XXXXXX ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S
O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F
O P E R A T I O N S
Xxxxxx Aluminum Corporation ("Kaiser" or the "Company"), through
its wholly owned subsidiary, Xxxxxx Aluminum & Chemical Corporation
("KACC"), operates in two business segments: bauxite and alumina,
and aluminum processing. As an integrated aluminum producer, the
Company uses a portion of its bauxite, alumina, and primary
aluminum production for additional processing at certain of its
facilities. Intracompany shipments and sales are excluded from the
information set forth in the table below. The table below provides
selected operational and financial information on a consolidated
basis with respect to the Company for the years ended December 31,
1997, 1996, and 1995. The following should be read in conjunction
with the Company's consolidated financial statements and the notes
thereto, contained elsewhere herein.
Year Ended December 31,
----------------------------------------------
(In millions of dollars, except shipments and prices) 1997 1996 1995
----------------------------------------------------------------------------------------------------
Shipments: (000 tons) (1)
Alumina 1,929.8 2,073.7 2,040.1
Aluminum products:
Primary aluminum 327.9 355.6 271.7
Fabricated aluminum products 400.0 327.1 368.2
-------------- -------------- --------------
Total aluminum products 727.9 682.7 639.9
============== ============== ==============
Average realized sales price:
Alumina (per ton) $ 198 $ 195 $ 208
Primary aluminum (per pound) .75 .69 .81
Net sales:
Bauxite and alumina:
Alumina $ 382.1 $ 404.1 $ 424.8
Other (2)(3) 106.5 103.9 89.4
-------------- -------------- --------------
Total bauxite and alumina 488.6 508.0 514.2
-------------- -------------- --------------
Aluminum processing:
Primary aluminum 543.4 538.3 488.0
Fabricated aluminum products 1,324.3 1,130.4 1,218.6
Other (3) 16.9 13.8 17.0
-------------- -------------- --------------
Total aluminum processing 1,884.6 1,682.5 1,723.6
-------------- -------------- --------------
Total net sales $ 2,373.2 $ 2,190.5 $ 2,237.8
============== ============== ==============
Operating income (loss):
Bauxite and alumina $ 20.0 $ 1.1 $ 54.0
Aluminum processing (4) 222.6 156.5 238.9
Corporate (4) (74.6) (59.8) (82.3)
-------------- -------------- --------------
Total operating income $ 168.0 $ 97.8 $ 210.6
============== ============== ==============
Net income $ 48.0 $ 8.2 $ 60.3
============== ============== ==============
Capital expenditures $ 128.5 $ 161.5 $ 88.4
============== ============== ==============
(1) All references to tons refer to metric tons of 2,204.6 pounds.
(2) Includes net sales of bauxite.
(3) Includes the portion of net sales attributable to minority
interests in consolidated subsidiaries.
(4) Includes pre-tax charges of $15.1 for the Aluminum processing
segment and $4.6 for the Corporate segment recorded in the
quarter ended June 30, 1997, related to restructuring of
operations.
This section contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements appear in a number of places
in this section (see "Overview," "Recent Events and Developments,"
"Results of Operations," "Liquidity and Capital Resources" and
"Other Matters"). Such statements can be identified by the use of
forward-looking terminology such as "believes," "expects," "may,"
"estimates," "will," "should," "plans" or "anticipates" or the
negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy. Readers are cautioned
that any such forward-looking statements are not guarantees of
future performance and involve significant risks and uncertainties,
and that actual results may vary materially from those in the
forward-looking statements as a result of various factors. These
factors include the effectiveness of management's strategies and
decisions, general economic and business conditions, developments
in technology, new or modified statutory or regulatory requirements
and changing prices and market conditions. This section and the
Company's Annual Report on Form 10-K each identify other factors
that could cause such differences. No assurance can be given that
these are all of the factors that could cause actual results to
vary materially from the forward-looking statements.
OVERVIEW
The Company's operating results are sensitive to changes in prices
of alumina, primary aluminum, and fabricated aluminum products, and
also depend to a significant degree on the volume and mix of all
products sold and on KACC's hedging strategies. Primary aluminum
prices have historically been subject to significant cyclical price
fluctuations. See Notes 1 and 10 of the Notes to Consolidated
Financial Statements for a discussion of KACC's hedging activities.
During the first eleven months of 1997, the Average Midwest United
States transaction price ("AMT Price") for primary aluminum
remained relatively stable generally in the $.75 - $.80 per pound
range. During December of 1997, the AMT Price fell to the $.70 -
$.75 per pound range. However, the average 1997 AMT Price compared
favorably to the average 1996 AMT Price which remained fairly
stable generally in the $.70 - $.75 range through June and then
declined during the second half of the year, reaching a low of
approximately $.65 per pound for October 1996, before recovering
late in the year. The AMT Price for 1995 was generally in the $.80
- $.90 per pound range. For the week ended February 20, 1998, the
AMT Price was $.70 per pound.
RECENT EVENTS AND DEVELOPMENTS
The Company has previously disclosed that it set a goal of
achieving $120.0 million of pre-tax cost reductions and other
profit improvements, independent of metal price changes, with the
full effect planned to be realized in 1998 and beyond, measured
against 1996 results. Management believes that recent operating
performance has been at a rate which indicates that approximately
half of the desired profit improvement was achieved at year-end
1997 and that the remainder should be achieved in the second half
of 1998. However, there are inherent uncertainties regarding
operating factors and economic and other external forces (such as
the Valco power situation discussed below), many of which are
outside management's direct control, and, as such, no assurances
can be given that the desired benefit of profit improvements will
be achieved.
In addition to working to improve the performance of the Company's
existing assets, the Company has expended significant efforts on
analyzing its current asset portfolio with the intent of focusing
its efforts and capital in sectors of the industry that are
considered most attractive. The initial steps of this process
resulted in the Company recording a $19.7 million pre-tax
restructuring charge during June 1997 related to the closing and
rationalization of certain businesses and facilities.
Additionally, this process led to the Company's acquisition of the
Bellwood aluminum extrusion plant in Richmond, Virginia. See Notes
3 and 4 of the Notes to Consolidated Financial Statements.
As discussed more fully in Note 9 of the Notes to Consolidated
Financial Statements, at December 31, 1997, there were
approximately 77,400 claims pending against KACC pertaining to
asbestos-related matters and the Company had accrued approximately
$158.8 million related to the litigation and settlement of these
claims and estimated future claims. Subsequent to December 31,
1997, KACC reached agreements settling approximately 25,000 of the
pending asbestos-related claims. Also, subsequent to year-end 1997,
KACC reached agreements on asbestos related coverage matters with
two insurance carriers under which the Company will collect a total
of approximately $17.5 million during the first quarter of 1998.
The insurance recoveries will reduce the approximately $134.0
million of asbestos related receivable accrued at December 31,
1997. As the amounts related to the claim settlements and
insurance recoveries were consistent with the Company's year-end
1997 accrual assumptions, these events are not expected to have a
material impact on the Company's financial position, results of
operations or liquidity.
The Company has previously disclosed that the Volta River Authority
("VRA") would partially reduce its electric power allocation to the
Company's 90%-owned Volta Aluminium Company Limited ("Valco")
smelter facility in Ghana in January 1998 and that Valco expected
to operate approximately three potlines at the facility in 1998 as
compared to the four potlines operated throughout 1997. During
February 1998, Valco and the VRA reached an agreement whereby Valco
agreed to receive compensation in lieu of the power necessary to
run one of the three remaining operating potlines, effective
February 25, 1998. Compensation under the agreement is expected to
substantially offset the financial impact of the curtailment. As
previously disclosed Valco has notified the VRA that it believes it
has contractual rights to sufficient energy to run four and one-
half potlines in 1998 and Valco continues to seek compensation from
the VRA with respect to the January 1998, reduction of its power
allocation. Valco and the VRA also are in continuing discussions
concerning other matters, including steps that might be taken to
reduce the likelihood of such power curtailments beyond 1998. No
assurances can be given, however, as to the success of these
discussions, the possibility of requests by the VRA for additional
curtailments, or the operating level of Valco for the remainder of
1998 or beyond. Valco intends to pursue its legal rights in
respect of reduced power allocation and compensation in respect of
such reductions.
RESULTS OF OPERATIONS
1997 AS COMPARED TO 1996
Summary - The Company reported net income of $48.0 million, or $.57
per common share, for 1997 compared to net income of $8.2 million,
or $.00 per common share, for 1996. Net sales in 1997 totaled
$2,373.2 million compared to $2,190.5 million in 1996.
Net income for 1997 includes the effect of certain non-recurring
items, including a $19.7 million pre-tax restructuring charge
(discussed above), an approximate $12.5 million non-cash tax
benefit related to settlement of certain tax matters, and a $5.8
million pre-tax charge related to additional litigation reserves.
Bauxite and Alumina - Net segment sales decreased by 4% in 1997 as
a 7% decline in alumina shipments more than offset a 2% increase in
average realized alumina prices. Shipment volumes were down as
compared to 1996 as a result of the timing of shipments and a
slight increase in internal transfers. Segment operating income
improved substantially from 1996 to 1997 despite the reduced level
of shipments and certain increased costs in part resulting from a
slowdown at the Company's 49%-owned Kaiser Jamaican Bauxite
Company, prior to the signing of a new labor contract in December
1997, primarily due to lower overall operating costs.
Aluminum Processing - Net sales of primary aluminum in 1997
approximated 1996 net sales figures as a 10% increase in average
realized prices offset an 8% decrease in primary aluminum
shipments. Net sales of fabricated aluminum products for 1997 were
up 17% as compared to 1996 as a 22% increase in shipments more than
offset a 4% decrease in average realized prices. The increase in
fabricated aluminum product shipments over 1996 was primarily the
result of the Company's June 1997 acquisition of an extrusion
facility in Richmond, Virginia, and to a lesser extent the result
of increased international shipments of can sheet and increased
shipments of heat-treated products.
The aluminum processing segment's operating income improved
substantially in 1997 as a result of the increases in average
realized prices for primary aluminum and shipments of fabricated
aluminum product cited above. Additionally, reduced power, raw
material and supply costs and improved operating efficiencies also
contributed to the improvement in segment operating income.
Included in the segment's operating income for the quarter and year
ended December 31, 1997, was approximately $2.8 million and $10.3
million of operating income realized during the periods, related to
the settlement of certain energy service contract issues.
Operating income for the year ended December 31, 1997, also
included a $15.1 million second quarter pre-tax charge resulting
from the restructuring of operations.
Corporate - Corporate operating expenses represent corporate
general and administrative expenses which are not allocated to the
Company's business segments. Operating results for 1997 included a
second quarter pre-tax charge of approximately $4.6 million
associated with the Company's restructuring of operations.
Corporate operating expenses for the year ended December 31, 1997,
also include consulting and other costs associated with the
Company's ongoing profit improvement program and portfolio review
initiatives.
1996 AS COMPARED TO 1995
Summary - For the year ended December 31, 1996, the Company's net
income was $8.2 million, or $.00 per common share, compared to net
income of $60.3 million, or $.69 per common share, in 1995. Net
sales for 1996 were $2,190.5 million, compared to $2,237.8 million
in 1995. Results for the year ended December 31, 1996, included an
after tax benefit of approximately $17.0 million resulting from
settlements of certain tax matters in December 1996. Excluding the
impact of these non-recurring items, the Company would have
reported a net loss for the year ended December 31, 1996.
Results for the year ended December 31, 1996, reflected the
substantial reduction in market prices for primary aluminum more
fully discussed above. Alumina prices, which are significantly
influenced by changes in primary aluminum prices, also declined
from period to period. The decrease in product prices more than
offset the positive impact of increases in shipments in several
segments of the Company's business, as more fully discussed below.
