UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to _____
Commission File Number 1-3939
KERR-McGEE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
A Delaware Corporation 73-0311467
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Kerr-McGee Center, Oklahoma City, Oklahoma 73125
(Address of Principal Executive Offices and Zip Code)
Registrant's telephone number, including area code (405) 270-1313
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Number of shares of common stock, $1.00 par value, outstanding as of October 31,
1998: 47,165,448
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
KERR-McGEE CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(Millions of dollars, except per-share amounts) 1998 1997 1998 1997
------------------------- -------------------------
<S> <C> <C> <C> <C>
Sales $ 359.5 $323.9 $1,045.0 $1,043.2
-------------------------------------------------------
Costs and Expenses
Costs and operating expenses 214.7 173.9 598.4 560.7
Selling, general and administrative expenses 35.1 49.7 101.6 107.6
Depreciation and depletion 71.5 55.8 206.1 179.3
Exploration, including dry holes and
amortization of undeveloped leases 17.3 16.2 56.5 41.7
Taxes, other than income taxes 4.6 4.5 14.9 16.0
Interest and debt expense 13.7 10.7 43.4 33.5
------- ------- --------- ---------
Total Costs and Expenses 356.9 310.8 1,020.9 938.8
------- ------- --------- ---------
2.6 13.1 24.1 104.4
Other Income (Expense) (27.8) 31.6 (1.9) 78.9
------- ------- --------- ---------
Income (Loss) from Continuing Operations
before Income Taxes (25.2) 44.7 22.2 183.3
Provision (Benefit) for Income Taxes (2.4) 13.4 3.1 57.2
------- ------- --------- ---------
Income (Loss) from Continuing Operations (22.8) 31.3 19.1 126.1
Income from Discontinued Operations (net of
provision for income taxes of $121.7 and $2.4
for the third quarter of 1998 and 1997,
respectively, and $155.7 and $6.6 for the first
nine months of 1998 and 1997, respectively) 217.9 5.5 277.4 22.5
------- ------- --------- ---------
Net Income $195.1 $ 36.8 $ 296.5 $ 148.6
====== ======= ========= =========
Net Income (Loss) per Common Share
Basic
Continuing operations $ (.48) $ .66 $ .40 $ 2.64
Discontinued operations 4.58 .12 5.83 .47
------- ------- --------- ----------
Total $ 4.10 $ .78 $ 6.23 $ 3.11
======= ======= ========= ==========
Diluted
Continuing operations $ (.48) $ .65 $ .40 $ 2.62
Discontinued operations 4.57 .12 5.81 .47
------- ------- --------- ----------
Total $ 4.09 $ .77 $ 6.21 $ 3.09
======= ======= ========= ==========
The accompanying notes are an integral part of this statement.
</TABLE>
<PAGE>
<TABLE>
KERR-McGEE CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<CAPTION>
September 30, December 31,
(Millions of dollars) 1998 1997
---------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash $ 251.2 $ 182.6
Notes and accounts receivable 275.6 274.3
Inventories 234.7 172.2
Deposits and prepaid expenses 37.1 59.4
--------- ---------
Total Current Assets 798.6 688.5
--------- ---------
Property, Plant and Equipment 4,884.3 4,602.1
Less reserves for depreciation,
depletion and amortization 2,325.7 2,603.7
--------- ---------
2,558.6 1,998.4
--------- ---------
Investments and Other Assets 374.2 409.2
--------- ---------
$3,731.4 $3,096.1
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 241.2 $ 247.1
Short-term borrowings - 25.0
Other current liabilities 314.5 250.9
--------- ---------
Total Current Liabilities 555.7 523.0
--------- ---------
Long-Term Debt 892.6 552.0
--------- ---------
Deferred Credits and Reserves 626.4 581.1
--------- ---------
Stockholders' Equity
Common stock, par value $1 - 150,000,000
shares authorized, 54,177,938 shares issued at
9-30-98 and 54,120,747 shares issued at 12-31-97 54.2 54.1
Capital in excess of par value 348.5 345.8
Preferred stock purchase rights .5 .5
Retained earnings 1,687.8 1,455.7
Accumulated other comprehensive income 1.3 .1
Common shares in treasury, at cost - 7,012,590
shares at 9-30-98 and 6,434,465 at 12-31-97 (387.9) (362.4)
Deferred compensation (47.7) (53.8)
--------- ---------
Total Stockholders' Equity 1,656.7 1,440.0
--------- ---------
$3,731.4 $3,096.1
======== ========
The "successful efforts" method of accounting for oil and gas exploration and
production activities has been followed in preparing this balance sheet.
