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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1997
Commission file number 1-82
PHELPS DODGE CORPORATION
(a New York corporation)
13-1808503
(I.R.S. Employer Identification No.)
2600 N. Central Avenue, Phoenix, AZ 85004-3089
Registrant's telephone number: (602) 234-8100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes x No .
--- ---
Number of Common Shares outstanding at November 10, 1997: 58,771,160 shares.
================================================================================
<PAGE>
PHELPS DODGE CORPORATION
Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 1997
Table of Contents
-----------------
Part I. Financial Information
Item 1. Financial Statements
Statement of Consolidated Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Common Shareholders' Equity
Notes to Consolidated Financial Information
Review by Independent Accountants
Report of Independent Accountants on Review of Interim Financial
Information
Item 2. Management's Discussion and Analysis
Results of Operations
Results of Phelps Dodge Mining Company
Results of Phelps Dodge Industries
Other Matters Relating to the Statement of Consolidated Income
Changes in Financial Condition
Part II. Other Information
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
Index to Exhibits
<PAGE>
PHELPS DODGE CORPORATION AND SUBSIDIARIES
Part I. Financial Information
Item 1. Financial Statements
- ----------------------------
STATEMENT OF CONSOLIDATED INCOME
- --------------------------------
(Unaudited; in millions except per share data)
Third Quarter First Nine Months
------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
Sales and other operating revenues .............. $961.7 853.6 3,048.4 2,816.0
------ ----- ------- -------
Operating costs and expenses
Cost of products sold ......................... 664.1 613.4 2,102.9 1,924.8
Depreciation, depletion and amortization ...... 72.9 61.9 211.5 185.8
Selling and general administrative expense .... 33.3 29.4 102.2 91.1
Exploration and research expense .............. 20.6 22.2 64.3 62.3
Provision for asset dispositions and
other non-recurring charges (see Note 4) .... 20.8 -- 20.8 --
------ ----- ------- -------
811.7 726.9 2,501.7 2,264.0
------ ----- ------- -------
Operating income ................................ 150.0 126.7 546.7 552.0
Interest expense ............................... (20.5) (17.5) (53.3) (45.0)
Capitalized interest ........................... 5.0 0.5 11.2 1.0
Miscellaneous income and expense, net .......... 7.2 11.4 32.1 28.6
------ ----- ------- -------
Income before taxes, minority interests and
equity in net earnings of affiliated companies . 141.7 121.1 536.7 536.6
Provision for taxes on income ................. (43.9) (39.3) (166.3) (174.4)
Minority interests in consolidated subsidiaries 1.0 (3.9) (4.1) (10.3)
Equity in net earnings of affiliated companies 5.4 2.3 10.2 7.7
------ ----- ------- -------
Net income ...................................... $104.2 80.2 376.5 359.6
====== ===== ======= =======
Earnings per share .............................. $ 1.72 1.22 6.02 5.40
====== ===== ======= =======
Average number of shares outstanding ............ 60.6 65.7 62.5 66.6
See Notes to Consolidated Financial Information.
<PAGE>
Third Quarter First Nine Months
------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
BUSINESS SEGMENTS
(Unaudited; in millions)
Sales and other operating revenues
Phelps Dodge Mining Company ................... $542.3 437.2 1,736.4 1,551.1
Phelps Dodge Industries ....................... 419.4 416.4 1,312.0 1,264.9
------ ----- ------- -------
$961.7 853.6 3,048.4 2,816.0
====== ===== ======= =======
Operating income (loss)
Phelps Dodge Mining Company ................... $116.3 76.5 430.5 407.4
Phelps Dodge Industries ....................... 44.0 58.8 149.2 173.3
Corporate and other ........................... (10.3) (8.6) (33.0) (28.7)
------ ----- ------- -------
$150.0 126.7 546.7 552.0
====== ===== ======= =======
See Notes to Consolidated Financial Information.
