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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, 1998
Commission file number 1-82
PHELPS DODGE CORPORATION
(a New York corporation)
13-1808503
(I.R.S. Employer Identification No.)
2600 N. Central Avenue, Phoenix, AZ 85004-3089
Registrant's telephone number: (602) 234-8100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No _____ .
Number of Common Shares outstanding at November 9, 1998: 57,942,591 shares.
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<PAGE>
PHELPS DODGE CORPORATION
Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 1998
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements
Statement of Consolidated Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Common Shareholders' Equity
Notes to Consolidated Financial Information
Review by Independent Accountants
Report of Independent Accountants on Review of Interim
Financial Information
Item 2. Management's Discussion and Analysis
Results of Operations
Results of Phelps Dodge Mining Company
Results of Phelps Dodge Industries
Other Matters Relating to the Statement of Consolidated Income
Changes in Financial Condition
Part II. Other Information
Item 1. Legal Proceedings
Item 5. Other Information
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)
<TABLE>
<CAPTION>
First Nine
Third Quarter Months
------------- ----------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
SALES AND OTHER OPERATING
REVENUES $ 764.0 961.7 2,356.7 3,048.4
---------- ----- ------- -------
OPERATING COSTS AND EXPENSES
Cost of products sold 594.7 664.1 1,790.8 2,102.9
Depreciation, depletion
and amortization 74.0 72.9 218.5 211.5
Selling and general
administrative expense 27.4 33.3 91.6 102.2
Exploration and research
expense 15.2 20.6 41.5 64.3
(Gain) loss on asset
dispositions and other
non-recurring charges
(see Note 4) (12.6) 20.8 (198.7) 20.8
---------- ----- ------- -------
698.7 811.7 1,943.7 2,501.7
---------- ----- ------- -------
OPERATING INCOME 65.3 150.0 413.0 546.7
Interest expense (23.3) (20.5) (67.9) (53.3)
Capitalized interest 0.5 5.0 1.7 11.2
Miscellaneous income and
expense, net 7.1 7.2 29.4 32.1
---------- ----- ------- -------
INCOME BEFORE TAXES, MINORITY
INTERESTS AND EQUITY IN NET
EARNINGS OF AFFILIATED
COMPANIES 49.6 141.7 376.2 536.7
Provision for taxes on
income (19.0) (43.9) (138.5) (166.3)
Minority interests in
consolidated subsidiaries (2.9) 1.0 (6.7) (4.1)
Equity in net earnings
of affiliated companies 0.9 5.4 1.7 10.2
---------- ----- ------- -------
NET INCOME $ 28.6 104.2 232.7 376.5
========== ===== ======= =======
BASIC EARNINGS PER SHARE $ 0.49 1.74 3.98 6.07
========== ===== ======= =======
DILUTED EARNINGS PER SHARE $ 0.49 1.72 3.97 6.02
========== ===== ======= =======
AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC 58.3 60.0 58.4 62.0
AVERAGE NUMBER OF SHARES
OUTSTANDING - DILUTED 58.5 60.5 58.6 62.5
</TABLE>
See Notes to Consolidated Financial Information.
<PAGE>
BUSINESS SEGMENTS
(Unaudited; in millions)
<TABLE>
<CAPTION>
First Nine
Third Quarter Months
------------- ----------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
SALES AND OTHER OPERATING
REVENUES
Phelps Dodge Mining
Company $ 421.9 542.3 1,303.5 1,736.4
Phelps Dodge Industries 342.1 419.4 1,053.2 1,312.0
---------- ----- ------- -------
$ 764.0 961.7 2,356.7 3,048.4
========== ===== ======= =======
OPERATING INCOME (LOSS)
Phelps Dodge Mining
Company (see Note 4) $ 27.5 116.3 117.0 430.5
Phelps Dodge Industries
(see Note 4) 46.8 44.0 324.1 149.2
Corporate and other (9.0) (10.3) (28.1) (33.0)
---------- ----- ------- -------
$ 65.3 150.0 413.0 546.7
========== ===== ======= =======
</TABLE>
See Notes to Consolidated Financial Information.