Results for 1996 also included approximately $20.5 million in
research and development expenses and other costs related to the
Company's new Micromill facility as well as additional expenses
related to other strategic initiatives.
Results for 1995 included approximately $17.0 million of first
quarter 1995 pre-tax expenses associated with an eight-day strike
at five major U.S. locations, a six-day strike at the Company's 65%
owned Alumina Partners of Jamaica ("Alpart") bauxite mining and
alumina refinery in Jamaica, and a four-day disruption of alumina
production at Alpart caused by a boiler failure.
Bauxite and Alumina - Net segment sales for 1996 were basically
unchanged from 1995 as a nominal decline in the average realized
price of alumina was offset by a modest increase in alumina
shipments. The reduction in prices realized reflected the
substantial decline in primary aluminum prices experienced in 1996
discussed above.
Operating income for this segment of the Company's business
declined significantly from prior year periods as a result of
reduced gross margins from alumina sales resulting from the
previously discussed price declines and increased natural gas costs
at the Company's Gramercy, Louisiana, alumina refinery. Operating
income for the year ended December 31, 1996, was also unfavorably
impacted by high operating costs associated with disruptions in the
power supply at the Company's Alpart alumina refinery during the
first nine months of 1996, higher manufacturing costs resulting
from higher market prices for fuel and caustic soda, and a
temporary raw material quality problem experienced at the Company's
Gramercy facility during the second quarter of 1996.
Aluminum Processing - An increase in primary aluminum shipments in
1996 of 31% more than offset a 15% decline in the average realized
price for primary aluminum from period to period. The increase in
shipments during the year ended December 31, 1996, was the result
of increased shipments of primary aluminum to third parties as a
result of a decline in intracompany transfers.
Net sales of fabricated aluminum products were down 7% for the year
ended December 31, 1996, as compared to the prior year as a result
of a decrease in shipments (primarily related to can sheet
activities) resulting from reduced growth in demand and the
reduction of customer inventories. The impact of reduced product
shipments was to a limited degree offset by a 4% increase in the
average realized price from the sale of fabricated aluminum
products, resulting primarily from a shift in product mix to higher
value added products.
Operating income for the aluminum processing segment for 1996 was
also impacted by approximately $5.6 million of scheduled non-
recurring maintenance costs at the Company's Trentwood, Washington,
rolling mill facility in the fourth quarter of 1996, offset by
$11.5 million ($7.2 on an after-tax basis) of reduced operating
costs resulting from the non-cash settlement in December 1996 of
certain tax matters.
Corporate - A substantial portion of the 1996 reduction in
operating losses of the corporate segment as compared to 1995 was
due to reduced incentive compensation accruals resulting from the
decline in earnings from the prior year period. Reduced post
employment benefit plan and pension plan costs also contributed to
the 1996 reduction.
LIQUIDITY AND CAPITAL RESOURCES
See Note 5 of the Notes to Consolidated Financial Statements for a
listing of the Company's indebtedness and information concerning
certain restrictive debt covenants.
OPERATING ACTIVITIES
Cash provided by operating activities was $45.0, $21.9 and $118.7
million in 1997, 1996 and 1995, respectively. The improvement in
cash flows from operating activities between 1996 and 1997 was
primarily due to higher earnings resulting from increased product
prices and increased sales of fabricated products partially offset
by increased investment in working capital. The reduction in cash
generated by operating activities from 1995 to 1996 was primarily
due to lower earnings resulting from the reduction in prices
realized by the Company from the sale of primary aluminum and
alumina.
At December 31, 1997, the Company had working capital of $451.5
million, compared with working capital of $414.3 million at
December 31, 1996. The increase in working capital in 1997 was due
primarily to an increase in Receivables, offset by a reduction in
Cash and cash equivalents.
INVESTING ACTIVITIES
Total consolidated capital expenditures were $128.5, $161.5 and
$88.4 million in 1997, 1996 and 1995, respectively (of which $6.6,
$7.4, and $8.3 million were funded by the minority partners in
certain foreign joint ventures in 1997, 1996, and 1995,
respectively), and were made primarily to construct or acquire new
facilities, improve production efficiency, reduce operating costs,
and expand capacity at existing facilities. Total consolidated
capital expenditures are currently expected to be between $75.0 and
$125.0 million per annum in each of 1998 through 2000 (of which
approximately 8% is expected to be funded by the Company's minority
partners in certain foreign joint ventures).
A substantial portion of the increase in capital expenditures in
1996 over the 1995 level was attributable to the development and
construction of the Company's proprietary Micromill(TM) technology for
the production of can sheet and other sheet products from molten
metal. The first Micromill(TM) facility, which was constructed in
Nevada during 1996 as a demonstration and production facility,
remained in a start-up mode throughout 1997. During January of
1998, the facility commenced trial product shipments to customers.
The Company currently anticipates that commercial deliveries from
the facility will commence during the first quarter of 1998.
However, the Micromill(TM) technology has not yet been fully
implemented or commercialized and there can be no assurances that
full implementation or commercialization will be successful.
During October 1997, a joint decision was made by a KACC subsidiary
and its joint venture partner to terminate and dissolve the Sino-
foreign aluminum joint venture formed in 1995. In January 1998,
the KACC subsidiary reached an agreement to sell its interests in
the venture to its partner. The terms of the agreement are subject
to certain governmental approvals by officials of the People's
Republic of China. This transaction will not have a material
effect on the Company's results of operations or financial
position.
Management continues to evaluate numerous projects, all of which
would require substantial capital, both in the United States and
overseas.
FINANCING ACTIVITIES AND LIQUIDITY
The Company and KACC have a credit agreement (as amended, the
"Credit Agreement") under which KACC is able to borrow by means of
revolving credit advances and letters of credit (up to $125.0
million) an aggregate amount equal to the lesser of $325.0 million
or a borrowing base relating to eligible accounts receivable and
eligible inventory. During January 1998, the maturity of the
Credit Agreement was extended from February 1999 to August 2001.
The Credit Agreement is guaranteed by the Company and by certain
significant subsidiaries of KACC. The Credit Agreement also
requires KACC to maintain certain financial covenants, places
significant restrictions on the Company and KACC and is secured by
a substantial majority of the Company's and KACC's assets. KACC's
public indebtedness also include various restrictions and a
repurchase obligation upon a Change of Control. The Credit
Agreement does not permit the Company or KACC to pay any dividends
on their common stock.
As of December 31, 1997, the Company's total consolidated
indebtedness was $971.7 million, no amounts were outstanding under
the revolving credit facility of the Credit Agreement, and after
allowances for $51.6 million of outstanding letters of credit,
$273.4 million of unused availability remained under the Credit
Agreement.
Management believes that the Company's existing cash resources,
together with cash flows from operations and borrowings under the
Credit Agreement, will be sufficient to satisfy its working capital
and capital expenditure requirements for the next year. With
respect to long-term liquidity, management believes that operating
cash flow, together with the ability to obtain both short and long-
term financing, should provide sufficient funds to meet the
Company's working capital and capital expenditure requirements.
CAPITAL STRUCTURE
MAXXAM Inc. ("MAXXAM") and one of its wholly owned subsidiaries
collectively own approximately 63% of the Company's Common Stock,
with the remaining approximately 37% of the Company's Common Stock
being publicly held. Certain of the shares of the Company's Common
Stock beneficially owned by MAXXAM are subject to certain pledge
agreements by MAXXAM and its subsidiaries. See Note 8 of the Notes
to Consolidated Financial Statements for a further description of
the pledge agreements.
During August 1997, the remaining 8,673,850 shares of outstanding
PRIDES were converted into 7,227,848 shares of the Company's Common
Stock pursuant to the PRIDES Certificate of Designations. See Note
8 of the Notes to Consolidated Financial Statements.
The Company has an effective "shelf" registration statement
covering the offering from time to time of up to $150.0 million of
equity securities. Any such offering will only be made by means of
a prospectus. The Company also has an effective "shelf"
registration statement covering the offering of up to 10,000,000
shares of the Company's Common Stock that are owned by MAXXAM. The
Company will not receive any of the net proceeds from any
transaction initiated by MAXXAM pursuant to this registration
statement.
See Note 8 of the Notes to Consolidated Financial Statements.
ENVIRONMENTAL AND ASBESTOS CONTINGENCIES
The Company and KACC are subject to a number of environmental laws,
to fines or penalties assessed for alleged breaches of the
environmental laws, and to claims and litigation based upon such
laws. KACC currently is subject to a number of lawsuits and, along
with certain other entities, has been named as a potentially
responsible party for remedial costs at certain third-party sites
listed on the National Priorities List under CERCLA. Based on the
Company's current evaluation of these and other environmental
matters, the Company has established environmental accruals of
$29.7 million at December 31, 1997. However, the Company believes
that it is reasonably possible that changes in various factors
could cause costs associated with these environmental matters to
exceed current accruals by amounts that could range, in the
aggregate, up to an estimated $18.0 million. The Company believes
that KACC has insurance coverage available to recover certain
incurred and future environmental costs and is actively pursuing
claims in this regard. However, no accruals have been made for any
such insurance recoveries and no assurances can be given that the
Company will be successful in its attempt to recover incurred or
future costs.
KACC is also a defendant in a number of lawsuits, some of which
involve claims of multiple persons, in which the plaintiffs allege
that certain of their injuries were caused by, among other things,
exposure to asbestos during, and as a result of, their employment
or association with KACC or exposure to products containing
asbestos produced or sold by KACC. The lawsuits generally relate to
products KACC has not manufactured for at least 20 years. Based on
past experience and reasonably anticipated future activity, the
Company has established a $158.8 million accrual for estimated
asbestos-related costs for claims filed and estimated to be filed
through 2008, before consideration of insurance recoveries. The
Company, based on prior insurance related recoveries in respect of
asbestos-related claims, existing insurance policies and the advice
of outside counsel with respect to applicable insurance coverage
law relating to the terms and conditions of these policies,
believes that KACC has insurance coverage available to recover a
substantial portion of its asbestos-related costs and that
substantial insurance recoveries are probable. Accordingly, the
Company has recorded an estimated aggregate insurance recovery of
$134.0 million (determined on the same basis as the asbestos-
related cost accrual) at December 31, 1997. However, claims for
recovery from some of KACC's insurance carriers are currently
subject to pending litigation and other carriers have raised
certain defenses, which have resulted in delays in recovering costs
from the insurance carriers.
While uncertainties are inherent in the final outcome of these
matters and it is presently impossible to determine the actual
costs that ultimately may be incurred and insurance recoveries that
ultimately may be received, management currently believes that the
resolution of these uncertainties and the incurrence of related
costs, net of any related insurance recoveries, should not have a
material adverse effect on the Company's consolidated financial
position, results of operations, or liquidity.
See note 9 of the Notes to Consolidated Financial Statements for a
more detailed discussion of these contingencies and the factors
affecting management's beliefs. See also "Recent Events and
Developments."
OTHER MATTERS
YEAR 2000
The Company utilizes software and related technologies throughout
its business that will be affected by the date change to the year
2000. An internal assessment has been undertaken to determine the
scope and the related costs to assure that the Company's systems
continue to function adequately to meet the Company's needs and
objectives. A detailed implementation plan is being developed from
these findings. Spending for related projects, which began in 1997
and will likely continue through 1999, is currently expected to
total in the $10 million to $15 million range. System modification
costs will be expensed as incurred. Costs associated with new
systems will be capitalized and amortized over the life of the
product.
RECENT ASIAN ECONOMIC DOWNTURN
The Company has not experienced any significant direct financial,
operating or other difficulties to date as a result of the recent
Asian economic downturn. Further, no significant direct impact is
currently anticipated as direct sales to the region are relatively
limited and the Company has taken steps to assure the
creditworthiness of customers. No assurance can be given, however,
as to any possible indirect impact that the Asian economic downturn
may have on the volume of shipments and prices on sales to
customers outside the region.
