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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, 1998
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, 1998: 58,674,000 shares.
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PHELPS DODGE CORPORATION
Quarterly Report on Form 10-Q
For the Quarter Ended June 30, 1998
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)
First Six
Second Quarter Months
-------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
SALES AND OTHER OPERATING
REVENUES $ 794.4 1,065.0 1,592.7 2,086.7
--------- ------- ------- -------
OPERATING COSTS AND EXPENSES
Cost of products sold 605.7 742.9 1,196.1 1,438.8
Depreciation, depletion
and amortization 71.0 69.7 144.5 138.6
Selling and general
administrative expense 30.4 35.2 64.2 68.9
Exploration and research
expense 13.4 26.5 26.3 43.7
(Gain) loss on asset
dispositions (see Note 4) 0.1 -- (186.1) --
--------- ------- ------- -------
720.6 874.3 1,245.0 1,690.0
--------- ------- ------- -------
OPERATING INCOME 73.8 190.7 347.7 396.7
Interest expense (22.9) (16.4) (44.6) (32.8)
Capitalized interest 0.7 3.7 1.2 6.2
Miscellaneous income and
expense, net 16.0 15.0 22.3 24.9
--------- ------- ------- -------
INCOME BEFORE TAXES, MINORITY
INTERESTS AND EQUITY IN NET
EARNINGS OF AFFILIATED
COMPANIES 67.6 193.0 326.6 395.0
Provision for taxes on
income (25.6) (57.8) (119.5) (122.4)
Minority interests in
consolidated subsidiaries (1.4) (2.8) (3.8) (5.1)
Equity in net earnings
(losses) of affiliated (0.2) 2.4 0.8 4.8
companies
--------- ------- ------- -------
NET INCOME $ 40.4 134.8 204.1 272.3
========= ======= ======= =======
BASIC EARNINGS PER SHARE $ 0.69 2.18 3.49 4.32
========= ======= ======= =======
DILUTED EARNINGS PER SHARE $ 0.69 2.16 3.48 4.29
========= ======= ======= =======
AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC 58.5 61.7 58.4 63.0
AVERAGE NUMBER OF SHARES
OUTSTANDING - DILUTED 58.7 62.3 58.7 63.5
See Notes to Consolidated Financial Information.
BUSINESS SEGMENTS
(Unaudited; in millions)
First Six
Second Quarter Months
-------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
SALES AND OTHER OPERATING
REVENUES
Phelps Dodge Mining
Company $ 440.4 603.8 881.6 1,194.1
Phelps Dodge Industries 354.0 461.2 711.1 892.6
--------- ------- ------- -------
$ 794.4 1,065.0 1,592.7 2,086.7
========= ======= ======= =======
OPERATING INCOME (LOSS)
Phelps Dodge Mining
Company $ 34.9 142.4 89.5 314.2
Phelps Dodge Industries
(see Note 4) 46.1 59.9 277.3 105.2
Corporate and other (7.2) (11.6) (19.1) (22.7)
--------- ------- ------- -------
$ 73.8 190.7 347.7 396.7
========= ======= ======= =======
See Notes to Consolidated Financial Information.
