and notes thereto included in the Corporation's Form 10-K
for the year ended December 31, 1996. This information reflects all
adjustments that are, in the opinion of management, necessary to
present a fair statement of the results for the interim periods
reported.
2. The results of operations for the three-month and six-month periods
ended June 30, 1997, are not necessarily indicative of the results to
be expected for the full year.
3. Depending on market circumstances, the Corporation may periodically
purchase or liquidate various copper price protection contracts for a
portion of its expected future mine production to mitigate the risk of
adverse price fluctuations. The Corporation currently has no copper
price protection contracts in place.
During the 1996 third quarter, the Corporation liquidated a portion of
its copper price protection contracts that covered anticipated mine
production in the first quarter of 1997. Consequently, a $6.8 million
gain was recognized in pre-tax income during the 1997 first quarter.
4. The Corporation's short-term debt increased from $66.5 million on
December 31, 1996, to $195.9 million on June 30, 1997, primarily as a
result of borrowings under the Corporation's revolving credit agreement
to support the Corporation's capital expenditure and share purchase
programs. The revolving credit agreement between the Corporation and
several lenders was amended on June 25, 1997. The agreement, as amended
and restated, permits borrowings of up to $1 billion until its
scheduled maturity on June 25, 2002. The agreement allows for two
one-year renewals beyond the scheduled maturity date if the Corporation
requests and receives approval from at least two-thirds of the lenders
involved. Interest is payable at a fluctuating rate based on the agent
bank's prime rate or a fixed rate based on the Eurodollar Interbank
Offered Rate (LIBOR), or at fixed rates offered independently by the
several lenders, for maturities of from seven to 360 days. This
agreement provides for a facility fee of six and one-half basis points
(0.065 percent) on total commitments. The agreement requires the
Corporation to maintain a minimum consolidated tangible net worth of
$1.1 billion and limits indebtedness to 50 percent of total
consolidated capitalization. There were borrowings of $125 million
under this agreement at June 30, 1997; there were no borrowings under
this agreement at December 31, 1996.
In addition, the Corporation's long-term debt increased from $554.6
million on December 31, 1996, to $602.8 million on June 30, 1997.
During the second quarter of 1997, the Corporation's 80-percent-owned
Chilean subsidiary, Compania Contractual Minera Candelaria (CCMC),
borrowed $30 million of 12-year, dollar-denominated debt to refinance
Chilean peso-denominated debt that was prepaid in December 1996. In
addition, during the quarter CCMC borrowed $58 million of a $150
million, 12-year dollar-denominated facility arranged in order to
partially finance CCMC's $337 million expansion project. Both of these
facilities are based on floating rates tied to six-month LIBOR and are
non-recourse to the Corporation. Under the proportional consolidation
method, the Corporation reflects 80 percent of these amounts in its
financial statements. The Corporation also caused CCMC to sell the 9
percent and 11 percent interest rate caps purchased in 1993 that were
intended to limit the effect of increases in the cost of CCMC's
floating rate debt. In turn, the Corporation caused CCMC to enter into
interest rate swaps with certain financial institutions to effectively
convert all of CCMC's floating rate debt to 7.84 percent, fixed rate
debt for the life of the debt. The obligations under the interest rate
swaps are non-recourse to the Corporation.
5. On June 25, 1997, the Corporation's board of directors declared a
regular quarterly dividend of 50 cents per common share for the 1997
third quarter. This dividend is to be paid on September 10, 1997, to
common shareholders of record at the close of business on August 20,
1997. This has resulted in an outstanding dividends payable balance as
of June 30, 1997, of $30.6 million.
6. The effect of the implementation of Statement of Financial Accounting
Standards No. 128, "Earnings per Share," would be immaterial on a pro
forma basis for the calculation of earnings per share for the
three-month and six-month periods ended June 30, 1997.
REVIEW BY INDEPENDENT ACCOUNTANTS
---------------------------------
The financial information as of June 30, 1997, and for the three-month
and six-month periods ended June 30, 1997 and 1996, included in Part I pursuant
to Rule 10-01 of Regulation S-X has been reviewed by Price Waterhouse LLP (Price
Waterhouse), the Corporation's independent accountants, in accordance with
standards established by the American Institute of Certified Public Accountants.