RECENT ACCOUNTING PRONOUNCEMENTS
During June 1997, two new accounting standards were issued that
will affect future financial reporting. Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
No. 130"), requires the presentation of an additional income
measure (termed "comprehensive income"), which adjusts traditional
net income for certain items that previously were only reflected as
direct charges to equity (such as minimum pension liabilities).
Statement of Financial Accounting Standards No. 131, Disclosures
About Segments of an Enterprise and Related Information ("SFAS No.
131"), requires that segment reporting for public reporting
purposes be conformed to the segment reporting used by management
for internal purposes. SFAS No. 131 also adds a requirement for
the presentation of certain segment data on a quarterly basis
starting in 1999. SFAS No. 130 and SFAS No. 131 must both be
adopted in the Company's year-end 1998 reporting. Management is
currently evaluating the impact of these two standards on the
Company's future financial reporting.
INCOME TAX MATTERS
The Company's net deferred income tax assets as of December 31,
1997, were $351.7 million, net of valuation allowances of $113.3
million. The Company believes a long-term view of profitability is
appropriate and has concluded that these net deferred income tax
assets will more likely than not be realized. See Note 6 of the
Notes to Consolidated Financial Statements for a discussion of
these and other income tax matters.
XXXXXX ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors of Xxxxxx Aluminum
Corporation:
We have audited the accompanying consolidated balance sheets of
Xxxxxx Aluminum Corporation (a Delaware corporation) and
subsidiaries as of December 31, 1997 and 1996, and the related
statements of consolidated income (loss) and cash flows for each of
the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Xxxxxx
Aluminum Corporation and subsidiaries as of December 31, 1997 and
1996, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
HOUSTON, TEXAS
February 16, 1998
XXXXXX ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
C O N S O L I D A T E D B A L A N C E S H E E T S
December 31,
------------------------------
(In millions of dollars, except share amounts) 1997 1996
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ASSETS
Current assets:
Cash and cash equivalents $ 15.8 $ 81.3
Receivables:
Trade, less allowance for doubtful receivables of
$5.8 in 1997 and $4.7 in 1996 232.9 177.9
Other 107.3 74.5
Inventories 568.3 562.2
Prepaid expenses and other current assets 121.3 127.8
-------------- --------------
Total current assets 1,045.6 1,023.7
Investments in and advances to unconsolidated affiliates 148.6 168.4
Property, plant, and equipment - net 1,171.8 1,168.7
Deferred income taxes 330.6 264.5
Other assets 317.3 308.7
-------------- --------------
Total $ 3,013.9 $ 2,934.0
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 176.2 $ 189.7
Accrued interest 37.6 35.6
Accrued salaries, wages, and related expenses 97.9 95.4
Accrued postretirement medical benefit obligation -
current portion 45.3 50.1
Other accrued liabilities 145.6 132.7
Payable to affiliates 82.7 97.0
Long-term debt - current portion 8.8 8.9
-------------- --------------
Total current liabilities 594.1 609.4
Long-term liabilities 491.9 458.1
Accrued postretirement medical benefit obligation 720.3 722.5
Long-term debt 962.9 953.0
Minority interests 127.7 121.7
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.05, authorized 20,000,000
shares;
PRIDES Convertible, par value $.05, issued and
outstanding, 8,673,850 in 1996. - .4
Common stock, par value $.01, authorized 100,000,000
shares; issued and outstanding, 78,980,881 and
71,646,789 in 1997 and 1996 .8 .7
Additional capital 533.8 531.1
Accumulated deficit (417.6) (460.1)
Additional minimum pension liability - (2.8)
-------------- --------------
Total stockholders' equity 117.0 69.3
-------------- --------------
Total $ 3,013.9 $ 2,934.0
============== ==============
The accompanying notes to consolidated financial statements are an
integral part of these statements.
XXXXXX ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
S T A T E M E N T S O F C O N S O L I D A T E D I N C O M E
( L O S S )
Year Ended December 31,
----------------------------------------------
(In millions of dollars, except share amounts) 1997 1996 1995
----------------------------------------------------------------------------------------------------------
Net sales $ 2,373.2 $ 2,190.5 $ 2,237.8
-------------- -------------- --------------
Costs and expenses:
Cost of products sold 1,962.6 1,869.1 1,798.4
Depreciation 91.1 96.0 94.3
Selling, administrative, research and development, and
general 131.8 127.6 134.5
Restructuring of operations 19.7 - -
-------------- -------------- --------------
Total costs and expenses 2,205.2 2,092.7 2,027.2
-------------- -------------- --------------
Operating income 168.0 97.8 210.6
Other income (expense):
Interest expense (110.7) (93.4) (93.9)
Other - net 3.0 (2.7) (14.1)
-------------- -------------- --------------
Income before income taxes and minority interests 60.3 1.7 102.6
(Provision) credit for income taxes (8.8) 9.3 (37.2)
Minority interests (3.5) (2.8) (5.1)
-------------- -------------- --------------
Net income 48.0 8.2 60.3
Dividends on preferred stock (5.5) (8.4) (17.6)
-------------- -------------- --------------
Net income (loss) available to common shareholders $ 42.5 $ (0.2) $ 42.7
============== ============== ==============
Earnings per common share:
Basic $ .57 $ .00 $ .69
============== ============== ==============
Diluted $ .57 $ .00 $ .69
============== ============== ==============
Weighted average common shares outstanding (000):
Basic 74,221 71,644 62,000
============== ============== ==============
Diluted 74,382 71,644 62,264
============== ============== ==============
The accompanying notes to consolidated financial statements are an
integral part of these statements.
XXXXXX ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
S T A T E M E N T S O F C O N S O L I D A T E D C A S H F L O W S
Year Ended December 31,
----------------------------------------------
(In millions of dollars) 1997 1996 1995
-----------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 48.0 $ 8.2 $ 60.3
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 91.1 96.0 94.3
Restructuring of operations 19.7 - -
Non-cash benefit for income taxes (12.5) - -
Amortization of excess investment over 11.4 11.6 11.4
equity in unconsolidated affiliates
Amortization of deferred financing costs 6.1 5.6 5.4
and net discount on long-term debt
Undistributed equity in (income) losses
of unconsolidated affiliates, net 7.8 3.0 (19.2)
of distributions
Minority interests 3.5 2.8 5.1
(Increase) decrease in receivables (85.9) 51.8 (109.7)
Increase in inventories (9.3) (36.5) (57.7)
Decrease (increase) in prepaid expenses 1.6 (39.5) 82.9
and other assets
(Decrease) increase in accounts payable (13.5) 5.2 32.4
Increase (decrease) in accrued interest 2.0 3.6 (.6)
(Decrease) increase in payable to (19.6) (62.9) 10.6
affiliates and accrued liabilities
Decrease in accrued and deferred income (17.4) (36.5) (7.4)
taxes
Other 12.0 9.5 10.9
-------------- -------------- --------------
Net cash provided by operating
activities 45.0 21.9 118.7
-------------- -------------- --------------
Cash flows from investing activities:
Additions to property, plant, and equipment (128.5) (161.5) (88.4)
Other 19.9 17.2 8.6
-------------- -------------- --------------
Net cash used for investing
activities (108.6) (144.3) (79.8)
-------------- -------------- --------------
Cash flows from financing activities:
Borrowings (repayments) under revolving credit - (13.1) 6.4
facility, net
Borrowings of long-term debt 19.0 225.9 -
Repayments of long-term debt (8.8) (9.0) (11.8)
Incurrence of financing costs (.9) (6.2) (.8)
Dividends paid (4.2) (10.5) (20.8)
Capital stock issued .4 - 1.2
Increase in restricted cash, net (5.3) - -
Redemption of minority interests' preference stock (2.1) (5.3) (8.8)
-------------- -------------- --------------
Net cash (used for) provided by
financing activities (1.9) 181.8 (34.6)
-------------- -------------- --------------
Net (decrease) increase in Cash and cash equivalents (65.5) 59.4 4.3
during the year
Cash and cash equivalents at beginning of year 81.3 21.9 17.6
-------------- -------------- --------------
Cash and cash equivalents at end of year $ 15.8 $ 81.3 $ 21.9
============== ============== ==============
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest $ 102.7 $ 84.2 $ 88.8
Income taxes paid 24.4 22.7 35.7
Tax allocation payments to MAXXAM Inc. 11.8 1.1 -
The accompanying notes to consolidated financial statements are an
integral part of these statements.
XXXXXX ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the statements of Xxxxxx
Aluminum Corporation ("Kaiser" or the "Company") and its
majority owned subsidiaries. The Company is a subsidiary of MAXXAM Inc.
("MAXXAM") and conducts its operations through its wholly
owned subsidiary, Xxxxxx Aluminum & Chemical Corporation ("KACC"). KACC
operates in all principal aspects of the aluminum
industry-the mining of bauxite (the major aluminum bearing ore), the
refining of bauxite into alumina (the intermediate material),
the production of primary aluminum, and the manufacture of fabricated and
semi-fabricated aluminum products. Xxxxxx'x production
levels of alumina and primary aluminum exceed its internal processing
needs, which allows it to be a major seller of alumina and
primary aluminum to domestic and international third parties (see Note 11).
The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities known
to exist as of the date the financial statements are published, and the
reported amounts of revenues and expenses during the
reporting period. Uncertainties, with respect to such estimates and
assumptions, are inherent in the preparation of the Company's
consolidated financial statements; accordingly, it is possible that the
actual results could differ from these estimates and
assumptions, which could have a material effect on the reported amounts of
the Company's consolidated financial position and
results of operation.
Investments in 50%-or-less-owned entities are accounted for primarily by
the equity method. Intercompany balances and transactions are eliminated.
Certain reclassifications of prior-year information were made to conform to
the current presentation.
CASH AND CASH EQUIVALENTS
The Company considers only those short-term, highly liquid investments with
original maturities of 90 days or less to be cash
equivalents.
INVENTORIES
Substantially all product inventories are stated at last-in, first-out
("LIFO") cost, not in excess of market value. Replacement
cost is not in excess of LIFO cost. Other inventories, principally
operating supplies and repair and maintenance parts, are stated
at the lower of average cost or market. Inventory costs consist of
material, labor, and manufacturing overhead, including
depreciation. Inventories consist of the following:
December 31,
------------------------------
1997 1996
-------------------------------------------------------------------------------------
Finished fabricated products $ 103.9 $ 113.5
Primary aluminum and work in process 226.6 200.3
Bauxite and alumina 108.4 110.2
Operating supplies and repair and maintenance parts 129.4 138.2
-------------- --------------
$ 568.3 $ 562.2
============== ==============
DEPRECIATION
Depreciation is computed principally by the straight-line method at rates
based on the estimated useful lives of the various
classes of assets. The principal estimated useful lives of land
improvements, buildings, and machinery and equipment are 8 to 25
years, 15 to 45 years, and 10 to 22 years, respectively.
STOCK-BASED COMPENSATION
The Company applies the intrinsic value method to account for a stock-based
compensation plan whereby compensation cost is
recognized only to the extent that the quoted market price of the stock at
the measurement date exceeds the amount an employee
must pay to acquire the stock. No compensation cost has been recognized
for this plan as the stock options granted in 1997 were
at the market price. No stock options were granted in 1996 or 1995. (See
Note 7).
OTHER INCOME (EXPENSE)
Other expense in 1997, 1996, and 1995 includes $8.8, $3.1, and $17.8 of
pre-tax charges related principally to establishing
additional: (i) litigation reserves for asbestos claims, net of estimated
aggregate insurance recoveries, and (ii) environmental
reserves for potential soil and ground water remediation matters, each
pertaining to operations which were discontinued prior to
the acquisition of the Company by MAXXAM in 1988.