CONSOLIDATED BALANCE SHEET
(Unaudited; in millions)
June 30, Dec. 31,
1998 1997
---- ----
ASSETS
Cash and cash equivalents $ 336.0 157.9
Accounts receivable, net 391.5 420.5
Inventories 287.9 297.8
Supplies 114.7 115.1
Prepaid expenses 12.8 7.8
Deferred income taxes 49.5 52.0
--------- -------
Current assets 1,192.4 1,051.1
Investments and long-term
accounts receivable 99.2 131.8
Property, plant and equipment, net 3,515.6 3,445.1
Other assets and deferred charges 253.8 337.2
--------- -------
$ 5,061.0 4,965.2
========= =======
LIABILITIES
Short-term debt $ 87.8 91.4
Current portion of long-term debt 65.2 54.8
Accounts payable and accrued expenses 445.3 553.2
Dividends payable (see Note 9) 29.3 --
Accrued income taxes 49.2 1.7
--------- -------
Current liabilities 676.8 701.1
Long-term debt 831.7 857.1
Deferred income taxes 499.1 439.2
Other liabilities and deferred credits 336.4 344.1
--------- -------
2,344.0 2,341.5
--------- -------
MINORITY INTERESTS IN CONSOLIDATED
SUBSIDIARIES 95.6 113.3
--------- -------
COMMON SHAREHOLDERS' EQUITY
Common shares, 58.7 outstanding
(12/31/97 - 58.6) 366.7 366.5
Capital in excess of par value 2.3 --
Retained earnings 2,416.8 2,301.0
Accumulated other comprehensive
income (loss) (155.7) (146.9)
Other (8.7) (10.2)
--------- -------
2,621.4 2,510.4
--------- -------
$ 5,061.0 4,965.2
========= =======
See Notes to Consolidated Financial Information.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited; in millions)
Six months
ended
June 30,
-------------
1998 1997
---- ----
OPERATING ACTIVITIES
Net income $ 204.1 272.3
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and
amortization 144.5 138.6
Deferred income taxes 21.6 35.5
Equity earnings net of dividends
received 0.4 (1.9)
Changes in current assets and
liabilities:
(Increase) decrease in accounts receivable (32.0) (29.8)
(Increase) decrease in inventories (17.8) (18.5)
(Increase) decrease in supplies (4.1) 1.3
(Increase) decrease in prepaid expenses (5.9) (11.4)
(Increase) decrease in deferred income taxes 1.1 1.0
Increase (decrease) in interest payable 3.2 2.0
Increase (decrease) in other accounts payable (50.6) (8.4)
Increase (decrease) in accrued income taxes 48.8 1.9
Increase (decrease) in other accrued expenses (4.9) (6.1)
Gain on asset disposition (see Note 4) (186.1) --
Other adjustments, net (13.1) (1.3)
-------- ------
Net cash provided by operating activities 109.2 375.2
-------- ------
INVESTING ACTIVITIES
Capital outlays (179.8) (281.9)
Capitalized interest (1.2) (6.2)
Investment in subsidiaries (129.6) (33.7)
Proceeds from asset dispositions
and other (see Note 4) 452.0 (1.3)
-------- ------
Net cash provided by (used in)
investing activities 141.4 (323.1)
-------- ------
FINANCING ACTIVITIES
Increase in debt 19.1 214.3
Payment of debt (33.9) (24.3)
Common dividends (58.9) (63.2)
Purchase of common shares -- (306.6)
Other, net 1.2 9.7
-------- ------
Net cash used in financing activities (72.5) (170.1)
-------- ------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 178.1 (118.0)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 157.9 470.1
-------- ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 336.0 352.1
======== =====
See Notes to Consolidated Financial Information.
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
(Unaudited; in millions)
Common Shares Accumulated
--------------- Other
Number Capital in Comprehensive Common
of At Par Excess of Retained Income Shareholders'
shares Value Par Value Earnings (Loss) Other Equity
------ ----- -------- -------- ------ ----- ------
BALANCE AT
DECEMBER 31, 1997 58.6 $366.5 $ -- $2,301.0 $(146.9) $(10.2) $ 2,510.4
Stock options
exercised 0.1 0.2 1.8 2.0
Restricted shares
issued, net -- -- (0.4) 1.5 1.1
Other investment
adjustments 0.9 0.9
Dividends on common
shares (88.3) (88.3)
Comprehensive
income:
Net income 204.1 204.1
Other
comprehensive
income, net of
tax:
Translation
adjustment (8.9) (8.9)
Unrealized
gains on
securities 0.1 0.1
------- --------
Other
comprehensive
income (8.8) (8.8)
------- --------
Comprehensive
income 195.3
---- ------ ---- -------- ------- ------ --------
BALANCE AT
JUNE 30, 1998 58.7 $366.7 $2.3 $2,416.8 $(155.7) $ (8.7) $2,621.4
==== ====== ==== ======== ======= ====== ========
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, 1997. This information reflects all
adjustments that are, in the opinion of management, necessary to 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, 1998, 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 such
copper price protection contracts in place.
4. Effective January 1, 1998, the Corporation sold Accuride Corporation
and related subsidiaries, its wheel and rim manufacturing business, to
an affiliate of Kohlberg Kravis Roberts and Co. (KKR) and the existing
management of Accuride. The Corporation retained a 10 percent interest
in Accuride. Under the terms of the sales agreement, the Corporation
received proceeds of $453.2 million from KKR resulting in a pre-tax
gain of approximately $186.1 million ($122.8 million after taxes, or
$2.09 per common share).