<PAGE>
CONSOLIDATED BALANCE SHEET
- --------------------------
(Unaudited; in millions)
September 30, December 31,
1997 1996
------------ ------------
Assets
Cash and cash equivalents ........................ $ 252.8 470.1
Accounts receivable, net ......................... 486.4 489.1
Inventories ...................................... 308.4 293.0
Supplies ......................................... 114.5 117.0
Prepaid expenses ................................. 16.3 6.1
Deferred income taxes ............................ 44.0 46.2
--------- --------
Current assets ............................... 1,222.4 1,421.5
Investments and long-term accounts receivable .... 137.5 86.4
Property, plant and equipment, net ............... 3,242.6 3,020.5
Other assets and deferred charges ................ 289.5 288.0
--------- --------
$ 4,892.0 4,816.4
========= ========
Liabilities
Short-term debt (see Note 5) ..................... $ 258.7 66.5
Current portion of long-term debt ................ 51.5 38.2
Accounts payable and accrued expenses ............ 523.8 564.9
Income taxes ..................................... 18.6 16.3
--------- --------
Current liabilities .......................... 852.6 685.9
Long-term debt (see Note 5) ...................... 611.3 554.6
Deferred income taxes ............................ 457.0 424.9
Other liabilities and deferred credits ........... 327.8 309.6
--------- --------
2,248.7 1,975.0
--------- --------
Minority interests in consolidated subsidiaries ... 70.2 85.5
--------- --------
Common shareholders' equity
Common shares, 59.4 outstanding (12/31/96 - 64.7). 371.4 404.4
Retained earnings ................................ 2,344.7 2,465.0
Cumulative translation adjustments ............... (128.6) (98.8)
Other ............................................ (14.4) (14.7)
--------- --------
2,573.1 2,755.9
--------- --------
$ 4,892.0 4,816.4
========= ========
See Notes to Consolidated Financial Information.
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------
(Unaudited; in millions)
Nine months ended September 30,
-------------------------------
1997 1996
--------- --------
Operating activities
Net income ........................................... $ 376.5 359.6
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization ......... 211.5 185.8
Deferred income taxes ............................ 37.6 56.3
Equity earnings net of dividends received ........ (7.3) (3.9)
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable .... (18.2) 39.0
(Increase) decrease in inventories ............. (26.2) 13.8
(Increase) decrease in supplies ................ 1.1 2.1
(Increase) decrease in prepaid expenses ........ (10.6) (3.6)
(Increase) decrease in deferred income taxes 2.2 1.3
Increase (decrease) in interest payable ........ 4.0 4.2
Increase (decrease) in other accounts payable (28.9) 2.3
Increase (decrease) in income taxes ............ 3.2 1.6
Increase (decrease) in other accrued expenses (2.6) 14.0
Other adjustments, net ........................... 11.5 4.6
------- -------
Net cash provided by operating activities ... 553.8 677.1
------- -------
Investing activities
Capital outlays ...................................... (444.3) (338.8)
Capitalized interest ................................. (11.2) (1.0)
Investment in subsidiaries ........................... (53.1) (47.3)
Proceeds from asset dispositions and other, net ...... 6.8 3.6
------- -------
Net cash used in investing activities ....... (501.8) (383.5)
------- -------
Financing activities
Increase in debt ..................................... 316.0 15.7
Payment of debt ...................................... (46.3) (17.6)
Common dividends ..................................... (93.3) (96.2)
Purchase of common shares ............................ (451.0) (247.0)
Other, net ........................................... 5.3 10.7
------- -------
Net cash used in financing activities ....... (269.3) (334.4)
------- -------
Decrease in cash and cash equivalents .................. (217.3) (40.8)
Cash and cash equivalents at beginning of period ....... 470.1 608.5
------- -------
Cash and cash equivalents at end of period ............. $ 252.8 567.7
======= =======
See Notes to Consolidated Financial Information.
<PAGE>
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
- -----------------------------------------------------
(Unaudited; in millions)
Common Shares Cumulative
---------------- Translation Common
Number At Par Retained Adjustments Shareholders'
of Shares Value Earnings and Other Equity
--------- ------ --------- ----------- -------------
Balance at December 31, 1996.. 64.7 $404.4 $2,465.0 ($113.5) $2,755.9
Stock options exercised...... 0.4 2.8 11.0 13.8
Common shares purchased...... (5.7) (35.9) (415.1) (451.0)
Restricted shares issued, net 0.1 0.6 0.9 1.6
Net income................... 376.5 376.5
Dividends on common shares... (93.3) (93.3)
Translation adjustment....... (29.8) (29.8)
Other........................ (0.6) (0.6)
---- ------ -------- ------- --------
Balance at September 30, 1997. 59.4 $371.4 $2,344.7 ($143.0) $2,573.1
==== ====== ======== ======= ========
See Notes to Consolidated Financial Information.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL INFORMATION
- -------------------------------------------
(Unaudited)
1. The unaudited consolidated financial information presented herein has
been prepared in accordance with the instructions to Form 10-Q and does
not include all of the information and note disclosures required by
generally accepted accounting principles. Therefore, this information
should be read in conjunction with the consolidated financial
statements and notes thereto included in the Corporation's Form 10-K
for the year ended December 31, 1996. This information reflects all
adjustments that are, in the opinion of management, necessary to
present a fair statement of the results for the interim periods
reported.
2. The results of operations for the three-month and nine-month periods
ended September 30, 1997, are not necessarily indicative of the results
to be expected for the full year.