The accompanying notes are an integral part of this statement.
</TABLE>
<PAGE>
<TABLE>
KERR-McGEE CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Nine Months Ended
September 30,
(Millions of dollar) 1998 1997
------------------------
<S> <C> <C>
Operating Activities
Net income $296.5 $148.6
Adjustments to reconcile to net cash
provided by operating activities -
Depreciation, depletion and amortization 229.8 202.4
Deferred income taxes 12.0 22.6
Gain on sale of discontinued coal operations (257.3) -
Loss (gain) on sale and retirement of assets 15.8 (3.8)
Realized gain on sale of available-for-sale securities - (18.4)
Noncash items affecting net income 3.0 20.1
Other net cash provided by operating activities (186.5) 55.7
------ ------
Net Cash Provided by Operating Activities 113.3 427.2
------- -------
Investing Activities
Capital expenditures (412.7) (253.1)
Acquisitions (515.9) -
Proceeds from sale of discontinued coal operations 598.8 -
Proceeds from sale of assets 47.3 27.4
Other investing activities 6.2 19.0
------- ------
Net Cash Used in Investing Activities (276.3) (206.7)
------ ------
Financing Activities
Issuance of long-term debt 393.1 -
Repayment of long-term debt (49.3) (137.2)
Decrease in short-term borrowings (25.0) (16.4)
Purchase of treasury stock (25.6) (59.5)
Dividends paid (64.4) (63.0)
Other financing activities 2.8 10.6
------- ------
Net Cash Used in Financing Activities 231.6 (265.5)
------- ------
Net Increase in Cash and Cash Equivalents 68.6 (45.0)
Cash and Cash Equivalents at Beginning of Period 182.6 120.9
------- ------
Cash and Cash Equivalents at End of Period $251.2 $ 75.9
====== ======
The accompanying notes are an integral part of this statement.
</TABLE>
<PAGE>
KERR-McGEE CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
A. The condensed financial statements included herein have been prepared by
the company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission and, in the opinion of management,
include all adjustments, consisting only of normal recurring accruals,
necessary to present fairly the resulting operations for the indicated
periods. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations. Although the company believes that the disclosures are
adequate to make the information presented not misleading, it is suggested
that these condensed financial statements be read in conjunction with the
financial statements and the notes thereto included in the company's latest
annual report on Form 10-K.
B. In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) No. 98-5, "Reporting on the Costs of
Start-Up Activities." This SOP is effective for financial statements for
fiscal years beginning after December 15, 1998, and earlier adoption is
permitted. The effect of adopting SOP 98-5 is not expected to have a
material impact on the company's results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The SFAS
establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset
or liability measured at its fair value. The SFAS requires that changes in
the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Accounting for qualifying
hedges allows a derivative's gains and losses to offset related results on
the hedged item in the income statement, and requires a company to formally
document, designate and assess the effectiveness of transactions that
receive hedge accounting. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999, and early adoption is permitted. The effect
of adopting SFAS No. 133 has not been determined, but is not expected to
have a material impact on the company's results of operations.