Price Waterhouse's report is included in this quarterly report.
Price Waterhouse does not carry out any significant or additional audit
tests beyond those that would have been necessary if its report had not been
included in this quarterly report. Accordingly, such report is not a "report" or
"part of a registration statement" within the meaning of Sections 7 and 11 of
the Securities Act of 1933 and the liability provisions of Section 11 of such
Act do not apply.
<AUDIT-REPORT>
PRICE WATERHOUSE LLP
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Phelps Dodge Corporation
We have reviewed the accompanying consolidated balance sheet of Phelps Dodge
Corporation and its subsidiaries as of June 30, 1997 and the consolidated
statements of income, of cash flows and of common shareholders' equity for the
three-month and six-month periods ended June 30, 1997 and 1996. These financial
statements are the responsibility of the Corporation's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We previously audited in accordance with generally accepted auditing standards,
the consolidated balance sheet as of December 31, 1996, and the related
consolidated statements of income, of cash flows and of common shareholders'
equity for the year then ended (not presented herein), and in our report dated
January 15, 1997 we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet information as of December 31, 1996, is
fairly stated in all material respects in relation to the consolidated balance
sheet from which it has been derived.
Price Waterhouse LLP
Phoenix, Arizona
July 10, 1997
</AUDIT-REPORT>
Item 2. Management's Discussion and Analysis
- ------- ------------------------------------
RESULTS OF OPERATIONS
Phelps Dodge Corporation had consolidated net income of $134.8 million,
or $2.16 per common share, in the second quarter of 1997, compared with $126.3
million, or $1.90 per common share, in the 1996 second quarter. Net income for
the six months ended June 30, 1997, was $272.3 million, or $4.28 per common
share, compared with $279.4 million, or $4.16 per common share in the
corresponding 1996 period. Earnings per share in the three-month and six-month
periods ended June 30, 1997, were higher than those reported in the
corresponding 1996 periods principally due to a decrease in the average number
of shares outstanding as a result of the Corporation's share purchase program.
Operating income in the 1997 second quarter was $190.7 million, a
decrease of $4.8 million from the corresponding 1996 period principally as a
result of higher copper production costs and lower sales volumes of specialty
chemicals in the European markets. Operating income of $396.7 million for the
six-month period ended June 30, 1997, was $28.6 million less than the
corresponding 1996 period principally due to higher copper production costs,
lower sales volumes of specialty chemicals in the European markets and the
effects of a first quarter strike at the Corporation's London, Ontario, wheel
and rim plant. Increased sales volumes in the Corporation's wire and cable
businesses and continued strength in the North American wheel and rim markets
partially offset these negative factors in 1997.
Any material change in the price the Corporation receives for copper,
or in its unit production costs, has a significant effect on the Corporation's
results. The Corporation's present share of annual production is approximately
1.6 billion pounds of copper. Accordingly, each 1 cent per pound change in the
average annual copper price received by the Corporation, or in average annual
unit production costs, causes a variation in annual operating income before
taxes of approximately $16 million.
The COMEX spot price per pound of copper cathode, upon which the
Corporation bases its selling price for a majority of its production, averaged
$1.14 in the second quarter and $1.13 in the first six months of 1997, compared
with $1.16 and $1.17 in the corresponding 1996 periods. From July 1 to August 7,
1997, the COMEX price averaged $1.09 per pound, closing at $1.08 on August 7,
1997.
Depending on market circumstances, the Corporation may periodically
purchase or liquidate various copper price protection contracts for a portion of
its expected future mine production to mitigate the risk of adverse price
fluctuations. For a further discussion of the Corporation's copper price
protection arrangements for 1997 production, see Note 3 to the Consolidated
Financial Information.
Sales were $1,065.0 million in the 1997 second quarter and $2,086.7
million in the first six months of 1997, compared with $957.7 million and
$1,962.4 million in the corresponding 1996 periods. The 1997 increases
principally resulted from increased sales of wire and cable products and wheels
and rims, and from increased amounts of copper purchased for resale.