<PAGE>
CONSOLIDATED BALANCE SHEET
(Unaudited; in millions)
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 309.5 157.9
Accounts receivable, net 395.1 420.5
Inventories 289.0 297.8
Supplies 114.0 115.1
Prepaid expenses 10.6 7.8
Deferred income taxes 45.4 52.0
---------- -------
Current assets 1,163.6 1,051.1
Investments and long-term
accounts receivable 99.1 131.8
Property, plant and equipment, net 3,512.9 3,445.1
Other assets and deferred charges 255.4 337.2
---------- -------
$ 5,031.0 4,965.2
========== =======
LIABILITIES
Short-term debt $ 83.1 91.4
Current portion of long-term debt 61.5 54.8
Accounts payable and accrued expenses 463.4 553.2
Accrued income taxes 29.5 1.7
---------- -------
Current liabilities 637.5 701.1
Long-term debt 815.4 857.1
Deferred income taxes 514.8 439.2
Other liabilities and deferred credits 342.1 344.1
---------- -------
2,309.8 2,341.5
---------- -------
MINORITY INTERESTS IN CONSOLIDATED
SUBSIDIARIES 96.7 113.3
---------- -------
COMMON SHAREHOLDERS' EQUITY
Common shares, 58.0 outstanding
(12/31/97 - 58.6) 362.6 366.5
Retained earnings 2,420.8 2,301.0
Accumulated other comprehensive
income (loss) (151.0) (146.9)
Other (7.9) (10.2)
---------- -------
2,624.5 2,510.4
---------- -------
$ 5,031.0 4,965.2
========== =======
</TABLE>
See Notes to Consolidated Financial Information.
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited; in millions)
<TABLE>
<CAPTION>
Nine months
ended
September 30,
-------------------
1998 1997
--------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 232.7 376.5
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and
amortization 218.5 211.5
Deferred income taxes 40.8 37.6
Equity earnings net of dividends
received (0.1) (7.3)
Changes in current assets and
liabilities:
(Increase) decrease in accounts
receivable (34.8) (18.2)
(Increase) decrease in inventories (17.3) (26.2)
(Increase) decrease in supplies (3.0) 1.1
(Increase) decrease in prepaid
expenses (3.5) (10.6)
(Increase) decrease in deferred
income taxes 6.7 2.2
Increase (decrease) in interest
payable 17.3 4.0
Increase (decrease) in other accounts
payable (44.8) (28.9)
Increase (decrease) in accrued income
taxes 28.8 3.2
Increase (decrease) in other accrued
expenses (6.9) (2.6)
Gain on asset disposition (see Note 4) (198.7) --
Other adjustments, net (7.8) 11.5
--------- -------
Net cash provided by operating
activities 227.9 553.8
--------- -------
INVESTING ACTIVITIES
Capital outlays (248.8) (444.3)
Capitalized interest (1.7) (11.2)
Investment in subsidiaries (135.4) (53.1)
Proceeds from asset dispositions
and other (see Note 4) 466.5 6.8
--------- -------
Net cash provided by (used in)
investing activities 80.6 (501.8)
--------- -------
FINANCING ACTIVITIES
Increase in debt 16.0 316.0
Payment of debt (54.0) (46.3)
Common dividends (88.3) (93.3)
Purchase of common shares (31.5) (451.0)
Other, net 0.9 5.3
--------- -------
Net cash used in financing activities (156.9) (269.3)
--------- -------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 151.6 (217.3)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 157.9 470.1
--------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 309.5 252.8
========= =======
</TABLE>
See Notes to Consolidated Financial Information.