DEFERRED FINANCING COSTS
Costs incurred to obtain debt financing are deferred and amortized over the
estimated term of the related borrowing. Such amortization is included in
interest expense.
FOREIGN CURRENCY
The Company uses the United States dollar as the functional currency for
its foreign operations.
DERIVATIVE FINANCIAL INSTRUMENTS
Hedging transactions using derivative financial instruments are primarily
designed to mitigate KACC's exposure to changes in
prices for certain of the products which KACC sells and consumes and, to a
lesser extent, to mitigate KACC's exposure to changes
in foreign currency exchange rates. KACC does not utilize derivative
financial instruments for trading or other speculative
purposes. KACC's derivative activities are initiated within guidelines
established by management and approved by KACC's and the
Company's boards of directors. Hedging transactions are executed centrally
on behalf of all of KACC's business segments to
minimize transaction costs, monitor consolidated net exposures and allow
for increased responsiveness to changes in market
factors.
Most of KACC's hedging activities involve the use of option contracts
(which establish a maximum and/or minimum amount to be paid
or received) and forward sales contracts (which effectively fix or lock-in
the amount KACC will pay or receive). Option contracts
typically require the payment of an up-front premium in return for the
right to receive the amount (if any) by which the price at
the settlement date exceeds the strike price. Any interim fluctuations in
prices prior to the settlement date are deferred until
the settlement date of the underlying hedged transaction, at which point
they are reflected in net sales or cost of sales (as
applicable) together with the related premium cost. Forward sales
contracts do not require an up-front payment and are settled by
the receipt or payment of the amount by which the price at the settlement
date varies from the contract price. No accounting
recognition is accorded to interim fluctuations in prices of forward sales
contracts.
KACC has established margin accounts and credit limits with certain
counterparties related to open forward sales and option
contracts. When unrealized gains or losses are in excess of such credit
limits, KACC is entitled to receive advances from the
counterparties on open positions or is required to make margin deposits to
counterparties, as the case may be. At December 31,
1997, KACC had neither received nor made any margin deposits. At December
31, 1996, XXXX had received $13.0 of margin advances
from counterparties. Management considers credit risk related to possible
failure of the counterparties to perform their
obligations pursuant to the derivative contracts to be minimal.
Deferred gains or losses as of December 31, 1997, are included in Prepaid
expenses and other current assets and Other accrued
liabilities (See Note 10).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates the fair value of its outstanding indebtedness to be
$1,020.0 and $1,007.0 at December 31, 1997, and 1996,
respectively, based on quoted market prices for KACC's 9-7/8% Senior Notes
due 2002 (the "9-7/8% Notes"), 12-3/4% Senior
Subordinated Notes due 2003 (the "12-3/4% Notes"), and 10-7/8% Senior Notes
due 2006 (the "10-7/8% Notes"), and the discounted
future cash flows for all other indebtedness, using the current rate for
debt of similar maturities and terms. The Company
believes that the carrying amount of other financial instruments is a
reasonable estimate of their fair value, unless otherwise
noted.
EARNINGS (LOSS) PER SHARE
In the fourth quarter of 1997 the Company adopted Statement of Financial
Accounting standards No. 128, Earnings Per Share ("SFAS
No. 128") which, among other things, requires the presentation of "Basic"
and "Diluted" earnings per share in lieu of "Primary"
and "Fully Diluted" earnings per share. Basic differs from Primary
earnings per share in that it only includes the weighted
average impact of outstanding shares of the Company's Common Stock (i.e.,
it excludes common stock equivalents and the dilutive
effect of stock options, etc.). Diluted earnings per share is
substantially similar to Fully diluted earnings per share as
previously reported. In accordance with the provision of SFAS No. 128, all
earnings per share data for prior periods has been
restated to conform to the new computation and presentation guidelines of
SFAS No. 128. However, such restatement did not have a
significant impact on earnings per share amounts previously reported for
any recent prior period.
Basic - Earnings (loss) per share is computed by deducting preferred stock
dividends from net income (loss) in order to determine
net income (loss) available to common share holders. This amount is then
divided by the weighted average number of common shares
outstanding during the period, including the weighted average impact of
the shares of common stock issued during the year from
the date(s) of issuance.
Diluted - Diluted earnings per share for the years ended December 31, 1997,
and 1995 include the dilutive effect of outstanding
stock options (161,000 and 264,000 shares, respectively). The impact of
outstanding stock options was excluded from the
computation for the year ended December 31, 1996, as its effect would have
been antidilutive. The Company's 8.255% PRIDES,
Convertible Preferred Stock ("PRIDES") have not been treated "as if"
converted for purposes of the Diluted computation in any
period presented as such treatment would have been antidilutive. The
Company's Mandatory Conversion Premium Dividend Preferred Stock was not
treated "as if" converted in the Diluted computation for the year ended
December 31, 1995, because such treatment
would have been antidilutive.
2. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
Summary combined financial information is provided below for unconsolidated
aluminum investments, most of which supply and process raw materials. The
investees are Queensland Alumina Limited ("QAL") (28.3% owned), Anglesey
Aluminium Limited ("Anglesey") (49.0% owned), and Kaiser Jamaica Bauxite
Company (49.0% owned). The equity in earnings (losses) before income taxes
of such operations is treated as a reduction (increase) in cost of products
sold. At December 31, 1997, and 1996, XXXX's net receivables from these
affiliates were not material.
The summary combined financial information for the year ended December 31,
1997, also contains the balances and results of AKW L.P. (50% owned), an
aluminum wheels joint venture formed with a third party during May 1997.
(See Note 4)
SUMMARY OF COMBINED FINANCIAL POSITION
December 31,
------------------------------
1997 1996
-------------------------------------------------------------------------------------
Current assets $ 393.0 $ 450.3
Long-term assets (primarily property, plant, and 395.0 364.7
equipment, net) -------------- --------------
Total assets $ 788.0 $ 815.0
============== ==============
Current liabilities $ 117.1 $ 116.9
Long-term liabilities (primarily long-term debt) 400.8 386.7
Stockholders' equity 270.1 311.4
-------------- --------------
Total liabilities and stockholders' equity $ 788.0 $ 815.0
============== ==============
SUMMARY OF COMBINED OPERATIONS
Year Ended December 31,
----------------------------------------------
1997 1996 1995
------------------------------------------------------------------------------------------------
Net sales $ 644.1 $ 660.5 $ 685.9
Costs and expenses (637.8) (631.5) (618.7)
Provision for income taxes (8.2) (8.7) (18.7)
-------------- -------------- --------------
Net income (loss) $ (1.9) $ 20.3 $ 48.5
============== ============== ==============
Company's equity in income (loss) $ 2.9 $ 8.8 $ 19.2
============== ============== ==============
Dividends received $ 10.7 $ 11.8 $ -
============== ============== ==============
The Company's equity in income (loss) differs from the summary net income
(loss) due to various percentage ownerships in the entities and equity
method accounting adjustments. At December 31, 1997, KACC's investment in
its unconsolidated affiliates exceeded its equity in their net assets by
approximately $28.8 which amount will be fully amortized over the next
three years.
The Company and its affiliates have interrelated operations. KACC provides
some of its affiliates with services such as financing, management, and
engineering. Significant activities with affiliates include the acquisition
and processing of bauxite, alumina, and primary aluminum. Purchases from
these affiliates were $245.2, $281.6, and $284.4 in the years ended
December 31, 1997, 1996, and 1995, respectively.
3. PROPERTY, PLANT, AND EQUIPMENT
The major classes of property, plant, and equipment are as follows:
December 31,
------------------------------
1997 1996
-------------------------------------------------------------------------------------
Land and improvements $ 163.9 $ 157.5
Buildings 228.3 216.0
Machinery and equipment 1,529.1 1,441.1
Construction in progress 51.2 84.7
-------------- --------------
1,972.5 1,899.3
Accumulated depreciation (800.7) (730.6)
-------------- --------------
Property, plant, and equipment, net $ 1,171.8 $ 1,168.7
============== ==============
During June 1997, Kaiser Bellwood Corporation, a newly formed, wholly owned
subsidiary of KACC, completed the acquisition of
Xxxxxxxx Metals Company's Richmond, Virginia, extrusion plant and its
existing inventories for a total purchase price of $41.6,
consisting of cash payments of $38.4 and the assumption of approximately
$3.2 of employee related and other liabilities. Upon
completion of the transaction, Kaiser Bellwood Corporation became a
subsidiary guarantor under the indentures in respect of the
9-7/8% Notes, 10-7/8% Notes, and the 12-3/4% Notes. (See Note 5).
4. RESTRUCTURING OF OPERATIONS
The Company has previously disclosed that it set a goal of achieving
significant cost reductions and other profit improvements,
measured against 1996 results, with the full effect planned to be realized
in 1998 and beyond. The initiative is based on the
Company's conclusion that the level of performance of its existing
facilities and businesses would not achieve the level of
profits the Company considers satisfactory based upon historic long-term
average prices for primary aluminum and alumina. During
the second quarter of 1997, the Company recorded a $19.7 restructuring
charge to reflect actions taken and plans initiated to
achieve the reduced production costs, decreased corporate selling, general
and administrative expenses, and enhanced product mix
intended to achieve this goal. The significant components of the
restructuring charge are enumerated below.
ERIE PLANT DISPOSITION
During the second quarter of 1997, the Company formed a joint venture with
a third party related to the assets and liabilities
associated with the wheel manufacturing operations at its Erie,
Pennsylvania, fabrication plant. Management subsequently decided
to close the remainder of the Erie plant in order to consolidate its
aluminum forgings operations at two other facilities for
increased efficiency. As a result of the joint venture formation and plant
closure, the Company recognized a net pre-tax loss of
approximately $1.4.
OTHER ASSET DISPOSITIONS
As a part of the Company's profit enhancement and cost reduction
initiative, management made decisions regarding product
rationalization and geographical optimization, which led management to
decide to dispose of certain assets which had nominal
operating contribution. These strategic decisions resulted in the Company
recognizing a pre-tax charge of approximately $15.6
associated with such asset dispositions.
EMPLOYEE AND OTHER COSTS
As a part of the Company's profit enhancement and cost reduction
initiative, management concluded that certain corporate and
other staff functions could be consolidated or eliminated resulting in a
second quarter pre-tax charge of approximately $2.7 for
the benefit and other costs.
5. LONG-TERM DEBT
Long-term debt and its maturity schedule are as follows:
December 31,
2003 ----------------------
and 1997 1996
1998 1999 2000 2001 2002 After Total Total
----------------------------------------------------------------------------------------------------------------------------
Credit Agreement - -
9-7/8% Senior Notes due 2002, $ 224.2 $ - $ 224.2 $ 224.0
net
10-7/8% Senior Notes due 2006, 225.8 225.8 225.9
net
12-3/4% Senior Subordinated 400.0 400.0 400.0
Notes due 2003
Alpart XXXXXX Loans - (fixed
and variable rates) 60.0 60.0 60.0
due 2007, 2008
Other borrowings (fixed and $ 8.8 $ .4 $ .3 $ .3 .3 51.6 61.7 52.0
variable rates) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total $ 8.8 $ .4 $ .3 $ .3 $ 224.5 $ 737.4 971.7 961.9
========== ========== ========== ========== ========== ==========
Less current portion 8.8 8.9
---------- ----------
Long-term debt $ 962.9 $ 953.0
========== ==========
CREDIT AGREEMENT
In February 1994, the Company and KACC entered into a credit agreement (as
amended, the "Credit Agreement") which provides a
$325.0 five-year secured, revolving line of credit. KACC is able to borrow
under the facility by means of revolving credit
advances and letters of credit (up to $125.0) in an aggregate amount equal
to the lesser of $325.0 or a borrowing base relating to
eligible accounts receivable and eligible inventory. As of December 31,
1997, $273.4 (of which $73.4 could have been used for
letters of credit) was available to KACC under the Credit Agreement. The
Credit Agreement is unconditionally guaranteed by the
Company and by certain significant subsidiaries of KACC. Interest on any
outstanding balances will bear a premium (which varies
based on the results of a financial test) over either a base rate or LIBOR,
at the Company's option.