3. Depending on market circumstances, the Corporation may periodically
purchase or liquidate various copper price protection contracts for a
portion of its expected future mine production to mitigate the risk of
adverse price fluctuations. The Corporation currently has no copper
price protection contracts in place.
During the 1996 third quarter, the Corporation liquidated a portion of
its copper price protection contracts that covered anticipated mine
production in the first quarter of 1997. Consequently, a $6.8 million
gain was recognized in pre-tax income during the 1997 first quarter.
4. The Corporation's 1997 third quarter earnings included non-recurring,
pre-tax charges of $20.8 million ($14.4 million, or 24 cents per common
share, after taxes) primarily due to an early retirement program at
Phelps Dodge Mining Company.
5. The Corporation's short-term debt increased from $66.5 million on
December 31, 1996, to $258.7 million on September 30, 1997, primarily
as a result of borrowings under the Corporation's newly instituted
commercial paper program issued for general corporate purposes. This
program was established on August 15, 1997, under a private placement
agency agreement between the Corporation and two placement agents. The
agreement permits the Corporation to issue up to $1 billion of
short-term promissory notes (generally known as commercial paper) at
any one time. Commercial paper may bear interest or be sold at a
discount, as mutually agreed by the Corporation and the placement
agents at the time of each issuance. The Corporation's commercial paper
rating requires that issuances of commercial paper be backed by an
undrawn line of credit; the revolving credit agreement described below
provides such support. There were $174.7 million of borrowings under
the commercial paper program at September 30, 1997.
On June 25, 1997, the revolving credit agreement between the
Corporation and several lenders was amended and restated permitting
borrowings of up to $1 billion until its scheduled maturity on June 25,
2002. The agreement allows for two one-year renewals beyond the
scheduled maturity date if the Corporation requests and receives
approval from at least two-thirds of the lenders involved. Interest is
payable at a fluctuating rate based on the agent bank's prime rate or a
fixed rate based on the Eurodollar Interbank Offered Rate (LIBOR), or
at fixed rates offered independently by the several lenders, for
maturities of from seven to 360 days. This agreement provides for a
facility fee of six and one-half basis points (0.065 percent) on total
commitments. The agreement requires the Corporation to maintain a
minimum consolidated tangible net worth of $1.1 billion and limits
indebtedness to 50 percent of total consolidated capitalization. There
were no borrowings under this agreement at September 30, 1997.
In addition, the Corporation's long-term debt increased from $554.6
million on December 31, 1996, to $611.3 million on September 30, 1997.
During the second quarter of 1997, the Corporation's 80-percent-owned
Chilean subsidiary, Compania Contractual Minera Candelaria (CCMC),
borrowed $30 million of 12-year, dollar-denominated debt to refinance
Chilean peso-denominated debt that was prepaid in December 1996. In
addition, CCMC borrowed $58 million in the 1997 second quarter and $11
million in the 1997 third quarter of a $150 million, 12-year
dollar-denominated facility arranged in order to partially finance
CCMC's $320 million expansion project. Both of these facilities are
based on floating rates tied to six-month LIBOR and are non-recourse to
the Corporation. Under the proportional consolidation method, the
Corporation reflects 80 percent of these amounts in its financial
statements. During the first quarter of 1997, the Corporation caused
CCMC to limit the effect of CCMC's floating rate debt by causing CCMC
to enter into interest rate swaps with certain financial institutions
to effectively convert all of CCMC's floating rate debt to 7.84
percent, fixed rate debt for the life of the debt. The obligations
under the interest rate swaps are non-recourse to the Corporation.
On November 5, 1997, the Corporation issued $100 million of 6.375
percent notes maturing on November 1, 2004, and $150 million of 7.125
percent debentures maturing on November 1, 2027, under an Indenture
dated as of September 22, 1997, between the Corporation and The Chase
Manhattan Bank, as Trustee. The Corporation will use most of the
proceeds from the sale of the offered securities to repay outstanding
commercial paper, which was issued for general corporate purposes
($174.7 million principal outstanding as of September 30, 1997, at a
weighted average rate of approximately 5.55 percent per annum); the
remainder will also be used for general corporate purposes including
(i) payment of capital expenditures of the Corporation (ii)
acquisitions, and (iii) purchasing common shares of the Corporation.
Pending such application, such proceeds will be invested in short-term
securities.
6. The effect of the implementation of Statement of Financial Accounting
Standards No. 128, "Earnings per Share," would be immaterial on a pro
forma basis for the calculation of earnings per share for the
three-month and nine-month periods ended September 30, 1997.