<PAGE>
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
(Unaudited; in millions)
<TABLE>
<CAPTION>
Common Shares Accumulated
--------------- Other
Number Comprehensive Common
of At Par Retained Income Shareholders'
shares Value Earnings (Loss) Other Equity
------ ----- -------- ------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1997 58.6 $ 366.5 $ 2,301.0 $ (146.9) $ (10.2) $ 2,510.4
Stock options
exercised 0.1 0.2 1.8 2.0
Common shares
purchased (0.7) (4.1) (27.4) (31.5)
Restricted shares
issued, net -- -- (0.4) 2.3 1.9
Other investment
adjustments 1.4 1.4
Dividends on common
shares (88.3) (88.3)
Comprehensive
income:
Net income 232.7 232.7
Other
comprehensive
income, net of
tax:
Translation
adjustment (4.1) (4.1)
Unrealized
gains on
securities -- --
------- --------
Other
comprehensive
income (4.1) (4.1)
------- --------
Comprehensive
income 228.6
------- -------- ---------- -------- ------- ----------
BALANCE AT
SEPTEMBER 30, 1998 58.0 $ 362.6 $ 2,420.8 $ (151.0) $ (7.9) $ 2,624.5
======= ======== ========== ======== ======= ==========
</TABLE>
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, 1997. 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, 1998, are not necessarily indicative of the results
to be expected for the full year.
3. Depending on market circumstances, the Corporation may periodically
purchase or liquidate various copper price protection contracts for a
portion of its expected future mine production to mitigate the risk of
adverse price fluctuations. The Corporation currently has no copper
price protection contracts in place.
4. Effective January 1, 1998, the Corporation sold a 90 percent interest
in Accuride Corporation and related subsidiaries, its wheel and rim
manufacturing business, to an affiliate of Kohlberg Kravis Roberts and
Co. (KKR) and the existing management of Accuride. That sale resulted
in a pre-tax gain to the Corporation of $186.1 million, ($122.8 million
after taxes, or $2.10 per common share). The remaining 10 percent
interest in Accuride was sold to RSTW Partners III, L.P. on September
30, 1998 resulting in a pre-tax gain of $12.6 million ($8.3 million
after taxes, or $0.14 per common share). Under the terms of the sales
agreements, the Corporation received total proceeds of $465.9 million
from the two transactions.
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. On February 3, 1998, the Corporation acquired the stock of Cobre Mining
Company Inc. (Cobre) for $113.3 million, including acquisition costs.
The Corporation also assumed Cobre's outstanding debt of $14.8 million.
The acquisition was at a price of $3.85 per common share for
substantially all of Cobre's 27 million common shares, including shares
issuable upon the exercise of outstanding warrants and options. The
primary assets of Cobre include the Continental Mine, which comprises
an open-pit copper mine, two underground copper mines, two mills, and
the surrounding 11,000 acres of land located in southwestern New Mexico
adjacent to the Corporation's Chino operations.
6. In the 1998 first quarter, the Corporation adopted Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." The Corporation has presented the required information in the
Consolidated Statement of Common Shareholders' Equity. SFAS No. 130 has
no effect on the Corporation's results of operations, financial
position, capital resources or liquidity.
7. On March 4, 1998, and April 3, 1998, respectively, the Accounting
Standards Executive Committee issued Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" and SOP 98-5, "Reporting on the Costs of Start-Up
Activities." These statements become effective for fiscal periods
beginning after December 15, 1998. The Corporation will adopt both SOPs
in 1999. The Corporation does not expect either SOP to have a material
effect on its results of operations or financial position.
8. In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
This Statement requires recognition of all derivatives as either assets
or liabilities on the balance sheet and measurement of those
instruments at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction.
This Statement is effective for fiscal years beginning after June 15,
1999. Phelps Dodge plans to adopt SFAS No. 133 effective January 1,
2000. The Corporation is evaluating the effect this Statement will have
on its financial reporting and disclosures.
9. In October 1998, the Corporation acquired the Brazilian carbon black
manufacturing business of Copebras S.A., a subsidiary of Minorco, for
$220.0 million. Columbian Chemicals, the Corporation's specialty
chemicals division, has assumed management and operating responsibility
of the new company. The manufacturing facility has an annual production
capacity of 170,000 metric tons of carbon black.