5. On February 3, 1998, the Corporation acquired the stock of Cobre Mining
Company Inc. (Cobre) for $113.3 million including acquisition costs.
The Corporation also assumed Cobre's outstanding debt of $14.8 million.
The acquisition was at a price of $3.85 per common share for
substantially all of Cobre's 27 million common shares, including shares
issuable upon the exercise of outstanding warrants and options. The
primary assets of Cobre include the Continental Mine, which comprises
an open-pit copper mine, two underground copper mines, two mills, and
the surrounding 11,000 acres of land located in southwestern New Mexico
adjacent to the Corporation's Chino operations.
6. In the 1998 first quarter, the Corporation adopted Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." The Corporation has presented the required information in the
Consolidated Statement of Common Shareholders' Equity. SFAS No. 130 has
no effect on the Corporation's results of operations, financial
position, capital resources or liquidity.
7. On March 4, 1998, and April 3, 1998, respectively, the Accounting
Standards Executive Committee issued Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" and SOP 98-5, "Reporting on the Costs of Start-Up
Activities." These statements become effective for fiscal periods
beginning after December 15, 1998. The Corporation will adopt both SOPs
in 1999. The Corporation does not expect either SOP to have a material
effect on its results of operations or financial position.
8. In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
This Statement requires recognition of all derivatives as either assets
or liabilities on the balance sheet and measurement of those
instruments at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction.
This Statement is effective for fiscal years beginning after June 15,
1999. Phelps Dodge plans to adopt SFAS No. 133 effective January 1,
2000. The Corporation is evaluating the effect this Statement will have
on its financial reporting and disclosures.
9. On June 24, 1998, the Corporation's board of directors declared a
regular quarterly dividend of 50 cents per common share for the 1998
third quarter. This dividend is to be paid on September 10, 1998, to
common shareholders of record at the close of business on August 20,
1998. This has resulted in an outstanding dividends payable balance of
$29.3 million as of June 30, 1998.
REVIEW BY INDEPENDENT ACCOUNTANTS
The financial information as of June 30, 1998, and for the three-month
and six-month periods ended June 30, 1998 and 1997, included in Part I pursuant
to Rule 10-01 of Regulation S-X has been reviewed by PricewaterhouseCoopers LLP
(PwC), the Corporation's independent accountants, in accordance with standards
established by the American Institute of Certified Public Accountants. PwC's
report is included in this quarterly report.
PwC 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>
PRICEWATERHOUSECOOPERS LLP
REPORT OF INDEPENDENT ACCOUNTANTS
July 13, 1998
To the Board of Directors and Shareholders of
the Phelps Dodge Corporation
We have reviewed the accompanying consolidated balance sheet of Phelps Dodge
Corporation and its subsidiaries as of June 30, 1998, 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, 1998 and 1997. This financial
information is 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 information referred to above for it 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, 1997, 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, 1998, except as to Note 2, which is as of February 3, 1998, 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, 1997, is fairly stated in all material
respects in relation to the consolidated balance sheet from which it has been
derived.
PricewaterhouseCoopers LLP
Phoenix, Arizona
</AUDIT-REPORT>
Item 2. Management's Discussion and Analysis
RESULTS OF OPERATIONS
Phelps Dodge Corporation had consolidated net income of $40.4 million,
or 69 cents per common share, in the second quarter of 1998, compared with
$134.8 million, or $2.16 per common share, in the 1997 second quarter. Earnings
for the six months ended June 30, 1998, were $81.3 million, or $1.39 per common
share, before a non-recurring, after-tax gain of $122.8 million, or $2.09 per
common share, from the January 1998, sale of Accuride Corporation, Phelps
Dodge's wheel and rim business. Net income after the non-recurring gain for the
six months ended June 30, 1998, was $204.1 million, or $3.48 per common share,
compared with $272.3 million, or $4.29 per common share, in the corresponding
1997 period.