In January 1998, the term of the Credit Agreement was extended from
February 1999 to August 2001.
LOAN COVENANTS AND RESTRICTIONS
The Credit Agreement requires KACC to comply with certain financial
covenants and places restrictions on the Company's and KACC's
ability to, among other things, incur debt and liens, make investments, pay
dividends, undertake transactions with affiliates,
make capital expenditures, and enter into unrelated lines of business. The
Credit Agreement is secured by, among other things,
(i) mortgages on KACC's major domestic plants (excluding KACC's Gramercy
alumina plant and Nevada Micromill(TM) facility); (ii)
subject to certain exceptions, liens on the accounts receivable, inventory,
equipment, domestic patents and trademarks, and
substantially all other personal property of KACC and certain of its
subsidiaries; (iii) a pledge of all the stock of KACC owned
by Kaiser; and (iv) pledges of all of the stock of a number of KACC's
wholly owned domestic subsidiaries, pledges of a portion of
the stock of certain foreign subsidiaries, and pledges of a portion of the
stock of certain partially owned foreign affiliates.
The obligations of KACC with respect to its 9-7/8% Notes, its 10-7/8% Notes
and its 12-3/4% Notes are guaranteed, jointly and
severally, by certain subsidiaries of KACC. The indentures governing the
9-7/8% Notes, the 10-7/8% Notes and the 12-3/4% Notes
(collectively, the "Indentures") restrict, among other things, KACC's
ability to incur debt, undertake transactions with
affiliates, and pay dividends. Further, the Indentures provide that KACC
must offer to purchase the 9-7/8% Notes, the 10-7/8%
Notes and the 12-3/4% Notes, respectively, upon the occurrence of a Change
of Control (as defined therein), and the Credit
Agreement provides that the occurrence of a Change in Control (as defined
therein) shall constitute an Event of Default
thereunder.
Under the most restrictive of the covenants in the Credit Agreement,
neither the Company nor KACC currently is permitted to pay
dividends on its common stock.
In December 1991, Alpart entered into a loan agreement with the Caribbean
Basin Projects Financing Authority ("XXXXXX"). Xxxxxx'x
obligations under the loan agreement are secured by a $64.2 letter of
credit guaranteed by the partners in Alpart (of which $22.5
is guaranteed by the Company's minority partner in Alpart). Alpart has
also agreed to indemnify bondholders of XXXXXX for certain
tax payments that could result from events, as defined, that adversely
affect the tax treatment of the interest income on the
bonds.
RESTRICTED NET ASSETS OF SUBSIDIARIES
Certain debt instruments restrict the ability of KACC to transfer assets,
make loans and advances, and pay dividends to the
Company. The restricted net assets of KACC totaled $121.9 and $56.1 at
December 31, 1997 and 1996, respectively.
CAPITALIZED INTEREST
Interest capitalized in 1997, 1996, and 1995 was $6.6, $4.9, and $2.8,
respectively.
6. INCOME TAXES
Income (loss) before income taxes and minority interests by geographic area
is as follows:
Year Ended December 31,
----------------------------------------------
1997 1996 1995
-------------------------------------------------------------------------------------------
Domestic $ (112.6) $ (45.8) $ (55.9)
Foreign 172.9 47.5 158.5
-------------- -------------- --------------
Total $ 60.3 $ 1.7 $ 102.6
============== ============== ==============
Income taxes are classified as either domestic or foreign, based on whether
payment is made or due to the United States or a
foreign country. Certain income classified as foreign is also subject to
domestic income taxes.
The (provision) credit for income taxes on income (loss) before income
taxes and minority interests consists of:
Federal Foreign State Total
-------------------------------------------------------------------------------------------------
1997 Current $ (2.0) $ (28.7) $ (.2) $ (30.9)
Deferred 30.5 (7.0) (1.4) 22.1
-------------- -------------- -------------- --------------
Total $ 28.5 $ (35.7) $ (1.6) $ (8.8)
============== ============== ============== ==============
1996 Current $ (1.6) $ (21.8) $ (.1) $ (23.5)
Deferred 8.6 7.6 16.6 32.8
-------------- -------------- -------------- --------------
Total $ 7.0 $ (14.2) $ 16.5 $ 9.3
============== ============== ============== ==============
1995 Current $ (4.3) $ (40.2) $ (.1) $ (44.6)
Deferred 15.2 (4.9) (2.9) 7.4
-------------- -------------- -------------- --------------
Total $ 10.9 $ (45.1) $ (3.0) $ (37.2)
============== ============== ============== ==============
A reconciliation between the (provision) credit for income taxes and the
amount computed by applying the federal statutory income
tax rate to income before income taxes and minority interests is as
follows:
Year Ended December 31,
----------------------------------------------
1997 1996 1995
------------------------------------------------------------------------------------------------
Amount of federal income tax provision based on $ (21.1) $ (.6) $ (35.9)
the statutory rate
Revision of prior years' tax estimates and other 12.5 10.0 1.5
changes in valuation allowances
Percentage depletion 4.2 3.9 4.2
Foreign taxes, net of federal tax benefit (3.1) (5.5) (5.4)
Other (1.3) 1.5 (1.6)
-------------- -------------- --------------
(Provision) credit for income taxes $ (8.8) $ 9.3 $ (37.2)
============== ============== ==============
Included in revision of prior years' tax estimates and other changes in
valuation allowances for 1997 and 1996 shown above are
$12.5 and $9.8 related to the resolution of certain income tax matters in
the second quarter of 1997 and fourth quarter of 1996,
respectively.
The components of the Company's net deferred income tax assets are as
follows:
December 31,
------------------------------
1997 1996
----------------------------------------------------- ------------------------------
Deferred income tax assets:
Postretirement benefits other than pensions $ 288.9 $ 290.5
Loss and credit carryforwards 99.3 135.1
Other liabilities 169.3 157.6
Other 102.0 86.7
Valuation allowances (113.3) (127.2)
-------------- --------------
Total deferred income tax assets-net 546.2 542.7
-------------- --------------
Deferred income tax liabilities:
Property, plant, and equipment (139.7) (160.9)
Other (54.8) (72.6)
-------------- --------------
Total deferred income tax liabilities (194.5) (233.5)
-------------- --------------
Net deferred income tax assets $ 351.7 $ 309.2
============== ==============
The principal component of the Company's net deferred income tax assets is
the tax benefit, net of certain valuation allowances,
associated with the accrued liability for postretirement benefits other
than pensions. The future tax deductions with respect to
the turnaround of this accrual will occur over a 30-to-40-year period. If
such deductions create or increase a net operating loss
in any year subsequent to 1997, the Company has the ability to carry
forward such loss for 20 taxable years. For these reasons,
the Company believes that a long-term view of profitability is appropriate
and has concluded that this net deferred income tax
asset will more likely than not be realized.
A substantial portion of the valuation allowances provided by the Company
relates to loss and credit carryforwards. To determine
the proper amount of valuation allowances with respect to these
carryforwards, the Company evaluated all appropriate factors,
including any limitations concerning their use and the year the
carryforwards expire, as well as the levels of taxable income
necessary for utilization. With regard to future levels of income, the
Company believes, based on the cyclical nature of its
business, its history of operating earnings, and its expectations for
future years, that it will more likely than not generate
sufficient taxable income to realize the benefit attributable to the loss
and credit carryforwards for which valuation allowances
were not provided.
As of December 31, 1997 and 1996, $53.7 and $69.7, respectively, of the net
deferred income tax assets listed above are included
on the Consolidated Balance Sheets in the caption entitled Prepaid expenses
and other current assets. Certain other portions of
the deferred income tax liabilities listed above are included on the
Consolidated Balance Sheets in the captions entitled Other
accrued liabilities and Long-term liabilities.
The Company and its domestic subsidiaries file consolidated federal income
tax returns. During the period from October 28, 1988
through June 30, 1993, the Company and its domestic subsidiaries were
included in the consolidated federal income tax returns of
MAXXAM. During 1997 MAXXAM reached a settlement with the Internal Revenue
Service regarding all remaining years where the Company
and its subsidiaries were included in the MAXXAM consolidated federal
income tax returns. As a result of this settlement, KACC
paid $11.8 to MAXXAM in respect of its liabilities pursuant to its tax
allocation agreement with MAXXAM. Payments or refunds for
periods prior to July 1, 1993, related to other jurisdictions could still
be required pursuant to the Company's and KACC's
respective tax allocation agreements with MAXXAM. In accordance with the
Credit Agreement, any such payments to MAXXAM by KACC
would require lender approval, except in certain specific circumstances.
The tax allocation agreements of the Company and KACC
with MAXXAM terminated pursuant to their terms, effective for taxable
periods beginning after June 30, 1993.
At December 31, 1997, the Company had certain tax attributes available to
offset regular federal income tax requirements, subject
to certain limitations, including net operating loss and general business
credit carryforwards of $33.2 and $10.4, respectively,
which expire periodically through 2011, foreign tax credit ("FTC")
carryforwards of $50.0, which expire periodically through 2002,
and alternative minimum tax ("AMT") credit carryforwards of $21.6, which
have an indefinite life. The Company also has AMT net
operating loss and FTC carryforwards of $17.6 and $74.7, respectively,
available, subject to certain limitations, to offset future
alternative minimum taxable income, which expire periodically through 2011
and 2002, respectively.
7. EMPLOYEE BENEFIT AND INCENTIVE PLANS
RETIREMENT PLANS
Retirement plans are non-contributory for salaried and hourly employees and
generally provide for benefits based on a formula
which considers length of service and earnings during years of service.
The Company's funding policies meet or exceed all
regulatory requirements.
The funded status of the employee pension benefit plans and the
corresponding amounts that are included in the Company's
Consolidated Balance Sheets are as follows:
Plans with Accumulated
Benefits Exceeding
Assets(1)
December 31,
-----------------------------
1997 1996
----------------------------------------------------------- ------------- - -------------
Accumulated benefit obligation:
Vested employees $ 785.4 $ 737.7
Nonvested employees 41.2 38.5
------------- -------------
Accumulated benefit obligation 826.6 776.2
Additional amounts related to projected salary increases 46.4 40.0
------------- -------------
Projected benefit obligation 873.0 816.2
Plan assets (principally common stocks and fixed income
obligations) at fair value (756.9) (662.0)
------------- -------------
Plan assets less than projected benefit obligation 116.1 154.2
Unrecognized net gains (losses) .3 (13.6)
Unrecognized net obligations (.3) (.4)
Unrecognized prior-service cost (22.2) (26.9)
Adjustment required to recognize minimum liability 5.4 13.7
------------- -------------
Accrued pension obligation included in the Consolidated
Balance Sheets (principally in Long-term liabilities) $ 99.3 $ 127.0
============= =============
(1) Includes accrued pension obligations of approximately $6.3 and $.3 in
1997 and 1996, respectively, related to plans with assets exceeding
accumulated benefits.
As required by Statement of Financial Accounting Standards No. 87,
Employers' Accounting for Pensions, the Company recorded after-tax credits
to equity of $2.8 and $11.0 at December 31, 1997 and 1996, respectively, to
reduce the deficit of the minimum liability over the unrecognized net
obligation and prior-service cost. These amounts were recorded net of the
related income tax provision of $1.3 and $6.5 as of December 31, 1997 and
1996, respectively, which approximated the federal and state statutory
rates.