REVIEW BY INDEPENDENT ACCOUNTANTS
The financial information as of September 30, 1998, and for the
three-month and nine-month periods ended September 30, 1998 and 1997, included
in Part I pursuant to Rule 10-01 of Regulation S-X has been reviewed by
PricewaterhouseCoopers LLP, the Corporation's independent accountants, in
accordance with standards established by the American Institute of Certified
Public Accountants. PricewaterhouseCoopers' report is included in this quarterly
report.
PricewaterhouseCoopers 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>
PRICEWATERHOUSECOOPERS LLP
REPORT OF INDEPENDENT ACCOUNTANTS
October 12, 1998
To the Board of Directors and Shareholders of
the Phelps Dodge Corporation
We have reviewed the accompanying consolidated balance sheet of Phelps Dodge
Corporation and its subsidiaries as of September 30, 1998, the statement of
consolidated income for the three-month and nine-month periods ended September
30, 1998 and 1997, the consolidated statement of cash flows for the nine-month
periods ended September 30, 1998 and 1997, and the consolidated statement of
common shareholders' equity for the nine-month period ended September 30, 1998.
This financial information is the responsibility of the Corporation's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial information referred to above
for it to be in conformity with generally accepted accounting principles.
We previously audited in accordance with generally accepted auditing standards,
the consolidated balance sheet as of December 31, 1997, and the related
consolidated statements of income, of cash flows and of common shareholders'
equity for the year then ended (not presented herein), and in our report dated
January 15, 1998, except as to Note 2, which is as of February 3, 1998, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying consolidated balance
sheet information as of December 31, 1997, is fairly stated in all material
respects in relation to the consolidated balance sheet from which it has been
derived.
PricewaterhouseCoopers LLP
Phoenix, Arizona
</AUDIT-REPORT>
<PAGE>
Item 2. Management's Discussion and Analysis
RESULTS OF OPERATIONS
Phelps Dodge Corporation had consolidated earnings in the 1998 third
quarter of $20.3 million, or 35 cents per common share, before a non-recurring,
after-tax gain of $8.3 million, or 14 cents per common share, from the
completion of the disposition of Accuride Corporation, the Corporation's wheel
and rim business (see Note 4 to the Consolidated Financial Information).
Earnings in the 1997 third quarter were $118.6 million, or $1.96 per common
share, 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. Earnings for the nine-months ended September 30, 1998,
were $101.6 million, or $1.73 per common share, before a non-recurring,
after-tax gain of $131.1 million, or $2.24 per common share, from the
disposition of Accuride Corporation. Earnings for the corresponding nine-month
period in 1997 were $390.9 million, or $6.25 per common share, before
non-recurring charges.
Net income including the non-recurring gain was $28.6 million, or 49
cents per common share, in the 1998 third quarter and $232.7 million, or $3.97
per common share, for the nine months ended September 30, 1998. Net income
including non-recurring items was $104.2 million, or $1.72 per common share for
the 1997 third quarter, and $376.5 million, or $6.02 per common share for the
first nine months of 1997.
Earnings before non-recurring items were less in the 1998 third quarter
and nine-month period than in the corresponding 1997 periods principally as a
result of lower average copper prices. The average spot price per pound of
cathode copper on the New York Commodity Exchange (COMEX) was 27 cents per pound
(26 percent) lower in the third quarter of 1998 than the third quarter of 1997,
and 32 cents per pound (29 percent) lower in the 1998 nine-month period than in
the first nine months of 1997. The effect of this price decrease was offset
slightly by increased volumes of copper sold from mine production and improved
results at the Corporation's carbon black business.
The COMEX spot price per pound of copper cathode, upon which the
Corporation bases its selling price for a majority of its production, averaged
75 cents in the third quarter and 77 cents in the first nine months of 1998,
compared with $1.02 and $1.09 in the corresponding 1997 periods. From October 1
to November 9, 1998, the COMEX price averaged 72 cents per pound, closing at 72
cents on November 9, 1998.
Any material change in the price the Corporation receives for copper,
or in its unit production costs, has a significant effect on the Corporation's
results. The Corporation's present share of annual production is approximately
1.8 billion pounds of copper. Accordingly, each 1 cent per pound change in the
average annual copper price received by the Corporation, or in average annual
unit production costs, causes a variation in annual operating income before
taxes of approximately $18 million.