C. Income (loss) from continuing operations for purposes of computing both
basic earnings per share and diluted earnings per share was $(22.8) million
and $31.3 million for the three months ended September 30, 1998 and 1997,
respectively, and $19.1 million and $126.1 million for the nine months
ended September 30, 1998 and 1997, respectively. A reconciliation of the
average shares outstanding used to compute basic earnings per share to the
shares used to compute diluted earnings per share is presented below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(Millions of shares) 1998 1997 1998 1997
---------------------- --------------------
<S> <C> <C> <C> <C>
Averages shares outstanding - basic 47.4 47.6 47.6 47.8
Dilutive effect of stock options - .2 .1 .2
---- ----- ----- ----
Average shares outstanding assuming dilution 47.4 47.8 47.7 48.0
==== ==== ==== ====
</TABLE>
D. Net cash provided by operating activities reflects cash payments for income
taxes and interest as follows:
Nine Months Ended
September 30,
(Millions of dollars) 1998 1997
---------------------
Income taxes $121.5 $14.8
Interest 36.4 36.9
E. The company committed to formal plans for the sale of its coal operations
in the second quarter of 1998; therefore, coal operations are reported as a
discontinued operation. During the third quarter of 1998, the company sold
Kerr-McGee Coal Corporation that held the Jacobs Ranch surface mine
operation in Wyoming to Kennecott Energy and Coal Company for $400 million
cash. During the second quarter of 1998, the company sold its Galatia Mine
in the Illinois Basin to the American Coal Company for $200 million in
cash. For the nine months ended September 30, 1998, the two negotiated
sales resulted in a gain of $257.3 million ($5.39 per diluted common
share), net of provision for income taxes of $149.1 million. The 1998
third-quarter gain totaled $215.6 million ($4.54 per share), net of
provision for income taxes of $121.3 million. The net proceeds received by
the company will be used to reduce outstanding debt and for general
corporate purposes.
Revenues applicable to the discontinued operation totaled $13.9 million and
$78.3 million for the three months ended September 30, 1998 and 1997,
respectively, and $174 million and $238.7 million for the nine months ended
September 30, 1998 and 1997, respectively.
F. During the third quarter of 1998 and 1997, comprehensive income was $197.9
million and $32.5 million, respectively. For the nine months ended
September 30, 1998 and 1997, comprehensive income was $299.8 million and
$137.1 million, respectively.
The company held U.S. government obligations considered to be available for
sale at September 30, 1998, and December 31, 1997. These financial
instruments are carried in the Consolidated Balance Sheet at fair value,
which is based on quoted market prices and approximated cost at both
September 30, 1998, and December 31, 1997. The company held no securities
classified as held to maturity or trading during the respective periods.
During 1997, the company sold equity securities considered to be available
for sale. Proceeds from the sale during the 1997 third quarter totaled $8.7
million, resulting in a realized gain of $7.7 million before income taxes.
Proceeds from the sale for the first nine months of 1997 totaled $21.1
million, resulting in a realized gain of $18.4 million before income taxes.
The average cost of the securities was used in computing the realized gain.
During the first nine months of 1997, the company donated 50,000 shares of
its available-for-sale securities to the Kerr-McGee Foundation Corporation,
a tax-exempt entity whose purpose is to contribute to not-for-profit
organizations. The fair value of these donated shares totaled $3.2 million,
which includes appreciation of $2.8 million before income taxes.
G. Investments in equity affiliates totaled $254.4 million at September 30,
1998, and $272.9 million at December 31, 1997. An equity loss related to
the investments is included in Other Income in the Consolidated Statement
of Income and totaled $24.6 million for the three months ended September
30, 1998, compared with income of $6.7 million for the same 1997 period.
For the first nine months of 1998, equity loss totaled $12.6 million,
compared with income of $22.8 million for the same 1997 period. The loss in
both 1998 periods includes an after-tax charge of $27.1 million resulting
from the company's interest in a noncash charge taken by an equity
affiliate.
H. On October 14, 1998, the company and Oryx Energy Company (Oryx) entered
into an Agreement and Plan of Merger under which Oryx will be merged with
and into the company. Each share of Oryx common stock will be converted
into 0.369 shares of the company's common stock. The merger is intended to
be accounted for as a pooling of interest and to be tax-free to the holders
of Oryx common stock. The merger is subject to shareholder approvals,
expiration of the Hart-Scott-Rodino waiting period and other customary
closing conditions and regulatory approvals.
