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 June 30, 1999
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
July 31, 1999: 86,408,234
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
KERR-McGEE CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(Millions of dollars, except per-share amounts) 1999 1998 1999 1998
------------------------- ----------------------
<S> <C> <C> <C> <C>
Sales $657.2 $601.1 $1,143.1 $1,107.8
------ ------ -------- --------
Costs and Expenses
Costs and operating expenses 268.4 283.2 493.5 496.2
Selling, general and administrative expenses 62.5 59.5 115.2 107.2
Depreciation and depletion 157.1 144.5 288.3 274.2
Exploration, including dry holes and
amortization of undeveloped leases 40.6 37.5 69.4 104.5
Taxes, other than income taxes 17.3 20.3 32.6 29.0
Merger costs - - 155.1 -
Interest and debt expense 45.8 39.8 90.5 74.6
------- ------- --------- --------
Total Costs and Expenses 591.7 584.8 1,244.6 1,085.7
------- ------- --------- ---------
65.5 16.3 (101.5) 22.1
Other Income 11.6 21.4 28.0 43.0
------- ------- --------- ---------
Income (Loss) from Continuing Operations before
Income Taxes 77.1 37.7 (73.5) 65.1
Provision (Benefit) for Income Taxes 31.8 6.3 (12.3) 17.9
------- ------- --------- ---------
Income (Loss) from Continuing Operations 45.3 31.4 (61.2) 47.2
Income from Discontinued Operations (net of
provision for income taxes of $31.6 and $34.0
for the second quarter and the first six months
of 1998, respectively) - 51.5 - 59.5
Cumulative Effect of Change in Accounting Principle
(net of benefit for income taxes of $2.2) - - (4.1) -
------- ------- --------- --------
Net Income (Loss) $ 45.3 $ 82.9 $ (65.3) $ 106.7
======= ======= ========= =========
Net Income (Loss) per Common Share - Diluted
Continuing operations $ .52 $ .36 $ (.71) $ .54
Discontinued operations - .59 - .68 (1)
Cumulative effect of change in
accounting principle - - (.05) -
-------- ------- --------- ---------
Total $ .52 $ .95 $ (.76) $ 1.22
======== ======= ========= =========
(1) Basic per share amount is $.69. All other basic and diluted per share
amounts are the same.
The accompanying notes are an integral part of this statement.
</TABLE>
<TABLE>
KERR-McGEE CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<CAPTION>
June 30, December 31,
(Millions of dollars) 1999 1998
---------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash $ 158.4 $ 121.0
Notes and accounts receivable 514.4 388.4
Inventories 298.0 247.1
Deposits and prepaid expenses 75.7 120.2
---------- -----------
Total Current Assets 1,046.5 876.7
---------- -----------
Property, Plant and Equipment 10,842.9 10,651.7
Less reserves for depreciation,
depletion and amortization 6,714.3 6,498.9
---------- -----------
4,128.6 4,152.8
---------- -----------
Investments and Other Assets 441.4 421.8
---------- -----------
$ 5,616.5 $ 5,451.3
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 51.8 $ 35.8
Accounts payable 378.1 385.3
Long-term debt due within one year 119.2 235.6
Other current liabilities 305.3 393.3
---------- -----------
Total Current Liabilities 854.4 1,050.0
---------- -----------
Long-Term Debt 2,498.4 1,978.5
---------- -----------
Deferred Credits and Reserves 1,070.5 1,077.3
---------- -----------
Stockholders' Equity
Common stock, par value $1 - 300,000,000
shares authorized, 93,395,707 shares issued at
6-30-99 and 93,378,069 shares issued at 12-31-98 93.4 93.4
Capital in excess of par value 1,281.0 1,282.2
Preferred stock purchase rights .5 .5
Retained earnings 383.9 527.0
Accumulated other comprehensive loss (51.1) (36.0)
Common shares in treasury, at cost - 7,010,790
shares at both 6-30-99 and 12-31-98 (387.8) (387.8)
Deferred compensation (126.7) (133.8)
---------- -----------
Total Stockholders' Equity 1,193.2 1,345.5
---------- -----------
$ 5,616.5 $ 5,451.3
========== ===========
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>
<TABLE>
KERR-McGEE CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Six Months Ended
June 30,
(Millions of dollars) 1999 1998
------------------------
<S> <C> <C>
Operating Activities
Net income (loss) $(65.3) $106.7
Adjustments to reconcile to net cash
provided by operating activities -