Depending on market circumstances, the Corporation may periodically
purchase or liquidate various copper price protection contracts for a portion of
its expected future mine production to mitigate the risk of adverse price
fluctuations. The Corporation currently has no such copper price protection
contracts in place.
Sales were $764.0 million in the 1998 third quarter and $2,356.7
million in the first nine months of 1998, compared with $961.7 million and
$3,048.4 million in the corresponding 1997 periods. The 1998 decreases
principally resulted from lower average copper prices and the absence of
Accuride Corporation, partially offset by higher sales volumes of copper and
carbon black.
RESULTS OF PHELPS DODGE MINING COMPANY
Phelps Dodge Mining Company is an international business comprising a
group of companies involved in vertically integrated copper operations including
mining, concentrating, electrowinning, smelting and refining, rod production,
marketing and sales, and related activities. Copper is sold primarily to others
as rod, cathode or in concentrates, and as rod to the Phelps Dodge Industries
segment. In addition, Phelps Dodge Mining Company at times smelts and refines
copper and produces copper rod for others on a toll basis. Phelps Dodge Mining
Company also produces gold, silver, molybdenum and copper chemicals, principally
as by-products, and sulfuric acid from its air quality control facilities. This
segment also includes the Corporation's other mining operations and investments
(including fluorspar, silver, lead and zinc operations) and its worldwide
mineral exploration and development programs.
================================================================================
<TABLE>
<CAPTION>
First Nine
Third Quarter Months
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Copper production (short tons):
Total production 265,400 250,200 792,300 726,900
Less minority participants'
shares * 44,800 43,800 134,100 126,400
------- ------- ------- -------
Net Phelps Dodge share 220,600 206,400 658,200 600,500
======= ======= ======= =======
Copper sales (short tons):
Net Phelps Dodge share from
own mines 220,600 210,500 650,700 593,000
Plus purchased copper 73,700 63,400 232,700 219,600
------- ------- ------- -------
Total copper sales 294,300 273,900 883,400 812,600
======= ======= ======= =======
New York Commodity Exchange
average spot price per
pound - copper cathodes $ 0.75 1.02 0.77 1.09
(in millions)
Sales and other operating
revenues $ 421.9 542.3 1,303.5 1,736.4
Operating income $ 27.5 116.3 117.0 430.5
- -------------------------
</TABLE>
* Minority participant interests include (i) a 15 percent undivided
interest in the Morenci, Arizona, copper mining complex held by
Sumitomo Metal Mining Arizona, Inc., (ii) a one-third partnership
interest in Chino Mines Company in New Mexico held by Heisei Minerals
Corporation, and (iii) a 20 percent interest in Candelaria in Chile
held by SMMA Candelaria, Inc., a jointly owned subsidiary of Sumitomo
Metal Mining Co., Ltd. and Sumitomo Corporation.
================================================================================
Phelps Dodge Mining Company's sales and other operating revenues
decreased by $120.4 million, or 22 percent, in the 1998 third quarter and by
$432.9 million, or 25 percent, in the first nine months of 1998 compared with
the corresponding 1997 periods. These variances primarily reflected decreased
average selling prices for copper that resulted in revenue reductions of
approximately $148 million and $520 million, respectively. Partially offsetting
that price variance was a 20,400 ton, or 7 percent, increase in the volume of
copper sold in the 1998 third quarter and a 70,800 ton, or 9 percent, increase
in the volume of copper sold for the first nine months. These sales volume
increases included greater availability of Phelps Dodge mined copper resulting
from production increases at the Candelaria mine in Chile and the February 1998
acquisition of Cobre Mining Company Inc. (Cobre) (see Note 5 to the Consolidated
Financial Information).