I. CONTINGENCIES
WEST CHICAGO -
In 1973, a wholly owned subsidiary, Kerr-McGee Chemical Corporation, closed
the facility located in West Chicago, Illinois, that processed thorium
ores. Kerr-McGee Chemical Corporation now operates as Kerr-McGee Chemical
LLC (Chemical). Operations resulted in some low-level radioactive
contamination at the site and, in 1979, Chemical filed a plan with the
Nuclear Regulatory Commission (NRC) to decommission the facility. The NRC
transferred jurisdiction of this site to the State of Illinois (the State)
in 1990. The following discusses the current status of various matters
associated with the West Chicago site.
Closed Facility - In 1994, Chemical, the City of West Chicago (the City),
and the State reached agreement on the initial phase of the decommissioning
plan for the closed West Chicago facility, and Chemical began shipping
material from the site to a licensed permanent disposal facility.
In February 1997, Chemical executed an agreement with the City as to the
terms and conditions for completing the final phase of decommissioning
work. The State indicated approval of this agreement and has issued license
amendments authorizing much of the work. Chemical expects the majority of
the work to be completed within six years.
In 1992, the State enacted legislation imposing an annual storage fee equal
to $2 per cubic foot of byproduct material located at the closed facility.
The storage fee cannot exceed $26 million per year, and any storage fee
payments must be reimbursed to Chemical as decommissioning costs are
incurred. Chemical has been fully reimbursed for all storage fees paid
pursuant to this legislation. In June 1997, the legislation was amended to
provide that future storage fee obligations are to be offset against
decommissioning costs incurred but not yet reimbursed.
Offsite Areas - The U.S. Environmental Protection Agency (EPA) has listed
four areas in the vicinity of the West Chicago facility on the National
Priority List that the EPA promulgates under authority of the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980 and has
designated Chemical as a potentially responsible party in these four areas.
The EPA issued unilateral administrative orders for two of these areas
(referred to as the residential areas and Reed-Keppler Park), which require
Chemical to conduct removal actions to excavate contaminated soils and ship
the soils elsewhere for disposal. Without waiving any of its rights or
defenses, Chemical has begun the cleanup of these two sites.
Judicial Proceedings - In December 1996, a lawsuit was filed against the
company and Chemical in Illinois state court on behalf of a purported class
of present and former West Chicago residents. The lawsuit seeks damages for
alleged diminution in property values and the establishment of a medical
monitoring fund to benefit those allegedly exposed to thorium wastes
originating from the former facility. The case was removed to federal court
and is being vigorously defended.
Government Reimbursement - Pursuant to Title X of the Energy Policy Act of
1992 (Title X), the United States Department of Energy is obligated to
reimburse Chemical for certain decommissioning and cleanup costs in
recognition of the fact that much of the facility's production was
dedicated to United States government contracts. Title X was amended in
1996 to increase the amount authorized to $65 million plus inflation
adjustments. Through October 31, 1998, Chemical has been reimbursed
approximately $54 million under Title X.
OTHER MATTERS
The plants and facilities of the company and its subsidiaries are subject
to various environmental laws and regulations. The company or its
subsidiaries have been notified that they may be responsible in varying
degrees for a portion of the costs to clean up certain waste disposal sites
and former plant sites. As of September 30, 1998, the company's estimate
for the cost to investigate and/or remediate all presently identified sites
of former or current operations, based on currently known facts and
circumstances, totaled $217 million, which includes $136 million for the
former West Chicago facility and $9 million for the residential areas and
Reed-Keppler Park. Reserves have been established based on this estimate.
Expenditures are reduced by the amounts recovered under government
programs. Expenditures from inception through September 30, 1998, totaled
$501 million for currently known sites.