7. On September 25, 1997, the Corporation sold its 72.25 percent interest
in the McDonald gold project in Montana and other associated properties
to CR Montana Corporation and Canyon Resources Corporation, the parent
of CR Montana. The sale included the immediate payment of $5 million to
the Corporation. Under the sales agreement, the Corporation would
receive an additional payment of between $95 million and $145 million
upon commencement of construction or issuance of permits necessary for
the project. This final component of the purchase price would be based,
if necessary, on quarterly production payments.
REVIEW BY INDEPENDENT ACCOUNTANTS
---------------------------------
The financial information as of September 30, 1997, and for the
three-month and nine-month periods ended September 30, 1997 and 1996, included
in Part I pursuant to Rule 10-01 of Regulation S-X has been reviewed by Price
Waterhouse LLP (Price Waterhouse), the Corporation's independent accountants, in
accordance with standards established by the American Institute of Certified
Public Accountants. Price Waterhouse's report is included in this quarterly
report.
Price Waterhouse does not carry out any significant or additional audit
tests beyond those that would have been necessary if its report had not been
included in this quarterly report. Accordingly, such report is not a "report" or
"part of a registration statement" within the meaning of Sections 7 and 11 of
the Securities Act of 1933 and the liability provisions of Section 11 of such
Act do not apply.
<PAGE>
<AUDIT-REPORT>
PRICE WATERHOUSE LLP
REPORT OF INDEPENDENT ACCOUNTANTS
October 9, 1997
To the Board of Directors and Shareholders
of Phelps Dodge Corporation
We have reviewed the accompanying consolidated balance sheet of Phelps Dodge
Corporation and its subsidiaries as of September 30, 1997, the statement of
consolidated income for the three-month and nine-month periods ended September
30, 1997 and 1996, the consolidated statement of cash flows for the nine-month
periods ended September 30, 1997 and 1996, and the consolidated statement of
common shareholders' equity for the nine-month period ended September 30, 1997.
These financial statements are the responsibility of the Corporation's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to consolidate financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We previously audited in accordance with generally accepted auditing standards,
the consolidated balance sheet as of December 31, 1996, and the related
consolidated statements of income, of cash flows and of common shareholders'
equity for the year ended (not presented herein), and in our report dated
January 15, 1997, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet information as of December 31, 1996, is
fairly stated in all material respects in relation to the consolidated balance
sheet from which it has been derived.
Price Waterhouse LLP
Phoenix, Arizona
</AUDIT-REPORT>
<PAGE>
Item 2. Management's Discussion and Analysis
- ---------------------------------------------
RESULTS OF OPERATIONS
Phelps Dodge Corporation had consolidated earnings of $118.6 million,
or $1.96 per common share, in the third quarter of 1997 before non-recurring,
after-tax charges of $14.4 million, or 24 cents per common share, which
primarily reflected an early retirement program at Phelps Dodge Mining Company.
Net income in the 1996 third quarter was $80.2 million, or $1.22 per common
share. Earnings for the nine months ended September 30, 1997, were $390.9
million, or $6.25 per common share, before the non-recurring charges, compared
with net income of $359.6 million, or $5.40 per common share, in the
corresponding 1996 period. Net income after non-recurring charges was $104.2
million, or $1.72 per common share, in the 1997 third quarter and $376.5
million, or $6.02 per common share, for the nine months ended September 30,
1997.
Operating income in the 1997 third quarter was $170.8 million before
non-recurring charges which were $20.8 million on a pre-tax basis. Operating
income in the corresponding 1996 period was $126.7 million. The 1997 increase
principally resulted from higher average copper prices and higher volumes of
copper sold from mine production. Operating income was $567.5 million for the
nine-month period ended September 30, 1997, before non-recurring, pre-tax
charges. Operating income in the corresponding period in 1996 was $552.0
million. The increase in 1997 was attributable to higher copper prices and
volumes partially offset by lower sales volumes of specialty chemicals in the
European market and the effects of economic difficulties in Southeast Asia.
Any material change in the price the Corporation receives for copper,
or in its unit production costs, has a significant effect on the Corporation's
results. The Corporation's present share of annual production is approximately
1.6 billion pounds of copper. Accordingly, each 1 cent per pound change in the
average annual copper price received by the Corporation, or in average annual
unit production costs, causes a variation in annual operating income before
taxes of approximately $16 million.
The COMEX spot price per pound of copper cathode, upon which the
Corporation bases its selling price, averaged $1.02 in the third quarter and
$1.09 in the first nine months of 1997, compared with an average of 91 cents and
$1.08 in the corresponding 1996 periods. From October 1 to November 10, 1997,
the average price was 92 cents, closing at 90 cents on November 10, 1997.