Earnings before non-recurring items were less in the 1998 second
quarter and the six-month period ended June 30, 1998, than in the corresponding
1997 periods principally as a result of lower average copper prices. The average
spot price per pound of cathode copper on the New York Commodity Exchange
(COMEX) was approximately 36 cents per pound (32 percent) lower in the second
quarter of 1998 than the second quarter of 1997, and 35 cents per pound (31
percent) lower than the average price in the first half of 1997. The effect of
this price decrease was mitigated by increased volumes of copper sold from mine
production, decreased copper production costs, and improved results at the
Corporation's carbon black and wire and cable businesses.
The COMEX spot price per pound of copper cathode, upon which the
Corporation bases its selling price for a majority of its production, averaged
78 cents in both the second quarter and first six months of 1998, compared with
$1.14 and $1.13 in the corresponding 1997 periods. From July 1 to August 7,
1998, the COMEX price averaged 75 cents per pound, closing at 74 cents on August
7, 1998.
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
1.8 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 $18 million.
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 such copper price protection
contracts in place.
Sales were $794.4 million in the 1998 second quarter and $1,592.7
million in the first six months of 1998, compared with $1,065.0 million and
$2,086.7 million in the corresponding 1997 periods. The 1998 decreases
principally resulted from lower average copper prices and the absence of
Accuride Corporation, partially offset by higher sales volumes of copper and
carbon black.
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 activities. Copper is sold primarily to others
as rod, cathode or in 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.
================================================================================
First Six
Second Quarter Months
-------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
Copper production (short tons):
Total production 263,100 241,400 526,900 476,700
Less minority participants'
shares * 44,500 41,900 89,300 82,600
------- ------- ------- -------
Net Phelps Dodge share 218,600 199,500 437,600 394,100
======= ======= ======= =======
Copper sales (short tons):
Net Phelps Dodge share from
own mines 214,800 189,700 430,100 382,500
Purchased copper 79,100 83,100 159,000 156,200
------- ------- ------- -------
Total copper sales 293,900 272,800 589,100 538,700
======= ======= ======= =======
New York Commodity Exchange
average spot price per
pound - copper cathodes $ 0.78 1.14 0.78 1.13
(in millions)
Sales and other operating
revenues $ 440.4 603.8 881.6 1,194.1
Operating income $ 34.9 142.4 89.5 314.2
- -------------------------
* 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 and other operating revenues
decreased by $163.4 million, or 27 percent, in the 1998 second quarter and by
$312.5 million, or 26 percent, in the first six months of 1998 compared with the
corresponding 1997 periods. These variances primarily reflected decreased
average selling prices for copper that resulted in revenue reductions of
approximately $196 million and $377 million, respectively. Partially offsetting
that price variance was a 21,100 ton, or 8 percent, increase in the volume of
copper sold in the 1998 second quarter and a 50,400 ton, or 9 percent increase
in the volume of copper sold for the first six months. These sales volume
increases principally were due to greater availability of Phelps Dodge mined
copper resulting from production increases at the Candelaria mine in Chile and
the February 1998 acquisition of Cobre Mining Company Inc. (Cobre) (see Note 5
to the Consolidated Financial Information).
Phelps Dodge Mining Company reported operating income of $34.9 million
in the 1998 second quarter, compared with $142.4 million in the corresponding
1997 period. For the six-month period ended June 30, 1998, Phelps Dodge Mining
Company contributed operating income of $89.5 million, compared with $314.2
million in the corresponding 1997 period. These decreases primarily reflected
the lower average copper prices, partially offset by the higher volumes of
copper sold from mine production and lower copper production costs. Copper sold
from mine production increased by 25,100 tons, or 13 percent, over second
quarter 1997 production and by 47,600 tons, or 12 percent, over production in
the first six months of 1997. Lower 1998 copper production costs were primarily
due to the effect of the Candelaria mine expansion. The comparison for the
six-month period also reflected a first quarter insurance claim recovery that
added $11.5 million to Phelps Dodge Mining Company's operating income ($6.7
million or 11 cents per share, after taxes) in the first half of 1998.
On May 29, 1998, the Corporation announced that it had withdrawn as a
member of the Kafue Consortium. The Consortium had been negotiating with the
Government of the Republic of Zambia on the purchase of a 94 percent interest in
the Nkana and Nchanga Divisions of the Zambia Consolidated Copper Mines Limited.