In addition to the environmental issues previously discussed, the company
or its subsidiaries are also a party to a number of other legal proceedings
pending in various courts or agencies in which the company or a subsidiary
appears as plaintiff or defendant. The ultimate costs to decommission
presently known sites are difficult to estimate because of the numerous
contingencies, including continually changing laws and regulations, the
nature of the company's businesses and pending legal proceedings. Actual
costs could differ from those currently estimated as information becomes
available for sites that are not now included in the reserve, if
contamination is not as expected, or field conditions or other variables
differ significantly from those that are now assumed. Therefore, it is not
possible to reliably estimate the amount or timing of all future
expenditures relating to environmental and other contingencies. The company
provides for costs related to contingencies when a loss is probable and the
amount is reasonably estimable. Although management believes, after
consultation with general counsel, that adequate reserves have been
provided for all known contingencies, the ultimate cost will depend on the
resolution of the above-noted uncertainties. Therefore, it is possible that
additional reserves could be required in the future.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Comparison of 1998 Results with 1997 Results
CONSOLIDATED OPERATIONS
Third-quarter 1998 net income totaled $195.1 million, compared with $36.8
million for the same 1997 period. Loss from continuing operations for the 1998
third quarter totaled $22.8 million, compared with 1997 third-quarter income of
$31.3 million. Excluding special items, income from continuing operations for
the 1998 third quarter totaled $2 million, compared with $34.5 million in the
third quarter of 1997. Net income for the first nine months of 1998 totaled
$296.5 million, compared with $148.6 million in the same 1997 period. For the
first nine months of 1998, income from continuing operations totaled $19.1
million, compared with $126.1 million a year earlier. Excluding special items,
income from continuing operations was $32.2 million, compared with $116.5
million in 1997.
Operating profit declined 45% and 44% in the third quarter and nine months ended
September 30, 1998, respectively, compared with the same 1997 periods. Higher
chemical operating profit in both 1998 periods, compared with the same 1997
periods, was more than offset by lower operating profit from exploration and
production. The decline for both periods was due primarily to lower crude oil
and natural gas sales prices, higher depreciation and depletion expense, higher
exploration expense and higher titanium dioxide pigment production costs,
partially offset by higher crude oil and natural gas sales volumes, lower
operating expenses, higher pigment sales prices and income from the European
pigment operations acquired in the first quarter of 1998.
The income tax benefit was $2.4 million for the 1998 third quarter, compared
with a provision of $13.4 million for the 1997 period. The benefit for the 1998
third quarter included a special tax item of $6.5 million relating to the
enactment of a lower tax rate in the United Kingdom. Excluding the effect of the
rate change and the tax benefit on the special items, the third-quarter 1998
provision for income taxes was $6.3 million, compared with $15.9 million for the
1997 period. The decrease was due to lower pretax income, partially offset by
higher effective tax rate. The provision for income taxes for the nine months
ended September 30, 1998, included tax benefits of $11.1 million and $6.5
million resulting from an income tax settlement and the United Kingdom tax rate
change, respectively. Excluding these special tax benefits and the tax benefits
on the special items, the provision for income taxes was $22.6 million for the
first nine months of 1998, compared with $52.1 million for the 1997 period. The
decrease was due to lower pretax income, partially offset by higher effective
tax rate.