Depending on market circumstances, the Corporation may periodically
purchase or liquidate various copper price protection contracts for a portion of
its expected future mine production to mitigate the risk of adverse price
fluctuations. For a further discussion of the Corporation's copper price
protection arrangements for 1997 production, see Note 3 to the Consolidated
Financial Information.
Sales were $961.7 million in the 1997 third quarter and $3,048.4
million in the first nine months of 1997, compared with $853.6 million and
$2,816.0 million in the corresponding 1996 periods. The 1997 increases
principally resulted from higher average copper prices, increased copper sales
volumes, and increased sales of wire and cable products and wheels and rims.
<PAGE>
RESULTS OF PHELPS DODGE MINING COMPANY
Phelps Dodge Mining Company is an international business comprising a
group of companies involved in vertically integrated copper operations including
mining, concentrating, electro-winning, smelting and refining, rod production,
marketing and sales, and related activities. Copper is sold primarily to others
as rod, cathode or concentrates, and as rod to the Phelps Dodge Industries
segment. In addition, Phelps Dodge Mining Company at times smelts and refines
copper and produces copper rod for others on a toll basis. Phelps Dodge Mining
Company also produces gold, silver, molybdenum and copper chemicals, principally
as by-products, and sulfuric acid from its air quality control facilities. This
segment also includes the Corporation's other mining operations and investments
(including fluorspar, silver, lead and zinc operations) and its worldwide
mineral exploration and development programs.
- --------------------------------------------------------------------------------
Third Quarter First Nine Months
------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
Copper production (short tons):
Total production---------------------- 250,200 227,000 726,900 694,400
Less minority participants' shares *-- 43,800 39,100 126,400 121,100
-------- -------- -------- --------
Net Phelps Dodge share---------------- 206,400 187,900 600,500 573,300
======== ======== ======== ========
Copper sales (short tons):
Net Phelps Dodge share from
own mines--------------------------- 210,500 194,500 593,000 573,900
Purchased copper---------------------- 63,400 43,900 219,600 163,500
-------- -------- -------- --------
Total copper sales-------------------- 273,900 238,400 812,600 737,400
======== ======== ======== ========
New York Commodity Exchange
average spot price per
pound - copper cathodes--------------- $ 1.02 0.91 1.09 1.08
(in millions)
Sales and other operating revenues------ $ 542.3 437.2 1,736.4 1,551.1
Operating income------------------------ $ 116.3 76.5 430.5 407.4
- ------------------------------
* Minority participant interests include (i) a 15 percent undivided
interest in the Morenci, Arizona, copper mining complex held by
Sumitomo Metal Mining Arizona, Inc., (ii) a one-third partnership
interest in Chino Mines Company in New Mexico held by Heisei Minerals
Corporation, and (iii) a 20 percent interest in Candelaria in Chile
held by SMMA Candelaria, Inc., a jointly owned subsidiary of Sumitomo
Metal Mining Co., Ltd. and Sumitomo Corporation.
- --------------------------------------------------------------------------------
Phelps Dodge Mining Company's sales of copper increased by 35,500 tons
or 15 percent in the third quarter of 1997 and by 75,200 tons or 10 percent in
the first nine months of 1997, compared with the corresponding 1996 periods. The
sales volume increases principally were due to higher production from the
Morenci mine and copper purchased for resale. Resulting sales and other
operating revenues in the third quarter of 1997 were $542.3 million, 24 percent
higher than the corresponding 1996 period, while sales and other operating
revenues in the first nine months of 1997 were $1,736.4 million, 12 percent
higher than the same 1996 period.
Phelps Dodge Mining Company reported operating income of $137.1 million
in the third quarter before $20.8 million of non-recurring, pre-tax charges
which primarily reflected an early retirement program (see Note 4 to the
Consolidated Financial Information). Operating income in the 1996 third quarter
was $76.5 million. For the nine-month period ending September 30, 1997, Phelps
Dodge Mining Company contributed operating income of $451.3 million before the
effects of the non-recurring charges, compared with $407.4 million in the
corresponding 1996 period. These increases reflected higher average copper
prices and higher volumes of copper sold from mine production.
The Phelps Dodge Mining Company share of mine production from its
worldwide operations was a record 206,400 tons of copper in the 1997 third
quarter and 600,500 tons in the first nine months of 1997. This production
compares with 187,900 tons in the 1996 third quarter and 573,300 tons in the
first nine months of 1996. Phelps Dodge Mining Company copper sales from mine
production were also a record at 210,500 tons in the 1997 third quarter and
593,000 tons in the first nine months, compared with 194,500 tons and 573,900
tons in the corresponding 1996 periods.