Phelps Dodge Mining Company reported operating income of $27.5 million
in the 1998 third quarter, compared with $137.1 million in the corresponding
1997 period before $20.8 million of non-recurring, pre-tax charges which
primarily reflected an early retirement program. For the nine-month period ended
September 30, 1998, Phelps Dodge Mining Company contributed operating income of
$117.0 million, compared with $451.3 million in the corresponding 1997 period
before the effects of the non-recurring charges. These decreases primarily
reflected the lower average copper prices, partially offset by the higher
volumes of copper sold from mine production. Copper sold from mine production
increased by 10,100 tons, or 5 percent, over third quarter 1997 and by 57,700
tons, or 10 percent, over the first nine months of 1997. The comparison for the
nine-month period also reflected a first quarter insurance claim recovery that
added $11.5 million to Phelps Dodge Mining Company's operating income ($6.7
million or 11 cents per share, after taxes) in the first nine months of 1998.
On October 21, 1998, the Corporation announced substantial production
curtailments at Chino Mines Company in New Mexico and the indefinite closure of
Cobre Mining Company in New Mexico and the Ojos del Salado operation in Chile.
These changes will reduce the Corporation's global copper production by nearly
100,000 short tons annually, and will result in the elimination of approximately
700 jobs. The production curtailment at Chino will occur in phases between
October 31 and the first half of 1999. Chino's annual copper production will be
reduced by approximately 35,000 short tons per year and will result in the
elimination of about 300 jobs at the facility. The underground mine at Cobre
closed October 21, resulting in the elimination of about 40 jobs. During the
first half of 1999, the entire operation will close, reducing copper production
by 35,000 short tons per year, and resulting in the loss of an additional 200
jobs. The Ojos del Salado underground mine and concentrator operations in Chile
closed October 21, resulting in the elimination of 180 jobs and reducing annual
copper production by approximately 22,000 short tons.
The collective bargaining agreements at Phelps Dodge Mining Company's
Chino operations in New Mexico expired on June 30, 1996. As of November 9, 1998,
employees who were covered by the agreements have continued to work without a
contract.
RESULTS OF PHELPS DODGE INDUSTRIES
Phelps Dodge Industries is a business segment comprising a group of
companies that manufacture engineered products principally for the global
energy, telecommunications, transportation and specialty chemicals sectors. Its
operations are characterized by products with significant market share,
internationally competitive costs and quality, and specialized engineering
capabilities. This business segment includes the Corporation's specialty
chemical operations through Columbian Chemicals Company and its subsidiaries;
its wire and cable and specialty conductor operations through Phelps Dodge
International Corporation and Phelps Dodge Magnet Wire Company and their
subsidiaries and affiliates; and, until its disposition in 1998, its wheel and
rim operations through Accuride Corporation and its subsidiaries.
================================================================================
<TABLE>
<CAPTION>
First Nine
Third Quarter Months
------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Sales and other operating revenues:
Specialty chemicals $ 104.6 101.5 326.9 316.6
Wheels and rims * -- 78.4 -- 247.0
Wire and cable 237.5 239.5 726.3 748.4
------- ------- ------- -------
$ 342.1 419.4 1,053.2 1,312.0
======= ======= ======= =======
Operating income:
Specialty chemicals $ 17.5 15.3 60.6 51.1
Wheels and rims * 12.6 14.1 198.7 33.9
Wire and cable 16.7 14.6 64.8 64.2
------- ------- ------- -------
$ 46.8 44.0 324.1 149.2
======= ======= ======= =======
</TABLE>
- -------------------------
* Ninety percent of Accuride Corporation, the Corporation's wheel and rim
business, was sold to KKR and the existing management of Accuride
effective January 1, 1998, and the remaining 10 percent interest was
sold to RSTW Partners III, L.P. on September 30, 1998, resulting in a
total pre-tax gain of $198.7 million (see Note 4 to the Consolidated
Financial Information).
================================================================================
Phelps Dodge Industries' reported sales of $342.1 million in the third
quarter and $1,053.2 million for the first nine months of 1998, compared with
$419.4 million and $1,312.0 million in the corresponding 1997 periods. The
decreases principally reflected the effect of the sale of Accuride which
contributed sales of $78.4 million in the 1997 third quarter and $247.0 million
for the first nine months of 1997. Also included in the decreases were reduced
sales prices for magnet wire related to low copper prices, and the effect of
Asian economic disruptions on the Corporation's wire and cable business,
particularly in Thailand.