<PAGE>
SEGMENT OPERATIONS
Following is a summary of sales and operating profit and a discussion of major
factors influencing the results of each of the company's business segments for
the third quarter and first nine months of 1998, compared with the same periods
last year.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(Millions of dollars) 1998 1997 1998 1997
------------------------ --------------------------
<S> <C> <C> <C> <C>
Sales
Exploration and production $109.2 $131.6 $ 350.5 $ 478.4
Chemicals 250.3 192.2 694.3 564.6
------ ------ -------- --------
359.5 323.8 1,044.8 1,043.0
All other - .1 .2 .2
------ ------ --------- --------
Total Sales $359.5 $323.9 $1,045.0 $1,043.2
====== ====== ======== ========
Operating Profit
Exploration and production $ 2.1 $ 31.4 $ 22.9 $ 131.9
Chemicals 29.1 24.9 85.8 61.8
------ ------ -------- --------
Total Operating Profit 31.2 56.3 108.7 193.7
Other Expense (56.4) (11.6) (86.5) (10.4)
------ ------ -------- --------
Income (Loss) from Continuing Operations
before Income Taxes (25.2) 44.7 22.2 183.3
Provision (Benefit) for Income Taxes (2.4) 13.4 3.1 57.2
------ ------ -------- --------
Income (Loss) from Continuing Operations (22.8) 31.3 19.1 126.1
Discontinued Operations, Net of
Income Taxes 217.9 5.5 277.4 22.5
------ ------ -------- --------
Net Income $195.1 $ 36.8 $ 296.5 $ 148.6
====== ====== ======== ========
</TABLE>
Exploration and Production -
Operating profit for the third quarter of 1998 was $2.1 million, compared with
$31.4 million for the same 1997 period. Operating profit for the first nine
months of 1998 and 1997 was $22.9 million and $131.9 million, respectively. The
decrease in operating profit for both periods was due primarily to lower crude
oil and natural gas sales prices, higher depreciation and depletion expense and
higher exploration expense, partially offset by higher crude oil and natural gas
sales volumes and lower operating expense. The higher volumes in the 1998 third
quarter and first nine months of 1998 were due primarily to the second-quarter
1998 acquisition of Gulf Canada Resources Limited's North Sea assets and higher
production from Indonesia, partially offset by production interruptions
associated with Gulf of Mexico storms.
Revenues were $109.2 million and $131.6 million for the three months ended
September 30, 1998 and 1997, respectively, and $350.5 million and $478.4 million
for the first nine months of 1998 and 1997, respectively. The following table
shows the company's average crude oil and natural gas sales volumes and prices
for both the third quarter and first nine months of 1998 and 1997.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, Increase September 30, Increase
1998 1997 (Decrease) 1998 1997 (Decrease)
------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C>
Crude oil sales
(thousands of bbls/day)
United States 20.0 23.4 (15) 22.2 24.6 (10)
North Sea 34.9 23.3 50 31.5 23.9 32
China 8.5 8.8 (3) 8.4 8.6 (2)
Other 3.2 .3 NM 2.7 .1 NM
------ ------ ------ ------
Total proprietary sales 66.6 55.8 19 64.8 57.2 13
Proportionate interest in
equity affiliate's sales 6.8 7.2 (6) 7.0 7.3 (4)
------ ------ ------ ------
Total 73.4 63.0 17 71.8 64.5 11
====== ====== ====== ======
Average crude oil sales price
(per barrel)
United States $11.23 $17.77 (37) $12.25 $18.73 (35)
North Sea 11.44 17.63 (35) 12.40 18.88 (34)
China 10.65 17.21 (38) 11.95 17.83 (33)
Other 12.33 17.86 (31) 12.76 17.86 (29)
Average 11.32 17.63 (36) 12.30 18.66 (34)
Natural gas sold
(MMCF/day)
United States 163 138 18 166 161 3
North Sea 34 28 21 34 30 13
------ ------ ------ ------
Total proprietary sales 197 166 19 200 191 5
Proportionate interest in
equity affiliate's sales 61 60 2 62 59 5
------ ------ ------ ------
Total 258 226 14 262 250 5
====== ====== ====== ======
Average natural gas sales price
(per MCF)
United States $2.02 $2.42 (17) $2.16 $2.45 (12)
North Sea 2.20 2.25 (2) 2.49 2.52 (1)
Average $2.05 $2.39 (14) $2.22 $2.47 (10)
</TABLE>
<PAGE>
Chemicals -
Third-quarter 1998 operating profit was $29.1 million on revenues of $250.3
million, compared with 1997 operating profit of $24.9 million on revenues of
$192.2 million. For the first nine months of 1998 and 1997, operating profit was
$85.8 million and $61.8 million, respectively, on revenues of $694.3 million and
$564.6 million, respectively. Revenues for both periods increased due to higher
pigment sales prices and volumes resulting from the first-quarter 1998
acquisition of the European pigment operations. Operating profit for both 1998
periods increased primarily due to higher revenues, partially offset by higher
production costs for pigments and lower results from electrolytic products.