Depreciation, depletion and amortization 309.9 300.7
Dry hole costs 22.8 48.4
Deferred income taxes 12.3 14.7
Gain on sale of discontinued coal operations - (41.7)
Gain on sale and retirement of assets (3.0) (3.5)
Noncash items affecting net income 160.2 (22.5)
Other net cash used in operating activities (362.1) (103.4)
------- -------
Net Cash Provided by Operating Activities 74.8 299.4
------- -------
Investing Activities
Capital expenditures (274.3) (567.8)
Acquisitions (54.4) (517.9)
Proceeds from the sale of discontinued coal operations - 198.8
Proceeds from sale of assets 2.7 62.5
Other investing activities (21.1) 7.4
------- -------
Net Cash Used in Investing Activities (347.1) (817.0)
------- -------
Financing Activities
Issuance of long-term debt 940.6 561.8
Repayment of long-term debt (538.7) (74.5)
Increase (decrease) in short-term borrowings 15.9 (25.0)
Dividends paid (60.6) (42.9)
Other financing activities (40.4) 5.3
------- -------
Net Cash Provided in Financing Activities 316.8 424.7
------- -------
Effects of Exchange Rate Changes on Cash and Cash Equivalents (7.1) -
------- -------
Net Increase (Decrease) in Cash and Cash Equivalents 37.4 (92.9)
Cash and Cash Equivalents at Beginning of Period 121.0 192.3
------- -------
Cash and Cash Equivalents at End of Period $ 158.4 $ 99.4
======= =======
The accompanying notes are an integral part of this statement.
</TABLE>
KERR-McGEE CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
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. On February 26, 1999, the company completed the merger
with Oryx Energy Company (Oryx). The merger was accounted for using the
pooling of interests method of accounting for business combinations.
Accordingly, the company's financial statements have been restated to
include the combined business activities for the company and Oryx for all
periods presented. 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 and the Form 8-K/A dated February 26, 1999, and
filed July 26, 1999.
B. Effective January 1, 1999, the company adopted Statement of Position (SOP)
No. 98-5, "Reporting on the Costs of Start-Up Activities." The SOP requires
costs of start-up activities to be expensed as incurred. Unamortized
start-up costs at the beginning of the year were required to be recognized
as cumulative effect of a change in accounting principle.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (FAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." FAS No. 133 establishes
accounting and reporting standards that require derivative instruments to
be recorded in the balance sheet as either an asset or liability and
measured at fair value. Changes in the derivative's fair value must 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 treatment. FAS
No. 133 was to be effective for fiscal years beginning after June 15, 1999.
In June 1999, the FASB issued FAS No. 137, which deferred the effective
date of FAS No. 133 until fiscal years beginning after June 15, 2000.
The effect of adopting FAS No. 133 has not been determined but is not
expected to have a material impact on the company's results of operations.
C. Net cash provided by operating activities reflects cash payments for income
taxes and interest as follows:
Six Months Ended
June 30,
(Millions of dollars) 1999 1998
-------------------
Income tax payments $53.7 $16.2
Less refunds received (58.5) (21.3)
------ ------
Net income tax refunds $ (4.8) $ (5.1)
====== ======
Interest payments $96.6 $63.9
===== =====
D. During the second quarter of 1999 and 1998, comprehensive income was $44.3
million and $82.8 million, respectively. For the six months ended June 30,
1999 and 1998, comprehensive income (loss) was $(80.5) million and $105.9
million, respectively.
E. Investments in equity affiliates totaled $172.9 million at June 30, 1999,
and $170.1 million at December 31, 1998. Equity income related to the
investments is included in Other Income in the Consolidated Statement of
Income and totaled $4.8 million and $5.5 million for the three months ended
June 30, 1999 and 1998, respectively. For the first six months of 1999,
equity income totaled $7.1 million, compared with $12 million for the same
1998 period.