During the 1998 third quarter, Phelps Dodge Industries recorded
operating income of $34.2 million, before a $12.6 million pre-tax gain from the
sale of the final 10 percent of Accuride, compared with $29.9 million in the
corresponding 1997 period before Accuride's $14.1 million contribution.
Operating income in the first nine months of 1998 was $125.4 million before a
$198.7 million pre-tax gain from the sale of Accuride, compared with $115.3
million in the first nine months of 1997 before Accuride's $33.9 million
contribution. The 1998 operating income exceeded corresponding prior year
periods, excluding Accuride, despite the continuing Asian economic disruptions.
This reflected strong performances by the Corporation's U.S. and European carbon
black businesses. In addition, the 60 percent owned wire and cable joint venture
in Brazil, which was acquired at the end of 1997, helped offset lower earnings
in the wire and cable business in Thailand and Venezuela and in the high
performance conductor business in the United States.
In October 1998, the Corporation acquired the Brazilian carbon black
manufacturing business of Copebras S.A., a subsidiary of Minorco, for $220.0
million. Columbian Chemicals, the Corporation's specialty chemicals division,
has assumed management and operating responsibility of the new company. The
manufacturing facility has an annual production capacity of 170,000 metric tons
of carbon black.
The collective bargaining agreement at Phelps Dodge Magnet Wire
Company's Hopkinsville, Kentucky, plant expired on October 11, 1996. As of
November 9, 1998, employees who were covered by the agreement have continued to
work without a contract.
OTHER MATTERS RELATING TO THE STATEMENT OF CONSOLIDATED INCOME
The Corporation's 1998 third quarter exploration and research expense
was $15.2 million, a decrease of 26 percent from the 1997 third quarter.
Exploration and research expense for the first nine months of 1998 was $41.5
million, a 35 percent decrease from the corresponding 1997 period. These
decreases were principally a result of the closure of the U.S. exploration
offices during the 1997 fourth quarter, but also reflected generally lower
exploration expenditures worldwide.
Miscellaneous income and expense, net, for the first nine months of
1998 included a non-cash, pre-tax gain of $10.0 million from the dissolution of
joint venture partnerships between Phelps Dodge and Sumitomo Electric
Industries, Ltd. at five international wire and cable manufacturing and support
companies. A non-cash, pre-tax gain of $6.0 million was included in
miscellaneous income and expense, net, in the corresponding 1997 period from the
exchange of shares of a cost-basis investment in a wire and cable business
located in Greece.
Interest expense net of capitalized interest was $22.8 million in the
third quarter of 1998 and $66.2 million in the first nine months, compared with
$15.5 million and $42.1 million in the corresponding periods in 1997. The 1998
increases principally reflect interest associated with corporate debt issued in
the 1997 fourth quarter and decreases in capitalized interest resulting from the
completion of the Candelaria expansion in October 1997.
The Corporation continues to review its "Year 2000" readiness. The Year
2000 issue stems from the predominant use in computer applications of a
two-digit field to capture the year (e.g., "98" for 1998). Because the "19" is
assumed in the date, when computers turn their clocks to the year 2000, the
two-digit field will read "00" and some computer programs will assume the year
is 1900. Programs that calculate, compare, or sort on a date field may cause
erroneous results and errors leading to the risk of business interruption or
shutdown and other potential problems. The Year 2000 issue is a global issue
that is very complex because of the many programs that may be impacted in any
computer system. These computer systems are used to support the activities of
the Corporation's businesses including financial systems, process control
technology and other computer-controlled equipment.
The Corporation has identified the scope of the Year 2000 issue as it
relates to its operations and all levels of management are providing leadership
to effect workable solutions. A program office team has been assembled to
oversee all facets of this project including information technology and process
control system conversions, contracts and agreements with vendors, suppliers,
and customers, insurance policies, and security systems. The Corporation is
working with major industry associations and agencies in North America, Europe,
Latin America, and Asia Pacific to facilitate the sharing of strategies and
solutions. The Corporation has also hired a consulting firm, PKS Systems
Integration LLC, to assist in the assessment and implementation of the Year 2000
conversion.