Other Expenses -
Other expense for the third quarter and the first nine months of 1998 and 1997,
were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---------------------- ----------------------
<S> <C> <C> <C> <C>
Other expense excluding special items $26.3 $ 7.4 $57.3 $27.5
Special items -
Equity affiliate's noncash charge 27.1 - 27.1 -
Loss on sale of assets - - 18.6 -
Restructuring 3.0 - 3.0 -
Net environmental provision - 19.5 .4 19.5
Gains on sales of equity securities - (7.7) - (18.4)
Settlements with insurance carriers - - (9.8) (12.2)
Interest income on income tax settlements - - (12.6) -
Deferred gain on sale of soda products facility - (10.0) - (10.0)
Other - 2.4 2.5 4.0
----- ------ ------ ------
Other expense $56.4 $11.6 $86.5 $10.4
===== ===== ===== =====
</TABLE>
Excluding special items, other expense for the third quarter 1998 was $26.3
million, up from $7.4 million in 1997, due primarily to lower equity income of
$4.3 million and 1998 foreign currency transaction losses of $8.4 million,
compared with 1997 gains of $3.5 million. All other expense, excluding special
items, for the first nine months of 1998 was $57.3 million, up from $27.5
million, due primarily to 1998 foreign currency transaction losses of $8.7
million, compared with 1997 gains of $3.8 million, lower equity income of $8.3
million and higher net interest expense of $6.9 million.
Financial Condition
At September 30, 1998, the company's net working capital position was $242.9
million, compared with $165.5 million at December 31, 1997. The current ratio
was 1.4 to 1 at September 30, 1998, compared with 1.3 to 1 at both December 31,
1997, and September 30, 1997. The company's percentage of total debt to total
capitalization was 35% at September 30, 1998, compared with 29% at December 31,
1997, and 27% at September 30, 1997. Debt less cash to total capitalization was
28% at September 30, 1998, compared with 22% at December 31, 1997 and 24% at
September 30, 1997.
On August 24, 1998, Kerr-McGee Pigment N.V., a wholly owned subsidiary, entered
into an overdraft credit agreement with KBC Bank N.V. to provide up to 500
million Belgian francs or equivalent foreign currency at varying rates. The
credit facility may also be used for short-term straight loans. The agreement
provides the credit until further notice and the company is the guarantor of the
agreement. A total of $5.4 million U.S. equivalent had been borrowed under this
agreement as of September 30, 1998.
The company had unused lines of credit and revolving credit facilities of $657
million at September 30, 1998. Of this amount, $380 million and $140 million can
be used to support commercial paper borrowings of Kerr-McGee Credit LLC and
Kerr-McGee Oil (U.K.) PLC, respectively.
Cash capital expenditures for the first nine months of 1998, excluding
acquisitions, totaled $412.7 million, compared with $253.1 million for the same
period last year. Exploration and production expenditures, principally in the
North Sea, Gulf of Mexico and offshore China, were 80% of the 1998 total.
Chemical expenditures were 16% of the 1998 amount. Management anticipates that
the cash requirements for the next several years can be provided through
internally generated funds and selective short-term and/or long-term borrowings.
On July 14, 1998, the company's Board of Directors authorized management to
purchase from time to time company stock of up to $300 million, or approximately
11% of the outstanding shares at the then current market price. During the third
quarter 1998, the company purchased approximately 580,000 shares of its stock at
a cost of $25.6 million. The stock repurchase program was suspended when the
company began merger discussions with Oryx Energy Company. Year 2000 Program
In 1996, the company established a formal Year 2000 Program (Program) to assess
and correct Year 2000 problems in both information technology and
non-information technology systems. The Program is organized into two major
areas: business systems and facilities integrity. Business systems include
replacement and upgrade of computer hardware and software, including major
business applications, such as purchasing, inventory, engineering, financial,
human resources, etc. Facilities integrity encompasses telecommunications, plant
process controls, instrumentation and embedded chip systems as well as an
assessment of third-party Year 2000 readiness.