The components of net periodic pension cost are:
Year Ended December 31,
----------------------------------------------
1997 1996 1995
-----------------------------------------------------------------------------------------------------
Service cost - benefits earned during the period $ 13.4 $ 12.9 $ 10.0
Interest cost on projected benefit obligation 61.6 60.0 59.8
Return on assets:
Actual gain (129.9) (89.8) (112.2)
Deferred gain 68.1 34.8 64.6
Net amortization and deferral 6.0 5.5 4.2
-------------- -------------- --------------
Net periodic pension cost $ 19.2 $ 23.4 $ 26.4
============== ============== ==============
Assumptions used to value obligations at year-end, and to determine the net
periodic pension cost in the subsequent year are:
1997 1996 1995
------------------------------------------------------------------------------------------------
Discount rate 7.25% 7.75% 7.5%
Expected long-term rate of return on assets 9.5% 9.5% 9.5%
Rate of increase in compensation levels 5.0% 5.0% 5.0%
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company and its subsidiaries provide postretirement health care and
life insurance benefits to eligible retired employees and
their dependents. Substantially all employees may become eligible for
those benefits if they reach retirement age while still
working for the Company or its subsidiaries. The Company has not funded
the liability for these benefits, which are expected to
be paid out of cash generated by operations. The Company reserves the
right, subject to applicable collective bargaining
agreements, to amend or terminate these benefits.
The Company's accrued postretirement benefit obligation is composed of the
following:
December 31,
------------------------------
1997 1996
------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $ 446.7 $ 498.7
Active employees eligible for postretirement benefits 35.1 36.7
Active employees not eligible for postretirement 62.7 67.4
benefits -------------- --------------
Accumulated postretirement benefit obligation 544.5 602.8
Unrecognized net gains 135.0 71.3
Unrecognized gains related to prior-service costs 86.1 98.5
-------------- --------------
Accrued postretirement benefit obligation $ 765.6 $ 772.6
============== ==============
The components of net periodic postretirement benefit cost are:
Year Ended December 31,
----------------------------------------------
1997 1996 1995
-----------------------------------------------------------------------------------------------------
Service cost $ 6.1 $ 3.8 $ 4.5
Interest cost 43.9 46.9 52.3
Amortization of prior service cost (12.4) (12.4) (8.9)
-------------- -------------- --------------
Net periodic postretirement benefit cost $ 37.6 $ 38.3 $ 47.9
============== ============== ==============
In 1997 annual assumed rates of increase in the per capita cost of covered
benefits (i.e., health care cost trend rate) for non-HMO are 7.5% and 5.5%
for retirees under 65 and over 65, respectively, and 4.0% for HMO at all
ages. Non-HMO rates are assumed to decrease gradually to 5.35% in 2007
and remain at that level thereafter. The health care cost trend rate has
a significant effect on the amounts reported. A one percentage point
increase in the assumed health care cost trend rate would increase the
accumulated postretirement benefit obligation as of December 31, 1997, by
approximately $53.0 and the aggregate of the service and
interest cost components of net periodic postretirement benefit cost for
1997 by approximately $6.0. The weighted average
discount rate used to determine the accumulated postretirement benefit
obligation at December 31, 1997 and 1996, was 7.25% and
7.75%, respectively.
POSTEMPLOYMENT BENEFITS
The Company provides certain benefits to former or inactive employees after
employment but before retirement.
INCENTIVE PLANS
The Company has an unfunded incentive compensation program, which provides
incentive compensation based on performance against
annual plans and over rolling three-year periods. In addition, the Company
has a "nonqualified" stock option plan and KACC has a
defined contribution plan for salaried employees. The Company's expense
for all of these plans was $8.3, $(2.1) and $11.9 for the
years ended December 31, 1997, 1996 and 1995, respectively.
The Company has a total of 5,500,000 shares of Common Stock reserved for
grant under its incentive compensation programs. At
December 31, 1997, 3,536,653 shares of Common Stock remained available for
grant after consideration of the 3,000,000 share
increase in available shares, approved by shareholders in May 1997, and
current year share grants and stock option activity.
Stock options granted pursuant to the Company's nonqualified stock option
program are granted at the prevailing market price,
generally vest at a rate of 20 - 33% per year, and have a ten year term.
Information concerning nonqualified stock option plan
activity is shown below. The weighted average price per share for each
year is shown parenthetically.
1997 1996 1995
-----------------------------------------------------------------------------------------------------
Outstanding at beginning of year ($10.33, $10.32 and 890,395 926,085 1,119,680
$9.85)
Granted ($10.06) 15,092 - -
Exercised ($8.33, $8.99, and $7.32) (48,410) (8,275) (155,500)
Expired or forfeited ($10.12, $10.45, and $8.88) (37,325) (27,415) (38,095)
-------------- -------------- --------------
Outstanding at end of year ($10.45, $10.33, and 819,752 890,395 926,085
$10.32) ============== ============== ==============
Exercisable at end of year ($10.53, $10.47, and 601,115 436,195 211,755
$10.73) ============== ============== ==============
In accordance with Statement of Financial Accounting Standards No. 123,
Accounting for Stock Based Compensation ("SFAS No. 123"),
the Company is required to calculate pro forma compensation cost for all
stock options granted subsequent to December 31, 1994.
No stock options were granted during 1995 and 1996. However, as shown in
the table above, 15,092 options were granted in 1997
which would be subject to the pro forma calculation requirements. For SFAS
No. 123 purposes, the fair value of the 1997 stock
option grant was estimated using the Black-Scholes option pricing model.
The estimated fair value of the 1997 stock options
grants of $.1 would result in increased pro forma compensation expense and
therefore reduced net income.
8. STOCKHOLDER'S EQUITY AND MINORITY INTERESTS
Changes in stockholders' equity and minority interests were:
Minority Interests Stockholders' Equity
--------------------- -------------------------------------------------------
Additional
Redeemable Accu Minimum
Preference Preferred Common Additional mulated Pension
Stock Other Stock Stock Capital Deficit Liability
--------------------------------------------------- ---------------------------------------------------------
BALANCE, DECEMBER 31, 1994 $ 29.1 $ 87.1 $ .6 $ .6 $ 527.8 $ (502.6) $ (9.1)
Net income 60.3
Redeemable preference
stock:
Accretion 3.9
Stock redemption (8.7)
Stock repurchase 5.4
Conversions (1,222
preference shares
into cash) (.1)
Common stock issued upon
redemption and
conversion of
preferred stock (.2) .1 1.1
Dividends on preferred
stock (17.6)
Minority interests 6.0
Incentive plans
accretion 1.4
Additional minimum (4.7)
pension liability ---------- ------- ---------- ------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1995 29.7 93.0 .4 .7 530.3 (459.9) (13.8)
Net income 8.2
Redeemable preference
stock:
Accretion 3.1
Stock redemption (5.3)
Common stock issued upon
redemption and
conversion of
preferred stock .1
Dividends on preferred
stock (8.4)
Minority interests 1.2
Incentive plan accretion .7
Reduction of minimum
pension liability 11.0
---------- ------- ---------- ------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1996 27.5 94.2 .4 .7 531.1 (460.1) (2.8)
Net income 48.0
Redeemable preference
stock:
Accretion 2.3
Stock redemption (2.1)
Common stock issued upon
redemption and
conversion of
preferred stock (.4) .1 1.7
Stock options exercised .4
Dividends on preferred
stock (5.5)
Minority interests 5.8
Incentive plan accretion .6
Reduction of minimum
pension liability 2.8
---------- ------- ---------- ------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1997 $ 27.7 $ 100.0 $ - $ .8 $ 533.8 $ (417.6) $ -
========== ======= ========== ======= ========== ========== ==========
REDEEMABLE PREFERENCE STOCK
In 1985, KACC issued its Cumulative (1985 Series A) Preference Stock and
its Cumulative (1985 Series B) Preference Stock
(together, the "Redeemable Preference Stock") each of which has a par value
of $1 per share and a liquidation and redemption value
of $50 per share plus accrued dividends, if any. No additional Redeemable
Preference Stock is expected to be issued. Holders of
the Redeemable Preference Stock are entitled to an annual cash dividend of
$5 per share, or an amount based on a formula tied to
KACC's pre-tax income from aluminum operations, when and as declared by the
Board of Directors.
The carrying values of the Redeemable Preference Stock are increased each
year to recognize accretion between the fair value (at
which the Redeemable Preference Stock was originally issued) and the
redemption value. Changes in Redeemable Preference Stock are
shown below.
1997 1996 1995
-----------------------------------------------------------------------------------------------
Shares:
Beginning of year 634,684 737,363 912,167
Redeemed (39,631) (102,679) (174,804)
------------- -------------- --------------
End of year 595,053 634,684 737,363
============= ============== ==============
Redemption fund agreements require KACC to make annual payments by March 31
of the subsequent year based on a formula tied to
consolidated net income until the redemption funds are sufficient to redeem
all of the Redeemable Preference Stock. On an annual
basis, the minimum payment is $4.3 and the maximum payment is $7.3. KACC
also has certain additional repurchase requirements
which are, among other things, based upon profitability tests.
The Redeemable Preference Stock is entitled to the same voting rights as
KACC common stock and to certain additional voting rights
under certain circumstances, including the right to elect, along with other
KACC preference stockholders, two directors whenever
accrued dividends have not been paid on two annual dividend payment dates
or when accrued dividends in an amount equivalent to six
full quarterly dividends are in arrears. The Redeemable Preference Stock
restricts the ability of KACC to redeem or pay dividends
on common stock if KACC is in default on any dividends payable on
Redeemable Preference Stock.
PREFERENCE STOCK
KACC has four series of $100 par value Cumulative Convertible Preference
Stock ("$100 Preference Stock") with annual dividend
requirements of between 4-1/8% and 4-3/4%. KACC has the option to redeem
the $100 Preference Stock at par value plus accrued
dividends. KACC does not intend to issue any additional shares of the $100
Preference Stock.
The $100 Preference Stock can be exchanged for per share cash amounts
between $69 - $80. KACC records the $100 Preference Stock
at their exchange amounts for financial statement presentation and the
Company includes such amounts in minority interests. At
December 31, 1997, and 1996, outstanding shares of $100 Preference Stock
were 20,543 and 21,630, respectively.
PREFERRED STOCK
PRIDES Convertible - during August 1997, the remaining 8,673,850
outstanding shares of PRIDES were converted into 7,227,848 shares
of Common Stock pursuant to the terms of the PRIDES Certificate of
Designations. Further, in accordance with the PRIDES
Certificate of Designations, no dividends were paid or payable for the
period June 30, 1997, to, but not including, the date of
conversion. However, in accordance with generally accepted accounting
principles, the $1.3 of accrued dividends attributable to
the period June 30, 1997, to, but not including, the conversion date is
treated as an increase in Additional capital at the date
of conversion and must still be reflected as a reduction of Net income
available to common shareholders.
Series A Convertible - In September 1995, the Company redeemed all
1,938,295 shares of its Series A Mandatory Conversion Premium
Dividend Preferred Stock, which resulted in the simultaneous redemption of
all of its $.65 Depositary Shares in exchange for (i)
13,126,521 shares of the Company's Common Stock and (ii) $2.8 in cash in
satisfaction of all accrued and unpaid dividends and
fractional shares of Common Stock that would have otherwise been issuable.
PLEDGED SHARES
From time to time MAXXAM or certain of its subsidiaries which own the
Company's Common Stock may use such stock as collateral
under various financing arrangements. At December 31, 1997, 27,938,250
shares of the Company's Common Stock (the "Pledged
Shares") beneficially owned by MAXXAM Group Holdings Inc. ("MGHI"), a
wholly owned subsidiary of MAXXAM, were pledged as security
for debt of MAXXAM Group Inc. ("MGI"), a wholly owned subsidiary of MGHI,
consisting of $100.0 aggregate principal amount of
11-1/4% Senior Secured Notes due 2003 and $125.7 aggregate principal amount
of 12-1/4% Senior Secured Discount Notes due 2003
(collectively the "MGI Secured Debt"). Additionally, up to 16,055,000 of
the Pledged Shares are to be pledged by MGHI as security
for $130.0 principal amount of 12% Senior Secured Notes due 2003 issued in
December 1996 by MGHI, if any of the Pledged Shares are
released as security for the MGI Secured Debt by reason of an early
retirement of such indebtedness (other than by a refinancing).
9. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
KACC has a variety of financial commitments, including purchase agreements,
tolling arrangements, forward foreign exchange and
forward sales contracts (see Note 10), letters of credit, and guarantees.
Such purchase agreements and tolling arrangements
include long-term agreements for the purchase and tolling of bauxite into
alumina in Australia by QAL. These obligations expire
in 2008. Under the agreements, KACC is unconditionally obligated to pay
its proportional share of debt, operating costs, and
certain other costs of QAL. The aggregate minimum amount of required
future principal payments at December 31, 1997, is $97.6, of
which approximately $12.0 is due in each of 2000 and 2001 with the balance
being due thereafter. KACC's share of payments,
including operating costs and certain other expenses under the agreements,
has ranged between $100.0 - $120.0 over the past three
years. KACC also has agreements to supply alumina to and to purchase
aluminum from Anglesey.
Minimum rental commitments under operating leases at December 31, 1997, are
as follows: years ending December 31, 1998 - $26.5;
1999 - $32.0; 2000 - $28.8; 2001 - $28.1; 2002 - $26.4; thereafter -
$134.3. The future minimum rentals receivable under
noncancelable subleases was $62.5 at December 31, 1997.
Rental expenses were $30.4, $29.6, and $29.0, for the years ended December
31, 1997, 1996, and 1995, respectively.
ENVIRONMENTAL CONTINGENCIES
The Company and KACC are subject to a number of environmental laws, to
fines or penalties assessed for alleged breaches of the
environmental laws, and to claims and litigation based upon such laws.
KACC currently is subject to a number of lawsuits under
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended by the Superfund Amendments
Reauthorization Act of 1986 ("CERCLA"), and, along with certain other
entities, has been named as a potentially responsible party
for remedial costs at certain third-party sites listed on the National
Priorities List under CERCLA.
Based on the Company's evaluation of these and other environmental matters,
the Company has established environmental accruals,
primarily related to potential solid waste disposal and soil and
groundwater remediation matters. The following table presents
the changes in such accruals, which are primarily included in Long-term
liabilities, for the years ended December 31, 1997, 1996,
and 1995:
1997 1996 1995
--------------------------------------------------------------------------------------------------
Balance at beginning of period $ 33.3 $ 38.9 $ 40.1
Additional amounts 2.0 3.2 3.3
Less expenditures (5.6) (8.8) (4.5)
-------------- -------------- --------------
Balance at end of period $ 29.7 $ 33.3 $ 38.9
============== ============== ==============
These environmental accruals represent the Company's estimate of costs
reasonably expected to be incurred based on presently
enacted laws and regulations, currently available facts, existing
technology, and the Company's assessment of the likely
remediation action to be taken. The Company expects that these remediation
actions will be taken over the next several years and
estimates that annual expenditures to be charged to these environmental
accruals will be approximately $3.0 to $8.0 for the years
1998 through 2002 and an aggregate of approximately $8.0 thereafter.
As additional facts are developed and definitive remediation plans and
necessary regulatory approvals for implementation of
remediation are established or alternative technologies are developed,
changes in these and other factors may result in actual
costs exceeding the current environmental accruals. The Company believes
that it is reasonably possible that costs associated
with these environmental matters may exceed current accruals by amounts
that could range, in the aggregate, up to an estimated
$18.0. As the resolution of these matters is subject to further regulatory
review and approval, no specific assurance can be
given as to when the factors upon which a substantial portion of this
estimate is based can be expected to be resolved. However,
the Company is currently working to resolve certain of these matters.
The Company believes that KACC has insurance coverage available to recover
certain incurred and future environmental costs and is
actively pursuing claims in this regard. However, no accruals have been
made for any such insurance recoveries and no assurances
can be given that the Company will be successful in its attempt to recover
incurred or future costs.
While uncertainties are inherent in the final outcome of these
environmental matters, and it is presently impossible to determine
the actual costs that ultimately may be incurred, management currently
believes that the resolution of such uncertainties should
not have a material adverse effect on the Company's consolidated financial
position, results of operations, or liquidity.
ASBESTOS CONTINGENCIES
KACC is a defendant in a number of lawsuits, some of which involve claims
of multiple persons, in which the plaintiffs allege that
certain of their injuries were caused by, among other things, exposure to
asbestos during, and as a result of, their employment or
association with KACC or exposure to products containing asbestos produced
or sold by KACC. The lawsuits generally relate to
products KACC has not manufactured for at least 20 years.
The following table presents the changes in number of such claims pending
for the years ended December 31, 1997, 1996, and 1995.
1997 1996 1995
-----------------------------------------------------------------------------------------------
Number of claims at beginning of period 71,100 59,700 25,200
Claims received 15,600 21,100 41,700
Claims settled or dismissed (9,300) (9,700) (7,200)
-------------- -------------- --------------
Number of claims at end of period 77,400 71,100 59,700
============== ============== ==============
Based on past experience and reasonably anticipated future activity, the
Company has established an accrual for estimated
asbestos-related costs for claims filed and estimated to be filed through
2008. There are inherent uncertainties involved in
estimating asbestos-related costs, and the Company's actual costs could
exceed these estimates. The Company's accrual was
calculated based on the current and anticipated number of asbestos-related
claims, the prior timing and amounts of asbestos-related payments, and the
advice of Xxxxxxx Xxxxx Xxxxxxxxxxx Xxxxx & Xxxx, P.A. with respect to the
current state of the law
related to asbestos claims. Accordingly, an estimated asbestos-related
cost accrual of $158.8, before consideration of insurance
recoveries, is included primarily in Long-term liabilities at December 31,
1997. While the Company does not presently believe
there is a reasonable basis for estimating such costs beyond 2008 and,
accordingly, no accrual has been recorded for such costs
which may be incurred beyond 2008, there is a reasonable possibility that
such costs may continue beyond 2008, and such costs may
be substantial. The Company estimates that annual future cash payments in
connection with such litigation will be approximately
$13.0 to $20.0 for each of the years 1998 through 2002, and an aggregate of
approximately $80.0 thereafter.
The Company believes that KACC has insurance coverage available to recover
a substantial portion of its asbestos-related costs.
Claims for recovery from some of KACC's insurance carriers are currently
subject to pending litigation and other carriers have
raised certain defenses, which have resulted in delays in recovering costs
from the insurance carriers. The timing and amount of
ultimate recoveries from these insurance carriers are dependent upon the
resolution of these disputes. The Company believes,
based on prior insurance-related recoveries in respect of asbestos-related
claims, existing insurance policies, and the advice of
Xxxxxx, Marrin, Xxxxxxx & Xxxxxxx LLP with respect to applicable insurance
coverage law relating to the terms and conditions of
those policies, that substantial recoveries from the insurance carriers are
probable. Accordingly, an estimated aggregate
insurance recovery of $134.0, determined on the same basis as
the asbestos-related cost accrual, is recorded primarily in Other
assets at December 31, 1997.
Subsequent to December 31, 1997, KACC reached agreements settling
approximately 25,000 of the pending asbestos-related claims.
Also, subsequent to year-end 1997, KACC reached agreements on asbestos
related coverage matters with two insurance carriers under
which the Company will collect a total of approximately $17.5 during the
first quarter of 1998. The insurance recoveries will
reduce the approximately $134.0 of asbestos related receivable accrued at
December 31, 1997. As the amounts related to the claim
settlements and insurance recoveries were consistent with the Company's
year-end 1997 accrual assumptions, these events are not
expected to have a material impact on the Company's financial position,
results of operations or liquidity.
Management continues to monitor claims activity, the status of lawsuits
(including settlement initiatives), legislative progress,
and costs incurred in order to ascertain whether an adjustment to the
existing accruals should be made to the extent that
historical experience may differ significantly from the Company's
underlying assumptions. While uncertainties are inherent in the
final outcome of these asbestos matters and it is presently impossible to
determine the actual costs that ultimately may be
incurred and insurance recoveries that will be received, management
currently believes that, based on the factors discussed in the
preceding paragraphs, the resolution of asbestos-related uncertainties and
the incurrence of asbestos-related costs net of related
insurance recoveries should not have a material adverse effect on the
Company's consolidated financial position, results of
operations, or liquidity.
OTHER CONTINGENCIES
The Company or KACC is involved in various other claims, lawsuits, and
other proceedings relating to a wide variety of matters.
While uncertainties are inherent in the final outcome of such matters, and
it is presently impossible to determine the actual
costs that ultimately may be incurred, management currently believes that
the resolution of such uncertainties and the incurrence
of such costs should not have a material adverse effect on the Company's
consolidated financial position, results of operations,
or liquidity.
10. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS
At December 31, 1997, the net unrealized loss on KACC's position in
aluminum forward sales and option contracts, (based on an
average price of $1,643 per ton ($.75 per pound) of primary aluminum),
natural gas and fuel oil forward purchase and option
contracts, and forward foreign exchange contracts, was approximately $21.0.
Any gains or losses on the derivative contracts
utilized in KACC's hedging activities are offset by losses or gains,
respectively, on the transactions being hedged.
ALUMINA AND ALUMINUM
The Company's earnings are sensitive to changes in the prices of alumina,
primary aluminum and fabricated aluminum products, and
also depend to a significant degree upon the volume and mix of all products
sold. Primary aluminum prices have historically been
subject to significant cyclical price fluctuations. Alumina prices as well
as fabricated aluminum product prices (which vary
considerably among products) are significantly influenced by changes in the
price of primary aluminum but generally lag behind
primary aluminum price changes by up to three months. Since 1993, the
Average Midwest United States transaction price for primary
aluminum has ranged from approximately $.50 to $1.00 per pound.
From time to time in the ordinary course of business, KACC enters into
hedging transactions to provide price risk management in
respect of the net exposure of earnings resulting from (i) anticipated
sales of alumina, primary aluminum and fabricated aluminum
products, less (ii) expected purchases of certain items, such as aluminum
scrap, rolling ingot, and bauxite, whose prices
fluctuate with the price of primary aluminum. Forward sales contracts are
used by KACC to effectively fix the price that KACC
will receive for its shipments. KACC also uses option contracts (i) to
establish a minimum price for its product shipments, (ii)
to establish a "collar" or range of price for KACC's anticipated sales,
and/or (iii) to permit KACC to realize possible upside
price movements. As of December 31, 1997, KACC had sold forward, at fixed
prices, approximately 109,850 and 24,000 tons of
primary aluminum with respect to 1998 and 1999, respectively. KACC had
also purchased put options to establish a minimum price
for approximately 52,000 tons with respect to 1998 and as of December 31,
1997, had entered into option contracts that established
a price range for an additional 243,600 and 124,500 tons with respect to
1998 and 1999, respectively. Additionally, at December
31, 1997, KACC also held fixed price purchase contracts for 134,850 tons of
primary aluminum with respect to 1998.
As of December 31, 1997, KACC had sold forward virtually all of the alumina
available to it in excess of its projected internal
smelting requirements for 1998 and 1999 at prices indexed to future prices
of primary aluminum.
ENERGY
KACC is exposed to energy price risk from fluctuating prices for fuel oil
and natural gas consumed in the production process.
Accordingly, KACC from time to time in the ordinary course of business
enters into hedging transactions with major suppliers of
energy and energy related financial instruments. As of December 31, 1997,
KACC had a combination of fixed price purchase and
option contracts for the purchase of approximately 41,000 MMBtu of natural
gas per day during 1998. At December 31, 1997, KACC
also held a combination of fixed price purchase and option contracts for an
average of 232,000 and 25,000 barrels of fuel oil per
month for 1998 and 1999, respectively.