F. Income (loss) from continuing operations for purposes of computing both
basic and diluted earnings per share was $45.3 million and $31.4 million
for the three months ended June 30, 1999 and 1998, respectively, and
$(61.2) million and $47.2 million for the six months ended June 30, 1999
and 1998, 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 for both periods is presented below:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Averages shares outstanding - basic 86,378,475 86,864,090 86,375,443 86,884,748
Dilutive effect of stock options 54,664 366,910 15,930 348,510
Dilutive effect of debentures * - - - -
---------- ---------- ---------- ----------
Average shares outstanding assuming dilution 86,433,139 87,231,000 86,391,373 87,233,258
========== ========== ========== ==========
</TABLE>
*The company has reserved 1,886,121 shares of common stock for issuance
to the owners of its 7 1/2% Convertible Subordinated Debentures due
2014 (Debentures). The Debentures were not included in the computation
of diluted shares since they have an antidilutive effect for all
periods presented.
G. CONTINGENCIES
WEST CHICAGO -
In 1973, a wholly owned subsidiary, Kerr-McGee Chemical Corporation, closed
the facility at 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.
Following is 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 has indicated approval of this agreement and has issued
license amendments authorizing much of the work. Chemical expects most of
the work to be completed within five 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 (CERCLA)
and has designated Chemical as a potentially responsible party in these
four areas. Two of the four areas are presently being studied to determine
the extent of contamination and the nature of any remedy. The EPA
previously issued unilateral administrative orders for the other two areas
(known 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 the two areas for which
unilateral administrative orders have been issued.
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 U. S. 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 1998 to increase the
amount authorized to $140 million plus inflation adjustments. Through July
31, 1999, Chemical has been reimbursed approximately $69 million under
Title X.
OTHER MATTERS
The company's current and former operations involve management of regulated
materials and are subject to various environmental laws and regulations.
These laws and regulations will obligate the company to clean up various
sites at which petroleum, chemicals, low-level radioactive substances or
other regulated materials have been disposed of or released. Some of these
sites have been designated Superfund sites by the EPA pursuant to CERCLA.
The company is also a party to legal proceedings involving environmental
matters pending in various courts and agencies. As of June 30, 1999, 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 $230 million, which
includes $160 million for the former West Chicago facility, 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 June 30, 1999,
totaled $595 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.
It is not possible for the company to reliably estimate the amount and
timing of all future expenditures related to environmental matters because
of the difficulty of predicting cleanup requirements and estimating cleanup
costs, the uncertainty in quantifying liability under environmental laws
that impose joint and several liability on all potentially responsible
parties, and the continually changing nature of environmental laws and
regulations.
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, the ultimate cost of contingencies, as noted above, is
subject to various uncertainties and additional reserves may be required in
the future.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Comparison of 1999 Results with 1998 Results
CONSOLIDATED OPERATIONS
Second-quarter 1999 net income totaled $45.3 million, compared with $82.9
million for the same 1998 period. Income from continuing operations for the 1999
second quarter totaled $45.3 million, compared with 1998 second-quarter income
of $31.4 million. Net loss for the first six months of 1999 totaled $65.3
million, compared with net income of $106.7 million for the same 1998 period.
For the first six months of 1999, loss from continuing operations totaled $61.2
million, compared with income of $47.2 million a year earlier.
Operating profit increased 83% in the 1999 second quarter, compared with the
same 1998 period, due to improved results from exploration and production. The
increase in operating profit was due primarily to higher crude oil sales volumes
and increased prices for crude oil and natural gas, partially offset by higher
depreciation and depletion expense and lower natural gas sales volumes. Both the
exploration and production and chemical operations contributed to the 43%
increase in operating profit for the first six months of 1999 compared with the
same 1998 period. The increase in operating profit was due primarily to higher
crude oil sales volumes, lower exploration expense, lower domestic titanium
dioxide pigment production costs and higher domestic pigment sales prices.
Partially offsetting were higher depreciation and depletion expense, lower crude
oil and natural gas sales prices and lower natural gas sales volumes.
Other expense for the second quarter of 1999 totaled $57.8 million, compared
with $35.9 million for the 1998 quarter. The increase was due primarily to
higher net interest expense and lower insurance claims settlements, partially
offset by gains on sale of assets, compared with 1998 losses and higher foreign
currency transaction gains. Other expense for the first six months of 1999 was
$257.3 million, compared with $63.2 million for the 1998 period. This increase
was due primarily to merger costs, higher net interest expense, lower insurance
claims settlements and lower equity income, partially offset by foreign currency
transaction gains, compared with 1998 losses.