The company's Program generally covers the following phases:
(1) Identification and evaluation of systems that need to be modified
or replaced.
(2) Remediation work to modify existing systems or install new systems.
(3) Testing and validation of systems and applications.
As of September 30, 1998, the company had completed approximately 95% of the
planned work on the business systems, with all phases scheduled to be completed
by year-end 1998. Most of these projects are system replacements to improve
business functionality and have not been undertaken as the sole result of Year
2000 issues.
As of September 30, 1998, the company had completed approximately 60% of the
work on facilities integrity. Domestic sites are expected to be completed in the
first quarter 1999, and foreign sites are expected to be completed in the third
quarter 1999.
An integral part of the Program is communication with third parties to assess
the extent and status of their Year 2000 efforts. Formal communications have
been initiated with critical suppliers to determine whether their operations
and/or the products and services provided to the company will be Year 2000
compliant. In addition, the company has contacted key customers requesting
information regarding their own Year 2000 compliance efforts. The company
continues to evaluate responses and make additional inquiries as needed.
As of September 30, 1998, inception to date program expenditures totaled $38
million, which includes $12 million spent in the first nine months of 1998. The
total capital and operating costs to achieve Year 2000 readiness are estimated
to be $45 million over the three-year period, which is not material to the
company's consolidated financial position, results of operations or cash flows.
Program expenditures are provided through internally generated funds and
selective short-term and/or long-term borrowings.
The company is developing contingency plans in the unlikely event that portions
of the Program are inadequate. Manual systems and other procedures are being
considered to accommodate significant disruptions that could be caused by system
failures. When possible, alternative providers are being identified should
certain critical suppliers become unable to provide an acceptable level of
service to the company. Contingency plans should be completed by the end of
third quarter 1999.
The failure to correct a material Year 2000 problem could result in disruptions
to some aspects of the company's normal business activities or operations. Such
failures could have a material effect on the company's results of operations and
cash flows in a particular quarter or annual period. Management believes that
the Program is comprehensive and reduces Year 2000 risks associated with
internal systems to a manageable level. Regardless of management's efforts to
assess and verify readiness, there can be no assurance that all other entities
affecting the company will be Year 2000 compliant. As reported herein, to
address these concerns, contingency plans are being developed. However, failure
by a third party to remediate Year 2000 issues in a timely manner could have a
material effect on the company's results of operations and cash flows in a
particular quarter or annual period. Failure of a critical operating or safety
component, or failure by a key third party supplier or customer are believed to
be the most reasonably likely worst case scenarios that could impact the
company.
<PAGE>
Forward-Looking Information
This report contains certain forward-looking statements, particularly as they
relate to the company's Year 2000 readiness, which are based on management's
current views and assumptions regarding future events and financial performance.
These statements are qualified by reference to the section "Forward-Looking
Information" contained in Part I of the company's Form 10-K for the year ended
December 31, 1997.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits -
27.0 Financial Data Schedule
(b) Reports on Form 8-K
Current report on Form 8-K dated October 14, 1998 (filed October 19,
1998), reporting under Item 5, Other Events, information related to
the Agreement and Plan of Merger with Oryx Energy Company.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KERR-McGEE CORPORATION
Date November 6, 1998 By: (Deborah A. Kitchens)
---------------- -----------------------------------
Deborah A. Kitchens
Vice President and Controller
and Chief Accounting Officer
<TABLE> <S> <C>
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<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet at September 30, 1998, and the Consolidated Statement
of Income for the period ending September 30, 1998, and is qualified in its
entirety by reference to such Form 10-Q.
</LEGEND>
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