At the end of October 1997, Phelps Dodge Mining Company completed the
expansion of its Candelaria operation in northern Chile, more than eight months
ahead of schedule and $30 million, or 10 percent, below the budgeted cost. The
expansion included additional mining activity, the construction of a second
semi-autogenous grinding mill, and new and expanded concentrator facilities. The
expansion will bring Candelaria's average annual copper production to
approximately 380 million pounds, increasing the Corporation's share of copper
production at Candelaria by nearly 130 million pounds annually, and boosting the
Corporation's worldwide copper production by 9 percent.
The collective bargaining agreements covering approximately 625
employees at Phelps Dodge Mining Company's Chino operations in New Mexico
expired on June 30, 1996. As of November 10, 1997, employees who were covered by
the agreements have continued to work without a contract.
In December 1996, the United States District Court of the Eastern
District of New York ruled that the 1986 sale of property in Maspeth, New York,
by the Corporation to the United States Postal Service was to be rescinded. The
Court ordered the Corporation to return the $14.8 million originally paid by the
Postal Service for the property and to pay interest on the sales price for a
portion of the time since the sale. In August 1997, the Corporation returned
$14.8 million to the Postal Service for the Maspeth property and paid $6.6
million of interest to the Postal Service.
<PAGE>
RESULTS OF PHELPS DODGE INDUSTRIES
Phelps Dodge Industries is a business segment comprising a group of
companies that manufacture engineered products principally for the
transportation, energy and telecommunications sectors worldwide. Its operations
are characterized by products with significant market share, internationally
competitive cost and quality, and specialized engineering capabilities. This
business segment includes the Corporation's specialty chemicals operations
through Columbian Chemicals Company and its subsidiaries; its wheel and rim
operations through Accuride Corporation and its subsidiaries; and its wire and
cable and specialty conductor operations through Phelps Dodge International
Corporation and Phelps Dodge Magnet Wire Company and their subsidiaries and
affiliates.
- --------------------------------------------------------------------------------
Third Quarter First Nine Months
------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
(in millions)
Sales and other operating revenues:
Specialty chemicals--------------- $ 101.5 105.1 316.6 327.4
Wheels and rims------------------- 78.4 71.3 247.0 235.2
Wire and cable-------------------- 239.5 240.0 748.4 702.3
------ ------- -------- -------
$ 419.4 416.4 1,312.0 1,264.9
====== ======= ======== =======
Operating income:
Specialty chemicals--------------- $ 15.3 19.4 51.1 64.3
Wheels and rims------------------- 14.1 9.5 33.9 33.7
Wire and cable-------------------- 14.6 29.9 64.2 75.3
------ ------- -------- -------
$ 44.0 58.8 149.2 173.3
====== ======= ======== =======
- --------------------------------------------------------------------------------
During the 1997 third quarter, Phelps Dodge Industries recorded
operating income of $44.0 million, compared with $58.8 million in the
corresponding 1996 period. Operating income in the first nine months of 1997 was
$149.2 million, compared with $173.3 million in the first nine months of 1996.
Third quarter earnings were adversely affected by economic difficulties in
Southeast Asia, and by lower sales volumes of specialty chemicals and generally
weaker currencies in the European market, partially offset by continued strength
in the U.S. wheel and rim market. In addition, the year-to-date decrease in
earnings reflected the effects of a first quarter 1997 strike at the
Corporation's London, Ontario, wheel and rim plant.
On October 6, 1997, the Corporation announced it was having discussions
with selected potential buyers for Accuride Corporation, its subsidiary that
produces wheels and rims for heavy trucks, trailers, and buses, and for
commercial light trucks and sport utility vehicles. The sale of this subsidiary
would allow Phelps Dodge to concentrate on its significant global growth plans
in mining, wire and cable, and specialty chemicals.
Accuride, which is a business unit of Phelps Dodge Industries, has
steel wheel operations in Henderson, Kentucky, and London, Ontario, Canada.
Accuride also is involved in the production of aluminum wheels through a joint
venture arrangement in Erie, Pennsylvania, and in a commercial tire and wheel
assembly joint venture in Springfield, Ohio. Accuride had sales of $307.8
million and operating income of $41.4 million in 1996.
The collective bargaining agreement covering approximately 360
employees at Phelps Dodge Magnet Wire Company's Hopkinsville, Kentucky, plant
expired on October 11, 1996. As of November 10, 1997, employees who were covered
by the agreement have continued to work without a contract.
OTHER MATTERS RELATING TO
THE STATEMENT OF CONSOLIDATED INCOME
Miscellaneous income and expense, net was $7.2 million in the third
quarter of 1997, compared with $11.4 million in the third quarter of 1996.