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, 1998, 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 global
energy, telecommunications, transportation and specialty chemicals sectors. 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 wire and cable and specialty conductor operations through Phelps Dodge
International Corporation and Phelps Dodge Magnet Wire Company and their
subsidiaries and affiliates; and, until its sale, effective January 1, 1998, its
wheel and rim operations through Accuride Corporation and its subsidiaries.
================================================================================
First Six
Second Quarter Months
-------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
(in millions)
Sales and other operating revenues:
Specialty chemicals $ 109.0 106.4 222.3 215.1
Wheels and rims * -- 87.1 -- 168.6
Wire and cable 245.0 267.7 488.8 508.9
-------- ----- ----- -----
$ 354.0 461.2 711.1 892.6
======== ===== ===== =====
Operating income:
Specialty chemicals $ 21.8 18.6 43.1 35.8
Wheels and rims * (0.1) 13.7 186.1 19.8
Wire and cable 24.4 27.6 48.1 49.6
-------- ----- ----- -----
$ 46.1 59.9 277.3 105.2
======== ===== ===== =====
- -------------------------
* Accuride Corporation, the Corporation's wheel and rim business, was
sold effective January 1, 1998, resulting in a pre-tax gain of $186.1
million (see Note 4 to the Consolidated Financial Information).
======================================================================
Phelps Dodge Industries' reported sales of $354.0 million in the second
quarter and $711.1 million for the first six months of 1998, compared with
$461.2 million and $892.6 million in the corresponding 1997 periods. The
decreases principally reflected the effect of the sale of Accuride which
contributed sales of $87.1 million in the 1997 second quarter and $168.6 million
for the first six months of 1997. Also included in the decreases were reduced
sales prices for magnet wire related to low copper prices, and the effect of
Asian economic disruptions on the Corporation's wire and cable business,
particularly in Thailand.
During the 1998 second quarter, Phelps Dodge Industries recorded
operating income of $46.1 million, compared with $46.2 million in the
corresponding 1997 period before Accuride's $13.7 million contribution.
Operating income in the first six months of 1998 was $91.2 million before a
$186.1 million pre-tax gain from the sale of Accuride, compared with $85.4
million in the first six months of 1997 before Accuride's $19.8 million
contribution. The 1998 operating income equaled or exceeded corresponding prior
year periods, excluding Accuride, despite the continuing Asian economic
disruptions. This reflected strong performances by its U.S. and European carbon
black businesses. The new 60 percent owned wire and cable joint venture in
Brazil, which was acquired at the end of 1997, contributed to the 1998
performance of Phelps Dodge Industries.
On June 16, 1998, the Corporation announced an agreement to acquire the
Brazilian carbon black manufacturing business of Copebras S.A., a subsidiary of
Minorco, for approximately $220 million. Columbian Chemicals will assume
management and operating responsibility of the new company. The sales
transaction is expected to be completed later in the year. The manufacturing
facility has an annual production capacity of 170,000 metric tons of carbon
black and annual sales of approximately $110 million.
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, 1998, employees who were covered by
the agreement have continued to work without a contract.
OTHER MATTERS RELATING TO THE STATEMENT OF CONSOLIDATED INCOME
The Corporation's 1998 second quarter exploration and research expense
was $13.4 million, a decrease of 49 percent from that in the 1997 second
quarter. Exploration and research expense for the first six months of 1998 was
$26.3 million, a 40 percent decrease from the corresponding 1997 period. These
decreases were principally a result of the closure of the U.S. exploration
offices during the 1997 fourth quarter, but also reflected generally lower
exploration expenditures worldwide.
Miscellaneous income and expense, net, in the 1998 second quarter
included a non-cash, pre-tax gain of $8.8 million from the dissolution of joint
venture partnerships between Phelps Dodge and Sumitomo Electric Industries, Ltd.
at five international wire and cable manufacturing and support companies. A
non-cash, pre-tax gain of $6.0 million was included in miscellaneous income and
expense, net, in the 1997 second quarter from the exchange of shares of a
cost-basis investment in a wire and cable business located in Greece.
Interest expense net of capitalized interest was $22.2 million in the
second quarter of 1998 and $43.4 million in the first six months, compared with
$12.7 million and $26.6 million in the corresponding periods in 1997. The 1998
increases principally reflect interest associated with corporate debt issued in
the 1997 fourth quarter.