The income tax provision was $31.8 million for the 1999 second quarter, compared
with $6.3 million for the 1998 period. The income tax benefit was $12.3 million
for the first six months of 1999, compared with a provision for income taxes of
$17.9 million for the 1998 period. The provision for both 1998 periods included
a tax benefit of $11.1 million resulting from an income tax settlement. The
income tax benefit for the first six months of 1999 included a $44.6 million tax
benefit related to the $155.1 million in merger costs. Excluding these special
items in all periods, the provision for income taxes was $31.8 million and $32.3
million for the second quarter and first six months of 1999, respectively,
compared with $17.4 million and $29 million for the respective 1998 periods. The
increase for both 1999 periods was due to higher pretax income excluding the
special items, partially offset by lower effective tax rates.
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 second quarter and first six months of 1999, compared with the same periods
last year.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(Millions of dollars) 1999 1998 1999 1998
----------------------- -------------------------
<S> <C> <C> <C> <C>
Sales
Exploration and production $422.5 $335.2 $ 705.6 $ 663.6
Chemicals 234.6 265.8 437.3 444.0
------ ------ -------- --------
657.1 601.0 1,142.9 1,107.6
All other .1 .1 .2 .2
------ ------ -------- --------
Total Sales $657.2 $601.1 $1,143.1 $1,107.8
====== ====== ======== ========
Operating Profit
Exploration and production $101.0 $ 38.8 $ 121.8 $ 71.6
Chemicals 33.9 34.8 62.0 56.7
------ ------ -------- --------
Total Operating Profit 134.9 73.6 183.8 128.3
Other Expense (57.8) (35.9) (257.3) (63.2)
------ ------ -------- --------
Income (Loss) from Continuing Operations
before Income Taxes 77.1 37.7 (73.5) 65.1
Provision (Benefit) for Income Taxes 31.8 6.3 (12.3) 17.9
------ ------ -------- --------
Income (Loss) from Continuing Operations 45.3 31.4 (61.2) 47.2
Discontinued Operations, Net of Income Taxes - 51.5 - 59.5
Cumulative Effect of a Change in Accounting
Principle, Net of Income Taxes - - (4.1) -
------ ------ -------- --------
Net Income $ 45.3 $ 82.9 $ (65.3) $ 106.7
====== ====== ======== ========
</TABLE>
Exploration and Production -
Operating profit for the second quarter of 1999 was $101 million, compared with
$38.8 million for the same 1998 period. Operating profit for the first six
months of 1999 and 1998 was $121.8 million and $71.6 million, respectively.
Second-quarter 1999 operating profit was higher due primarily to higher crude
oil and natural gas sales prices and higher crude oil sales volumes, partially
offset by higher depreciation and depletion expense and lower natural gas sales
volumes. Operating profit for the first six months of 1999 was higher due to
higher crude oil sales volumes and lower exploration expenses, partially offset
by higher depreciation and depletion expense, lower crude oil and natural
gas sales prices, and lower natural gas sales volumes.
Revenues were $422.5 million and $335.2 million for the three months ended June
30, 1999 and 1998, respectively, and $705.6 million and $663.6 million for the
first six months of 1999 and 1998, respectively. The following table shows the
company's average crude oil and natural gas sales prices and volumes for both
the second quarter and first six months of 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended % Six Months Ended %
June 30, Increase June 30, Increase
1999 1998 (Decrease) 1999 1998 (Decrease)
------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Crude oil sales
(thousands of bbls/day)
Domestic
Offshore 61.7 43.7 41 56.0 44.3 26
Onshore 18.8 24.8 (24) 18.9 25.4 (26)
North Sea 117.2 93.0 26 107.1 82.5 30
Other International 15.1 18.9 (20) 15.7 18.5 (15)
----- ----- ----- -----
Total proprietary sales 212.8 180.4 18 197.7 170.7 16
Proportionate interest in
equity affiliate's sales 6.8 7.1 (4) 6.8 7.2 (6)
----- ----- ----- -----
Total 219.6 187.5 17 204.5 177.9 15
===== ===== ===== =====
Average crude oil sales price
(per barrel)
Domestic
Offshore $13.93 $11.85 18 $12.06 $12.83 (6)
Onshore 15.82 12.73 24 13.51 13.52 -
North Sea 15.18 12.75 19 13.57 13.23 3
Other International 12.99 10.22 27 10.84 10.79 -
Average $14.81 $12.64 17 $13.01 $13.30 (2)
Natural gas sold (MMCF/day)
Domestic
Offshore 376 346 9 362 329 10
Onshore 172 219 (21) 168 221 (24)
North Sea 43 46 (7) 51 48 6
----- ----- ----- -----
Total proprietary sales 591 611 (3) 581 598 (3)
Proportionate interest in
equity affiliate's sales 81 63 29 81 63 29
----- ----- ----- -----
Total 672 674 - 662 661 -
===== ===== ===== =====
Average natural gas sales price
(per MCF)
Domestic
Offshore $2.16 $2.17 - $1.93 $2.16 (11)
Onshore 2.18 2.07 5 1.90 2.10 (10)
North Sea 2.28 2.35 (3) 2.42 2.55 (5)
Average $2.28 $2.15 6 $2.10 $2.18 (4)
</TABLE>
Chemicals -
Second-quarter 1999 operating profit was $33.9 million on revenues of $234.6
million, compared with operating profit of $34.8 million on revenues of $265.8
million for the same 1998 period. For the first six months of 1999 and 1998,
operating profit was $62 million and $56.7 million, respectively, on revenues of
$437.3 million and $444 million, respectively.