Miscellaneous income and expense, net was $32.1 million in the first nine months
of 1997, compared with $28.6 million in the corresponding 1996 period. The third
quarter decrease from prior year principally reflected a decrease in interest
income. The year-to-date increase principally reflected a 1996 second quarter
$7.1 million foreign exchange loss from the effect on working capital of the
devaluation of the Venezuelan bolivar, and a $6.0 million pre-tax, non-cash gain
in the 1997 second quarter from the exchange of shares of a cost basis
investment in a wire and cable business located in Greece. The year-to-date
increase was partially offset by an $8.3 million decrease in interest income and
a $2.3 million decrease in dividends received from the Corporation's 13.9
percent minority interest in the Southern Peru Copper Corporation. The $7.1
million 1996 second quarter foreign exchange loss from the devaluation of the
bolivar was offset by an $8.0 million interest expense gain that represented a
remeasurement of Venezuelan local currency debt after the devaluation.
CHANGES IN FINANCIAL CONDITION
Capital expenditures and investments during the first nine months of
1997 were $329.8 million for Phelps Dodge Mining Company, including $135.2
million for the expansion of the Corporation's Candelaria mining operations in
Chile. Capital expenditures and investments were $149.1 million for Phelps Dodge
Industries. Capital expenditures and investments in the corresponding 1996
period were $225.4 million for Phelps Dodge Mining Company and $122.7 million
for Phelps Dodge Industries. The Corporation expects capital expenditures and
investments for the year 1997 to be approximately $465 million for Phelps Dodge
Mining Company (including approximately $165 million for the Candelaria
expansion project). Phelps Dodge Industries is expected to spend approximately
$245 million during the year.
At September 30, 1997, the Corporation's total debt was $921.5 million,
compared with $659.3 million at year-end 1996. Debt increased as a result of
non-recourse borrowings for the expansion of the Candelaria mine and borrowings
under the Corporation's newly instituted commercial paper program to support the
Corporation's capital expenditure and share purchase programs. The Corporation's
ratio of debt to total capitalization was 25.9 percent at September 30, 1997,
compared with 18.8 percent at December 31, 1996. For further information
concerning the Candelaria borrowings, the Corporation's commercial paper program
and the Corporation's revolving credit agreement that was amended in the second
quarter of 1997, please refer to Note 5 to the Consolidated Financial
Information. Also refer to Note 5 for information concerning the Corporation's
issuance of $250 million of long-term notes and debentures in November 1997,
which will be used for general corporate purposes including the repayment of the
Corporation's outstanding commercial paper ($174.7 million at September 30,
1997) which was issued for the Corporation's capital expenditure and share
purchase programs, as well as acquisitions.
On September 10, 1997, the Corporation paid a regular quarterly
dividend of 50 cents per share on its common shares for the 1997 third quarter;
the total amount paid was $30.1 million, bringing total 1997 dividends paid
through September 30 to $93.3 million. On November 5, 1997, the Board of
Directors declared a 1997 fourth quarter regular dividend of 50 cents per common
share to be paid on December 10, 1997, to shareholders of record at the close of
business on November 21, 1997.
On May 7, 1997, the Corporation announced that its board of directors
had authorized the purchase of up to an additional 6 million of its common
shares, approximately 10 percent of its then outstanding shares. This
authorization followed a 5 million share purchase program that was initiated in
March 1995 and extended to 10 million shares in March 1996. Under that program,
9.9 million shares were purchased by the Corporation. In 1997 through November
10, the Corporation purchased a total of 6.4 million of its common shares at a
total cost of $501.1 million, including 3.5 million shares at a cost of $282.5
million under the new 6 million share authorization. An additional 2.5 million
shares remain authorized for purchase under the new program. There were 59.4
million common shares outstanding on September 30, 1997.
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
- --------------------------
I. Reference is made to Paragraph II, section A.2.(a) of Item 3, Legal
Proceedings of the Corporation's Form 10-K for the year ended December 31, 1996,
regarding In re the General Adjudication of all Rights to Use Water in the Gila
River System and Source, Nos. W-1 (Salt River), W-2 (Verde River), W-3 (Gila
River) and W-4 (San Pedro River) (Superior Court of Arizona, Maricopa County),
and to Paragraph I of Item 1. Legal Proceedings of the Corporation's Forms 10-Q
for the quarters ended March 31 and June 30, 1997.