RESULTS OF PHELPS DODGE MINING COMPANY
Phelps Dodge Mining Company is an international business comprising a
group of companies involved in vertically integrated copper operations including
mining, concentrating, electrowinning, smelting and refining, rod production,
marketing and sales, and related activites. Copper is sold primarily to others
as rod, cathode or concentrates, and as rod to the Phelps Dodge Industries
segment. In addition, Phelps Dodge Mining Company at times smelts and refines
copper and produces copper rod for others on a toll basis. Phelps Dodge Mining
Company also produces gold, silver, molybdenum and copper chemicals, principally
as by-products, and sulfuric acid from its air quality control facilities. This
segment also includes the Corporation's other mining operations and investments
(including fluorspar, silver, lead and zinc operations) and its worldwide
mineral exploration and development programs.
- --------------------------------------------------------------------------------
Second Quarter First Six Months
-------------- ----------------
1997 1996 1997 1996
---- ---- ---- ----
Copper production (short tons):
Total production-------------------------241,400 236,000 476,700 467,400
Less minority participants' shares *----- 41,900 40,800 82,600 82,000
------- ------- ------- -------
Net Phelps Dodge share-------------------199,500 195,200 394,100 385,400
======= ======= ======= =======
Copper sales (short tons):
Net Phelps Dodge share from
own mines------------------------------189,700 189,000 382,500 379,400
Purchased copper------------------------- 83,100 57,500 156,200 119,600
------- ------- ------- -------
Total copper sales-----------------------272,800 246,500 538,700 499,000
======= ======= ======= =======
New York Commodity Exchange
average spot price per
pound - copper cathodes------------------$ 1.14 1.16 1.13 1.17
(in millions)
Sales and other operating revenues---------$ 603.8 529.3 1,194.1 1,113.9
Operating income---------------------------$ 142.4 146.3 314.2 330.9
- ------------------------------
* Minority participant interests include (i) a 15 percent undivided
interest in the Morenci, Arizona, copper mining complex held by
Sumitomo Metal Mining Arizona, Inc., (ii) a one-third partnership
interest in Chino Mines Company in New Mexico held by Heisei Minerals
Corporation, and (iii) a 20 percent interest in Candelaria in Chile
held by SMMA Candelaria, Inc., a jointly owned subsidiary of Sumitomo
Metal Mining Co., Ltd. and Sumitomo Corporation.
- --------------------------------------------------------------------------------
Phelps Dodge Mining Company's sales of copper increased by 26,300 tons
or 11 percent in the second quarter of 1997 and by 39,700 tons or 8 percent in
the first six months of 1997 compared with the corresponding 1996 periods. The
sales volume increases principally consisted of copper purchased for resale.
Resulting sales and other operating revenues in the second quarter of 1997 were
$603.8 million, 14 percent higher than the corresponding 1996 period, while
sales and other operating revenues in the first six months of 1997 were 7
percent higher than the same 1996 period.
Phelps Dodge Mining Company recorded operating income of $142.4 million
in the 1997 second quarter and $314.2 million in the first six months of 1997,
compared with $146.3 million and $330.9 million in the corresponding 1996
periods. These decreases reflected higher copper production costs primarily
resulting from increased depreciation charges and reduced by-product credits for
gold.
The collective bargaining agreements covering approximately 625
employees at Phelps Dodge Mining Company's Chino operations in New Mexico
expired on June 30, 1996. As of August 7, 1997, employees who were covered by
the agreements have continued to work without a contract.
RESULTS OF PHELPS DODGE INDUSTRIES
Phelps Dodge Industries is a business segment comprising a group of
companies that manufacture engineered products principally for the
transportation, energy and telecommunications sectors worldwide. Its operations
are characterized by products with significant market share, internationally
competitive cost and quality, and specialized engineering capabilities. This
business segment includes the Corporation's specialty chemical operations
through Columbian Chemicals Company and its subsidiaries; its wheel and rim
operations through Accuride Corporation and its subsidiaries; and its wire and
cable and specialty conductor operations through Phelps Dodge International
Corporation and Phelps Dodge Magnet Wire Company and their subsidiaries and
affiliates.