Revenues for the second quarter of 1999 decreased due to lower European pigment
sales volumes and prices, lower forest product sales volumes and lower
electrolytic products sales prices and volumes. Revenues for the first six
months of 1999 declined due to lower forest products sales volumes and lower
electrolytic products sales prices and volumes, partially offset by higher
European pigment sales volumes and higher domestic pigment sales prices.
Operating profit for the second quarter of 1999 decreased slightly due to lower
revenues and higher European pigment per-unit production costs, partially offset
by lower domestic pigment per-unit production costs. For the first six months of
1999, operating profit increased due to lower domestic pigment per-unit
production costs, partially offset by lower revenues.
Financial Condition
At June 30, 1999, the company's net working capital position was $192.1 million,
compared with a negative $16.5 million at June 30, 1998, and a negative $173.3
million at December 31, 1998. The current ratio was 1.2 to 1 at June 30, 1999,
compared with 1.0 to 1 at June 30, 1998, and .8 to 1 at December 31, 1998. The
company's percentage of net debt (debt less cash) to capitalization was 67%
at June 30, 1999, compared with 56% at June 30, 1998, and 61% at December 31,
1998.
The company had unused lines of credit and revolving credit facilities of $942
million at June 30, 1999. Of this amount, $535 million and $265 million can be
used to support commercial paper borrowings of Kerr-McGee Credit LLC and
Kerr-McGee Oil (U.K.) PLC, respectively.
In July and August 1999, the company issued $330 million of 5 1/2% Debt
Exchangeable for Common Stock (DECS) due August 2, 2004. The DECS are
exchangeable at maturity for shares of Devon Energy Corporation common stock or,
at the option of the company, the cash equivalent of such common stock. The
proceeds received by the company were used to reduce its outstanding
indebtedness under variable interest rate credit agreements.
Cash capital expenditures for the first six months of 1999 totaled $274.3
million, compared with $567.8 million for the same period last year. Exploration
and production expenditures, principally in the Gulf of Mexico and North Sea,
were 84% of the 1999 total. Chemical expenditures were 16% of the 1999 amount.
Management anticipates that the cash requirements for the next several years can
be provided through internally generated funds and selective borrowings.
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 Program is generally divided
into the following phases:
o Identification, evaluation and prioritization of systems that need to be
modified or replaced.
o Remediation work to modify existing systems or install new systems.
o Testing and validation of the systems and applications.
o Contingency planning.
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
ready. In addition, the company has contacted key customers and partners
requesting information regarding their Year 2000 readiness. The company
continues to evaluate responses and make additional inquiries as needed.
The company is also developing contingency plans to address potential failure of
critical systems and/or critical suppliers. These plans may include items such
as activating manual systems, placing operations on standby and other procedures
to accommodate significant disruptions that could be caused by system failures.
When appropriate, alternative providers are being identified in the event that
certain critical suppliers are unable to provide an acceptable level of service
to the company. Contingency plans that address business critical areas are
expected to be completed by the end of the third quarter of 1999.