The Corporation understands that, pursuant to the applicable federal
legislation (Pub. L. No. 105-18, ss. 5003, 111 Stat. 158, 181-187, the
"Legislation"), the San Carlos Apache Tribal Court dismissed the action filed
against the Corporation in that court on May 12, 1997, by the San Carlos Apache
Tribe. (The Legislation required that suit be dismissed by August 22, 1997.) Any
claims by the San Carlos Apache Tribe relating to the Corporation's historical
use and occupancy and operation of its pump station on the Black River and
related facilities are now to be brought, if at all, in the United States
District Court.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Any exhibits required to be filed by the Corporation are
listed in the Index to Exhibits.
(b) Reports on Form 8-K:
The Corporation filed a Current Report on Form 8-K on November
3, 1997, with respect to the issuance of debt securities
pursuant to an Indenture, dated as of September 22, 1997,
between the Corporation and The Chase Manhattan Bank, as
Trustee.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Corporation has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHELPS DODGE CORPORATION
------------------------
(Corporation or Registrant)
Date: November 13, 1997 By: Gregory W. Stevens
------------------
Gregory W. Stevens
Vice President and Controller
(Principal Accounting Officer)
<PAGE>
PHELPS DODGE CORPORATION AND SUBSIDIARIES
Index to Exhibits
-----------------
4.3 Form of Indenture, dated as of September 22, 1997, between the
Corporation and The Chase Manhattan Bank, as Trustee (incorporated by
reference to the Corporation's Registration Statement and
Post-Effective Amendment No. 1 on Form S-3 (Registration Nos. 333-36415
and 33-44380) filed with the Securities and Exchange Commission on
September 25, 1997 (SEC File No. 1-82)).
4.4 Form of 6.375 percent Note, due November 1, 2004, of the Corporation
issued on November 5, 1997, pursuant to the Indenture, dated as of
September 22, 1997, between the Corporation and The Chase Manhattan
Bank, as Trustee (incorporated by reference to the Corporation's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on November 3, 1997 (SEC File No. 1-82)).
4.5 Form of 7.125 percent Debenture, due November 1, 2027, of the
Corporation issued on November 5, 1997, pursuant to the Indenture,
dated as of September 22, 1997, between the Corporation and The Chase
Manhattan Bank, as Trustee (incorporated by reference to the
Corporation's Current Report on Form 8-K filed with the Securities and
Exchange Commission on November 3, 1997 (SEC File No. 1-82)).
12 Computation of ratios of total debt to total capitalization.
15 Letter from Price Waterhouse LLP with respect to unaudited interim
financial information.
PHELPS DODGE CORPORATION AND SUBSIDIARIES
Exhibit 12
COMPUTATION OF TOTAL DEBT TO TOTAL CAPITALIZATION
- -------------------------------------------------
(Unaudited; dollars in thousands)
September 30, December 31,
1997 1996
------------- ------------
Short-term debt.................................. $ 258,700 66,500
Current portion of long-term debt................ 51,500 38,200
Long-term debt................................... 611,300 554,600
------------- -----------
Total debt.................................. 921,500 659,300
Minority interests in subsidiaries............... 70,200 85,500
Common shareholders' equity...................... 2,573,100 2,755,900
------------- -----------
Total capitalization........................ $ 3,564,800 3,500,700
============= ===========
Ratio of total debt to total capitalization...... 25.9% 18.8%
============= ===========
Exhibit 15
November 11, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
We are aware that Phelps Dodge Corporation has incorporated by reference our
report dated October 9, 1997 (issued pursuant to the provisions of Statement on
Auditing Standards No. 71) in the Prospectus constituting part of its
Registration Statements and post-effective amendment No. 1 on Form S-3 (Nos.
33-44380, 333-36415) and Form S-8 (Nos. 33-26442, 33-6141, 33-26443, 33-29144,
33-19012, 2-67317, 33-34363, 33-34362 and 33-62648). We are also aware of our
responsibilities under the Securities Act of 1933.
Yours very truly,
Price Waterhouse LLP
Phoenix, Arizona
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE CONSOLIDATED
BALANCE SHEET AT SEPTEMBER 30, 1997 AND THE
RELATED CONSOLIDATED STATEMENTS OF INCOME AND OF
CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1997 OF PHELPS DODGE CORPORATION AND ITS
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<CURRENCY> U.S. DOLLARS
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
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<CASH> 252,800
<SECURITIES> 0
<RECEIVABLES> 486,400
<ALLOWANCES> 0
<INVENTORY> 308,400
<CURRENT-ASSETS> 1,222,400
<PP&E> 3,242,600
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<TOTAL-ASSETS> 4,892,000
<CURRENT-LIABILITIES> 852,600
<BONDS> 611,300
0
0
<COMMON> 371,400
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<TOTAL-LIABILITY-AND-EQUITY> 4,892,000
<SALES> 3,048,400
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<CGS> 2,102,900
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<INCOME-CONTINUING> 376,500
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