- --------------------------------------------------------------------------------
Second Quarter First Six Months
-------------- ----------------
1997 1996 1997 1996
---- ---- ---- ----
(in millions)
Sales and other operating revenues:
Specialty chemicals---------------- $ 106.4 109.9 215.1 222.3
Wheels and rims-------------------- 87.1 81.1 168.6 163.9
Wire and cable--------------------- 267.7 237.4 508.9 462.3
-------- ------- ------- -------
$ 461.2 428.4 892.6 848.5
======== ======= ======= =======
Operating income:
Specialty chemicals---------------- $ 18.6 23.7 35.8 44.9
Wheels and rims-------------------- 13.7 13.2 19.8 24.2
Wire and cable--------------------- 27.6 23.2 49.6 45.4
-------- ------- ------- -------
$ 59.9 60.1 105.2 114.5
======== ======= ======= =======
- --------------------------------------------------------------------------------
During the 1997 second quarter, Phelps Dodge Industries recorded
operating income of $59.9 million, compared with a record $60.1 million in the
corresponding 1996 period. Operating income in the first six months of 1997 was
$105.2 million, compared with $114.5 million in the first six months of 1996.
The strong second quarter earnings reflected increased sales volumes in the wire
and cable business and continued strength in the North American wheel and rim
markets. The year-to-date decrease in earnings reflected lower sales volumes of
specialty chemicals in the European markets and the effects of a strike at the
Corporation's London, Ontario, wheel and rim plant which began on January 21,
1997, and was settled on March 15, 1997.
The collective bargaining agreement covering approximately 360
employees at Phelps Dodge Magnet Wire Company's Hopkinsville, Kentucky, plant
expired on October 11, 1996. As of August 7, 1997, employees who were covered by
the agreement have continued to work without a contract.
OTHER MATTERS RELATING TO
THE STATEMENT OF CONSOLIDATED INCOME
Miscellaneous income and expense, net, increased by $12.8 million in
the second quarter and $7.7 million in the first six months of 1997, compared
with the corresponding 1996 periods. These increases principally reflected a
1996 second quarter $7.1 million foreign exchange loss from the effect on
working capital of the devaluation of the Venezuelan Bolivar, and a $6.0 million
pre-tax, non-cash gain in the 1997 second quarter from the exchange of shares of
a cost basis investment in a wire and cable business located in Greece. The
year-to-date increase was partially offset by a $3.4 million decrease in
dividends received from the Corporation's 13.9 percent minority interest in
Southern Peru Copper Corporation. The $7.1 million 1996 second quarter foreign
exchange loss from the devaluation of the Bolivar was offset by an $8.0 million
interest expense gain that represented a remeasurement of Venezuelan local
currency debt after the devaluation.
CHANGES IN FINANCIAL CONDITION
Capital outlays during the first six months of 1997 were $207.3 million
for Phelps Dodge Mining Company including $108.3 million for the expansion of
the Corporation's Candelaria mining operations in Chile. Capital outlays were
$72.6 million for Phelps Dodge Industries. Capital outlays in the corresponding
1996 period were $136.4 million for Phelps Dodge Mining Company and $71.0
million for Phelps Dodge Industries. The Corporation expects capital outlays for
the year 1997 to be approximately $500 million for Phelps Dodge Mining Company
(including approximately $175 million for the Candelaria expansion project).
Phelps Dodge Industries is expected to spend approximately $200 million during
the year.
At June 30, 1997, the Corporation's total debt was $847.2 million,
compared with $659.3 million at year-end 1996. Debt increased as a result of
non-recourse borrowings for the expansion of the Candelaria mine and borrowings
under the Corporation's revolving credit agreement to support the Corporation's
capital expenditure and share purchase programs. The Corporation's ratio of debt
to total capitalization was 23.7 percent at June 30, 1997, compared with 18.8
percent at December 31, 1996. For further information concerning the Candelaria
borrowings and the Corporation's revolving credit agreement that was amended in
the second quarter of 1997, please refer to Note 4 of the Consolidated Financial
Information.