FOREIGN CURRENCY
KACC enters into forward exchange contracts to hedge material cash
commitments to foreign subsidiaries or affiliates. At December
31, 1997, KACC had net forward foreign exchange contracts totaling
approximately $136.6 for the purchase of 180.0 Australian
dollars from January 1998 through February 1999, in respect of its
commitments for 1998 and 1999 expenditures denominated in
Australian dollars.
11. SEGMENT AND GEOGRAPHICAL AREA INFORMATION
The Company's operations are located in many foreign countries, including
Australia, Canada, Ghana, Jamaica, and the United
Kingdom. Foreign operations in general may be more vulnerable than
domestic operations due to a variety of political and other
risks. Sales and transfers among geographic areas are made on a basis
intended to reflect the market value of products.
The aggregate foreign currency gain included in determining net income was
immaterial for the years ended December 31, 1997, 1996,
and 1995.
No single customer accounted for sales in excess of 10% of total revenue in
1997, 1996 or 1995.
Export sales were less than 10% of total revenue during the years ended
December 31, 1997, 1996, and 1995.
Geographical area information relative to operations is summarized as
follows:
Year Ended Other
December 31, Domestic Caribbean Africa Foreign Eliminations Total
------------------------------------------------------------------------------------------------------------------- -------------
Net sales to unaffiliated customers 1997 $ 1,720.3 $ 204.6 $ 234.2 $ 214.1 $ 2,373.2
1996 1,610.0 201.8 198.3 180.4 2,190.5
1995 1,589.5 191.7 239.4 217.2 2,237.8
Sales and transfers among 1997 $ 121.7 $ 197.3 $ (319.0)
geographic areas 1996 116.9 206.0 (322.9)
1995 79.6 191.5 (271.1)
Equity in income (losses) of 1997 $ 4.8 $ (1.9) $ 2.9
unconsolidated affiliates 1996 .3 8.5 8.8
1995 (.2) 19.4 19.2
Operating income 1997 $ 18.9 $ 11.6 $ 72.2 $ 65.3 $ 168.0
1996 4.4 1.6 27.8 64.0 97.8
1995 32.0 9.8 83.5 85.3 210.6
Investment in and advances to 1997 $ 15.8 $ 23.9 $ 108.9 $ 148.6
unconsolidated affiliates 1996 .5 25.3 142.6 168.4
Identifiable assets 1997 $ 2,274.9 $ 391.2 $ 179.6 $ 168.2 $ 3,013.9
1996 2,136.7 391.2 194.7 211.4 2,934.0
Financial information by industry segment at December 31, 1997 and 1996,
and for the years ended December 31, 1997, 1996, and
1995, is as follows:
Year Ended Bauxite & Aluminum
December 31, Alumina Processing Corporate Total
------------------------------------------------------------------------------------------------------------------
Net sales to unaffiliated customers 1997 $ 483.3 $ 1,889.9 $ 2,373.2
1996 508.0 1,682.5 2,190.5
1995 514.2 1,723.6 2,237.8
Intersegment sales 1997 $ 193.2 $ 193.2
1996 181.6 181.6
1995 159.7 159.7
Equity in income (losses) of 1997 $ (7.0) $ 9.9 $ - $ 2.9
unconsolidated affiliates 1996 1.7 6.7 .4 8.8
1995 3.6 15.8 (.2) 19.2
Operating income (loss) 1997 $ 20.0 $ 222.6 $ (74.6) $ 168.0
1996 1.1 156.5 (59.8) 97.8
1995 54.0 238.9 (82.3) 210.6
Depreciation 1997 $ 29.3 $ 58.7 $ 3.1 $ 91.1
1996 31.2 61.7 3.1 96.0
1995 31.1 60.4 2.8 94.3
Capital expenditures 1997 $ 27.8 $ 99.0 $ 1.7 $ 128.5
1996 29.9 126.9 4.7 161.5
1995 27.3 53.0 8.1 88.4
Investment in and advances to 1997 $ 88.6 $ 59.5 $ .5 $ 148.6
unconsolidated affiliates 1996 121.3 46.6 .5 168.4
Identifiable assets 1997 $ 735.9 $ 1,510.9 $ 767.1 $ 3,013.9
1996 784.6 1,408.5 740.9 2,934.0
XXXXXX ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
F I V E - Y E A R F I N A N C I A L D A T A
C O N S O L I D A T E D B A L A N C E S H E E T S
December 31,
------------------------------------------------------------------------------
(In millions of dollars, except share amounts) 1997 1996 1995 1994 1993
--------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 15.8 $ 81.3 $ 21.9 $ 17.6 $ 14.7
Receivables 340.2 252.4 308.6 199.2 234.7
Inventories 568.3 562.2 525.7 468.0 426.9
Prepaid expenses and other current assets 121.3 127.8 76.6 158.0 60.7
-------------- -------------- -------------- -------------- --------------
Total current assets 1,045.6 1,023.7 932.8 842.8 737.0
Investments in and advances to unconsolidated 148.6 168.4 178.2 169.7 183.2
affiliates
Property, plant, and equipment - net 1,171.8 1,168.7 1,109.6 1,133.2 1,163.7
Deferred income taxes 330.6 264.5 269.1 271.2 210.8
Other assets 317.3 308.7 323.5 281.2 233.2
-------------- -------------- -------------- -------------- --------------
Total $ 3,013.9 $ 2,934.0 $ 2,813.2 $ 2,698.1 $ 2,527.9
============== ============== ============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accruals $ 457.3 $ 453.4 $ 451.2 $ 439.3 $ 339.7
Accrued postretirement medical benefit 45.3 50.1 46.8 47.0 47.6
obligation - current portion
Payable to affiliates 82.7 97.0 94.2 85.3 62.4
Long-term debt - current portion 8.8 8.9 8.9 11.5 8.7
-------------- -------------- -------------- -------------- --------------
Total current liabilities 594.1 609.4 601.1 583.1 458.4
Long-term liabilities 491.9 458.1 548.5 495.5 501.8
Accrued postretirement medical benefit obligation 720.3 722.5 734.0 734.9 713.1
Long-term debt 962.9 953.0 749.2 751.1 720.2
Minority interests 127.7 121.7 122.7 116.2 105.0
Stockholders' equity:
Preferred stock - .4 .4 .6 .2
Common stock .8 .7 .7 .6 .6
Additional capital 533.8 531.1 530.3 527.8 425.9
Retained earnings (accumulated deficit) (417.6) (460.1) (459.9) (502.6) (375.7)
Additional minimum pension liability - (2.8) (13.8) (9.1) (21.6)
-------------- -------------- -------------- -------------- --------------
Total stockholders' equity 117.0 69.3 57.7 17.3 29.4
-------------- -------------- -------------- -------------- --------------
Total $ 3,013.9 $ 2,934.0 $ 2,813.2 $ 2,698.1 $ 2,527.9
============== ============== ============== ============== ==============
Debt-to-capital ratio(1) 77.8 81.2 78.1 82.4 81.3
(1) Total of long-term debt - current portion and long-term debt
(collectively "total debt") as a ratio of total debt, deferred income
tax liabilities, minority interests, and stockholders' equity.
XXXXXX ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
F I V E - Y E A R F I N A N C I A L D A T A
S T A T E M E N T S O F C O N S O L I D A T E D I N C O M E
( L O S S )
Year Ended December 31,
----------------------------------------------------------------------
(In millions of dollars, except share amounts) 1997 1996 1995 1994 1993
-------------------------------------------------------------------------------------- ---------------------------- --------------
Net sales $ 2,373.2 $ 2,190.5 $ 2,237.8 $ 1,781.5 $ 1,719.1
------------ ------------ ------------ ------------ ------------
Costs and expenses:
Cost of products sold 1,962.6 1,869.1 1,798.4 1,625.5 1,587.7
Depreciation 91.1 96.0 94.3 95.4 97.1
Selling, administrative, research and development,
and general 131.8 127.6 134.5 116.8 121.9
Restructuring of operations 19.7 - - - 35.8
------------ ------------ ------------ ------------ ------------
Total costs and expenses 2,205.2 2,092.7 2,027.2 1,837.7 1,842.5
------------ ------------ ------------ ------------ ------------
Operating income (loss) 168.0 97.8 210.6 (56.2) (123.4)
Other income (expense):
Interest expense (110.7) (93.4) (93.9) (88.6) (84.2)
Other - net 3.0 (2.7) (14.1) (7.3) (.9)
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes, minority interests,
extraordinary loss, and cumulative effect of
changes in accounting principles 60.3 1.7 102.6 (152.1) (208.5)
(Provision) credit for income taxes (8.8) 9.3 (37.2) 53.8 86.9
Minority interests (3.5) (2.8) (5.1) (3.1) (1.5)
------------ ------------ ------------ ------------ ------------
Income (loss) before extraordinary loss and cumulative
effect of changes in accounting principles 48.0 8.2 60.3 (101.4) (123.1)
Extraordinary loss on early extinguishments of debt,
net of tax benefits of $2.9 and $11.2 for 1994 and - - - (5.4) (21.8)
1993, respectively
Cumulative effect of changes in accounting principles, net
of tax benefit of $237.7 - - - - (507.3)
------------ ------------ ------------ ------------ ------------
Net income (loss) 48.0 8.2 60.3 (106.8) (652.2)
Preferred stock dividends (5.5) (8.4) (17.6) (20.1) (6.3)
------------ ------------ ------------ ------------ ------------
Net income (loss) available to common shareholders $ 42.5 $ (.2) $ 42.7 $ (126.9) $ (658.5)
============ ============ ============ ============ ============
Earnings (loss) per share:
Basic $ .57 $ .00 $ .69 $ (2.18) $ (11.47)
Diluted $ .57 $ .00 $ .69 $ (2.18) $ (11.47)
Weighted average shares outstanding:
Basic 74,221 71,644 62,000 58,139 57,423
Diluted 74,382 71,644 62,264 58,139 57,423
XXXXXX ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
Q U A R T E R L Y F I N A N C I A L D A T A ( U N A U D I T E D )
Quarter Ended
--------------------------------------------------------------------
(In millions of dollars, except share amounts) March 31 June 30 September 30 December 31
----------------------------------------------------------------------------------------------------------------------
1997
Net sales $ 547.4 $ 597.1 $ 634.1 $ 594.6
Operating income 31.3 35.3 (1) 54.5 46.9
Net income 2.6 13.7 (2) 17.5 14.2
Earnings per share:
Basic .01 .16 (2) .22 .18
Diluted .01 .16 (2) .22 .18
Common stock market price:
High 13-5/8 12-1/4 16 14-7/8
Low 10-7/8 10-1/8 11-5/8 8-3/8
1996
Net sales $ 531.1 $ 567.6 $ 553.4 $ 538.4
Operating income 40.3 36.6 10.5 10.4 (3)
Net income (loss) 9.9 8.2 (6.6) (3.3)(3)
Earnings (loss) per share:
Basic .11 .09 (.12) (.08)(3)
Diluted .11 .09 (.12) (.08)(3)
Common stock market price:
High 16-1/8 15-3/4 12-1/2 12
Low 12 10-7/8 9-3/4 10-1/8
(1) Includes a $19.7 pre-tax charge for restructuring of operations and a
$5.8 pre-tax charge for litigation matters.
(2) Includes a $19.7 pre-tax charge for restructuring of operations, an
offsetting after-tax benefit of $12.5 related to the settlement of
certain tax matters and a $5.8 pre-tax charge for litigation matters.
(3) Includes approximately $17.0 on an after tax basis resulting from
settlements of certain tax matters. Excluding these items, basic loss
per common share would have been approximately $.32.