As of June 30, 1999, 100% of the pre-merger work on the Business Systems
projects had been completed. Most of these projects were system replacements to
improve business functionality and were not undertaken solely because of Year
2000 issues. As a result of the merger with Oryx, Year 2000 Programs for both
companies were combined. Most of the Oryx business systems have been replaced
with Year 2000 compliant systems already in place at Kerr-McGee. The remaining
business systems are being tested for Year 2000 readiness and modified as
required. These Year 2000 activities are scheduled to be completed near the end
of the third quarter of 1999.
Approximately 90% of the planned work on Facilities Integrity has also been
completed, including additional activities resulting from the merger. Critical
activities are expected to be completed by the end of the third quarter of 1999.
However, some ongoing work in areas of contingency planning, third-party
communications, auditing and year-end communication response planning is
expected to continue through the end of 1999.
Program expenditures for the merged company activities total approximately $48
million from inception through June 30, 1999. Expenditures for the second
quarter of 1999 were less than $1 million. The total cost to achieve Year 2000
readiness is estimated to be $51 million for the entire Program, which is not
material to the company's consolidated results of operations, financial position
or cash flows. Program expenditures are provided through internally generated
funds and selective short-term and/or long-term borrowings.
The failure to correct a material Year 2000 problem could result in disruption
to some aspects of the company's normal business activities or operations. Such
failures could have a material adverse 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 entities with which the company does business will be Year 2000
compliant. Contingency plans are being developed to address these concerns.
However, failure by a third party to remediate Year 2000 issues in a timely
manner could have a material adverse 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 system, or the failure of a key third-party
supplier, partner or customer, are believed to be the most reasonably likely
worst-case scenarios that could impact the company.
Forward-Looking Information
This report contains certain forward-looking statements, particularly as they
relate to the company's Year 2000 readiness, that 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, 1998.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits -
Exhibit No.
4.6 The company agrees to furnish the Securities and Exchange
Commission, upon request, a copy of the Prospectus Supplement
dated July 27, 1999, relating to the company's 5 1/2%
Exchangeable Notes due August 2, 2004.
27.0 Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K dated April 29, 1999, and filed April 30,
1999, for purposes of reporting, under Item 5, the company's
first-quarter 1999 earnings and related information.
Current Report on Form 8-K dated May 11, 1999, and filed May 12,
1999, for purposes of reporting under Item 5, the company's 1998
accomplishments and 1999 plan as presented at the annual
stockholders' meeting and issued in a press release.
Current Report on Form 8-K dated February 26, 1999, and filed June 4,
1999, for purposes of reporting under Items 5 and 7, certain
information pertaining to the merger between the company and Oryx
Energy Company and supplemental financial statements for the three
years ended December 31, 1998.
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 August 13, 1999 By: (Deborah A. Kitchens)
--------------- -------------------------------
Deborah A. Kitchens
Vice President and Controller
and Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet at June 30, 1999 and the Consolidated Statement of
Income for the periods ending June 30, 1999 and 1998, and is qualified in its
entirety by reference to such Form 10-Q.
</LEGEND>
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
<CASH> 158400 0
<SECURITIES> 0 0
<RECEIVABLES> 514400 0
<ALLOWANCES> 0 0
<INVENTORY> 298000 0
<CURRENT-ASSETS> 1046500 0
<PP&E> 10842900 0
<DEPRECIATION> 6741300 0
<TOTAL-ASSETS> 5616500 0
<CURRENT-LIABILITIES> 854400 0
<BONDS> 0 0
0 0
0 0
<COMMON> 93400 0
<OTHER-SE> 1099800 0
<TOTAL-LIABILITY-AND-EQUITY> 5616500 0
<SALES> 1143100 1107800<F1>
<TOTAL-REVENUES> 1143100 1107800<F1>
<CGS> 493500 496200<F1>
<TOTAL-COSTS> 1244600 1085700<F1>
<OTHER-EXPENSES> (28000) (43000)<F1>
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 90500 74600<F1>
<INCOME-PRETAX> (73500) 65100<F1>
<INCOME-TAX> (12300) 17900<F1>
<INCOME-CONTINUING> (61200) 47200<F1>
<DISCONTINUED> 0 59500<F1>
<EXTRAORDINARY> 0 0
<CHANGES> (4100) 0
<NET-INCOME> (65300) 106700<F1>
<EPS-BASIC> (.76) 1.23<F1>
<EPS-DILUTED> (.76) 1.22<F1>
<FN>
<F1>Amount restated as the result of the merger with Oryx Energy Company
accounted for using the pooling of interest method of accounting.
</FN>
</TABLE>