On June 10, 1997, the Corporation paid a regular quarterly dividend of
50 cents per share on its common shares for the 1997 second quarter; the total
amount paid was $30.9 million, bringing total 1997 dividends paid through June
30 to $63.2 million. On June 25, 1997, the board of directors declared a 1997
third quarter regular dividend of 50 cents per common share to be paid on
September 10, 1997, to shareholders of record at the close of business on August
20, 1997.
On May 7, 1997, the Corporation announced that its board of directors
had authorized the purchase of up to an additional 6 million of its common
shares, approximately 10 percent of its then outstanding shares. This
authorization follows a 5 million share purchase program that was initiated in
March 1995 and extended to 10 million shares in March 1996. Under that program,
9.9 million shares were purchased by the Corporation. In 1997 through August 7,
the Corporation purchased a total of 4.8 million of its common shares at a total
cost of $370.5 million, including 1.8 million shares at a cost of $151.9 million
under the new 6 million share authorization. An additional 4.2 million shares
remain authorized for purchase under the new program. There were 61.1 million
common shares outstanding on June 30, 1997.
Part II. Other Information
Item 1. Legal Proceedings
- --------------------------
I. Reference is made to Paragraph II, section A.2.(a) of Item 3, Legal
Proceedings of the Corporation's Form 10-K for the year ended December 31, 1996,
and to paragraph I of Item 1, Legal Proceedings of the Corporation's Form 10-Q
for the quarter ended March 31, 1997, regarding In re the General Adjudication
of All Rights to Use Water in the Gila River System and Source, Nos. W-1 (Salt
River), W-2 (Verde River), W-3 (Gila River) and W-4 (San Pedro River) (Superior
Court of Arizona, Maricopa County).
On May 12, 1997, the San Carlos Apache Tribe filed a complaint (the
"Complaint") in San Carlos Apache Tribal Court naming the Corporation as a
defendant (the "Tribal Court Action"). The Complaint alleges, among other
things, that a right-of-way permit issued by the Secretary of the Interior in
1944 and relied upon by the Corporation in transporting water from the Black
River across the San Carlos Apache reservation to Morenci was void when issued
or has expired. The Complaint seeks declaratory and injunctive relief, including
eviction of the Corporation from the reservation, and requests substantial
damages based on, among other things, production and profits of the Morenci
mine. The Corporation believes that the right-of-way was validly issued and has
at no point expired and that the Corporation's presence on the reservation lands
has been lawful.
In June 1997, federal legislation (Public Law No. 105 18, sec. 5003,
the "Legislation") was adopted which amends the San Carlos Apache Water Rights
Settlement Act of 1992 and provides for dismissal of the Tribal Court Action.
The Corporation's time to respond to the Complaint has been adjourned
indefinitely and under the Legislation, the Tribal Court Action must be
dismissed by August 22, 1997. The Legislation does not address any potential
claims by the Tribe relating to the Corporation's historical occupancy and
operation of its pump station on the Black River and related facilities but does
require that any such claims be brought, if at all, exclusively in the United
States District Court.
On July 23, 1997, as contemplated by the Legislation, personnel of the
Federal Bureau of Reclamation officially assumed operation of the Black River
facilities and the Corporation's personnel vacated the reservation.
Responsibility for operation of the Black River pump station and related
facilities is to be transferred to the Tribe by December 31, 1998, upon a
finding by the United States that the Tribe is qualified to operate the
facilities. With the approval of the Secretary of the Interior, the Tribe may
contract with third parties for the operation of the facilities. During the
period prior to the transfer of operation of such facilities to the Tribe (the
"Interim Period"), the Corporation is entitled to receive up to 14,000 acre feet
of water per year (subject to certain limitations) from Black River. During the
Interim Period, the Corporation shall pay a monthly fee and reimburse the
Bureau's operating costs of the Black River facilities.