The Corporation continues to review its year 2000 readiness including
cost estimations, exposure and contingency plans. Comprehensive plans to
identify, correct or reprogram and test its systems to ensure year 2000
compliance have been finalized. The Corporation is in the process of
implementing the required changes to its internal computer systems with
particular attention being given to process control technology. Also, the
Corporation continues to focus attention on the compliance efforts of vendors,
customers, service providers, shippers and other third-party providers, and is
in the process of attaining confirmations from them with regard to their state
of readiness. Notwithstanding the substantive efforts described above, the
Corporation could potentially experience disruptions to some aspects of its
operations. Contingency plans are therefore under development in order to
mitigate the extent of potential disruptions to the business operations. The
total cost to the Corporation of achieving year 2000 compliance, which is not
expected to be material to the operations of Phelps Dodge, is estimated at
approximately $10 million as previously reported in the 1997 Annual Report on
Form 10-K.
CHANGES IN FINANCIAL CONDITION
Capital expenditures and investments during the first six months of
1998 were $241.7 million for Phelps Dodge Mining Company, including $113.3
million for the acquisition of the stock of Cobre Mining Company. Capital
expenditures and investments were $71.0 million for Phelps Dodge Industries.
Capital expenditures and investments in the corresponding 1997 period were
$220.3 million for Phelps Dodge Mining Company, including $108.3 million for the
expansion of the Corporation's Candelaria mining operations in Chile, and $92.8
million for Phelps Dodge Industries. The Corporation expects capital
expenditures and investments for the year 1998 to be approximately $350 million
for Phelps Dodge Mining Company and approximately $325 million for Phelps Dodge
Industries, including the planned acquisition of Copebras.
At June 30, 1998, the Corporation's total debt was $984.7 million,
compared with $1,003.3 million at year-end 1997. The Corporation's ratio of debt
to total capitalization was 26.6 percent at June 30, 1998, compared with 27.7
percent at December 31, 1997.
On June 10, 1998, the Corporation paid a regular quarterly dividend of
50 cents per share on its common shares for the 1998 second quarter; the total
amount paid was $29.3 million, bringing total 1998 dividends paid through June
30 to $58.9 million. On June 24, 1998, the board of directors declared a 1998
third quarter regular dividend of 50 cents per common share to be paid on
September 10, 1998, to shareholders of record at the close of business on August
20, 1998.
This year through August 7, the Corporation has not purchased any of
its shares under its May 7, 1997, share purchase authorization. Under that
program, 2,394,000 shares remain authorized for purchase. There were 58,674,000
common shares outstanding at June 30, 1998.
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, 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 4, 1998, Phelps Dodge and the Gila River Indian Community
executed a settlement agreement that resolves the issues between themselves
pertinent to this litigation. This settlement is subject to the approval of the
Secretary of the Interior and the passage of federal legislation.
Item 4. Submission of Matters to a Vote of Security Holders
The Corporation's annual meeting was held on May 6, 1998. A total of
49,685,703 common shares, or about 84.7 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:
Paul Hazen 49,320,772 364,931
Manuel J. Iraola 49,322,352 363,351
Marie L. Knowles 49,315,654 370,049
Gordon R. Parker 49,324,895 360,808
For Against Abstain
--- ------- -------
Appointment of
Auditors 49,455,491 36,099 194,113
Proposal to adopt the
1998 Stock Option
and Restricted
Stock Plan 43,770,370 1,756,651 204,407
There were no broker non-votes included in the results of the election
of directors listed above, the appointment of auditors, or adoption of the 1998
Stock Option and Restricted Stock Plan.
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, 1998.
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, 1998 By: Gregory W. Stevens
------------------
Gregory W. Stevens
Vice President and Controller
(Principal Accounting Officer)
PHELPS DODGE CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
10.12 The Corporation's 1998 Stock Option and Restricted Stock Plan (the
1998 Plan), (incorporated by reference to Exhibit 99 to the
Corporation's Registration Statement on Form S-8 (Reg No. 333-52175)
(SEC File No. 1-82)). Forms of Stock Option Agreement and Reload
Option Agreement under the 1998 Plan, and form of Restricted Stock
Agreement under the 1998 Plan, all effective as of March 4, 1998 (SEC
File No. 1-82).
12 Computation of ratios of total debt to total capitalization.
15 Letter from PricewaterhouseCoopers LLP with respect to unaudited
interim financial information.