Following the Interim Period, the Tribe will lease to the Corporation
14,000 acre feet of water per year (subject to certain limitations) under a
lease having a term of 50 years subject to a 50 year extension (or to earlier
termination if mining activities cease at the Morenci mine complex). The
Corporation will make an initial one-time payment of $5 million and make an
annual payment on an ongoing basis of approximately $640,000 per year, subject
to inflation adjustment and the amount of water actually delivered. The
Corporation will also advance funds sufficient to cover the reasonable costs of
the operation of the Black River facilities and pay certain monthly fees and
other charges.
In addition, the Legislation also provides that the Corporation, for a
monthly fee, may transport water from the Corporation's Upper Eagle Creek
wellfields across the Tribe's reservation. The amount pumped from the Upper
Eagle Creek wellfield, in combination with the water received from the Black
River facilities, may not exceed 22,000 acre feet annually. The rights of
landholders to pump percolating groundwater, such as the Corporation's rights to
pump water from the Upper Eagle Creek wellfields, are subject to determination
under the general adjudication proceeding pending in the Superior Court of
Arizona.
Management believes that the water available under the arrangement
prescribed by the Legislation, along with other available water supplies, will
be adequate for the needs of the Morenci mine.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
The Corporation's annual meeting was held on May 7, 1997. A total of
54,042,107 common shares, or about 84 percent of the issued and outstanding
common shares of the Corporation, were represented at the meeting. Set forth
below is a description of the matters voted upon at the meeting and a summary of
the voting regarding each matter:
For Withheld
--- --------
Election of Directors:
Robert N. Burt 53,835,117 206,990
Robert D. Krebs 53,839,184 202,923
Douglas C. Yearley 53,830,017 212,090
For Against Abstain
--- ------- -------
Appointment of Auditors 53,892,119 56,222 93,766
Proposal to approve an amendment
to the 1993 Stock Option and
Restricted Stock Plan 52,413,148 1,433,865 195,094
Proposal to amend the Registrant's
Certificate of Incorporation to
increase the number of authorized
common shares 46,904,944 6,992,729 144,434
Proposal to amend the Registrant's
Certificate of Incorporation to
decrease the maximum size of the
Registrant's Board of Directors 53,661,619 259,065 121,423
There were no broker non-votes included in the results of the election
of directors listed above, or the appointment of auditors, amendment to the 1993
Stock Option and Restricted Stock Plan, or the two amendments to the
Registrant's Certificate of Incorporation.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Any exhibits required to be filed by the Corporation are
listed in the Index to Exhibits.
(b) No reports on Form 8-K were filed by the Corporation during
the quarter ended June 30, 1997.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Corporation has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHELPS DODGE CORPORATION
(Corporation or Registrant)
Date: August 12, 1997 By: Gregory W. Stevens
------------------
Gregory W. Stevens
Vice President and Controller
(Principal Accounting Officer)
PHELPS DODGE CORPORATION AND SUBSIDIARIES
Index to Exhibits
-----------------
3.1 Certificate of Amendment of the Restated Certificate of Incorporation
effective June 19, 1997 (SEC File No. 1-82). Complete composite copy of
the Certificate of Incorporation of the Corporation as amended to date
(incorporated by reference to exhibit 3.1 to the Corporation's 1992
Form 10-K (SEC File No. 1-82)).
3.2 By-Laws of the Corporation, as amended, effective May 7, 1997 (SEC File
No. 1-82).
4.2 Second Amended and Restated Credit Agreement, dated as of June 25,
1997, among the Corporation, several banks and other lending
institutions, and The Chase Manhattan Bank, as administrative agent
(SEC File No. 1-82).
10.5 Deferred Compensation Plan for the Directors of the Corporation,
amended and restated as of June 25, 1997, effective September 30, 1997
(SEC File No. 1-82).
10.15 Amendment to the Corporation's 1993 Stock Option and Restricted Stock
Plan (the 1993 Plan), effective May 7, 1997 (SEC File No. 1-82).
12 Computation of ratios of total debt to total capitalization.
15 Letter from Price Waterhouse LLP with respect to unaudited interim
financial information.