The conversion project has been structured into four phases - Inventory
Phase, Assessment Phase, Remediation and Testing Phase and the Field
Implementation Phase. At September 30, 1998, the inventory phase was 98 percent
complete. The assessment phase, the final cost estimation and action plan
identification phase, is projected to be complete by the end of 1998. The
remediation and testing phase is expected to be complete by the end of the first
quarter of 1999 and the field implementation phase is expected to be complete by
the end of the second quarter of 1999 for mission critical processes and
systems.
The process of identifying and prioritizing critical suppliers and
customers has been completed. A formal program to communicate with and evaluate
these external organizations is in progress and will be ongoing throughout the
conversion process. The Corporation is devoting special attention to the utility
and transportation companies due to their importance to this organization.
Similarly, the Corporation is giving extra attention to key customers. In
addition, the Corporation is in the process of developing contingency plans to
offset potential problems related to external organizations.
Phelps Dodge's investment in standardizing business system platforms
over the past several years has streamlined and facilitated the Year 2000
conversion requirements by eliminating redundant technologies and allowing the
sharing of services. In addition, coordination of other initiatives (e.g.,
replacement of process control and business systems previously identified for
retirement or upgrade without regard to the Year 2000 issue, with Year 2000
compliant systems) and concentrating resources on key systems are also expected
to allow the Corporation to achieve desired results.
The total cost associated with the Year 2000 conversion is not expected
to be material to the Corporation's financial position. The estimated total cost
of the conversion is approximately $10 million as previously reported in the
1997 Annual Report of Form 10-K. This estimate does not include the
Corporation's potential share of Year 2000 costs that may be incurred at
operations that the Corporation does not consolidate or those expenditures for
planned system and process control upgrades that are undertaken for other
reasons and also incorporate Year 2000 compliant technology.
Failure to correct a material Year 2000 problem could result in a
potential disruption to one or more of the Corporation's operations. Such
failures could materially and adversely affect the Corporation's results of
operations, liquidity and financial condition. Due to the general uncertainty
inherent in the Year 2000 issue, resulting in part from the uncertainty of the
readiness of suppliers and customers, the Corporation is unable to determine
with any certainty the consequences of Year 2000 failures and the materiality of
these potential failures. Therefore, the Corporation is in the process of
developing contingency plans in order to mitigate the extent of potential
disruptions to the business operations.
CHANGES IN FINANCIAL CONDITION
Capital expenditures and investments during the first nine months of
1998 were $279.9 million for Phelps Dodge Mining Company, including $113.3
million for the acquisition of the stock of Cobre Mining Company. Capital
expenditures and investments were $105.5 million for Phelps Dodge Industries.
Capital expenditures and investments in the corresponding 1997 period 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 in
the first nine months of 1997. The Corporation expects capital expenditures and
investments for the year 1998 to be approximately $325 million for Phelps Dodge
Mining Company, including the Cobre acquisition, and approximately $350 million
for Phelps Dodge Industries, including $220 million for the acquisition of
Copebras (see Note 9 to the Consolidated Financial Information).
At September 30, 1998, the Corporation's total debt was $960.0 million,
compared with $1,003.3 million at year-end 1997. The Corporation's ratio of debt
to total capitalization was 26.1 percent at September 30, 1998, compared with
27.7 percent at December 31, 1997.
On September 10, 1998, the Corporation paid a regular quarterly
dividend of 50 cents per share on its common shares for the 1998 third quarter;
the amount paid was $29.4 million, bringing total 1998 dividends paid through
September 30 to $88.3 million. On November 4, 1998, the board of directors
declared a 1998 fourth quarter regular dividend of 50 cents per common share to
be paid on December 10, 1998, to shareholders of record at the close of business
on November 20, 1998.
On May 7, 1997, the Corporation announced that its board of directors
had authorized the purchase of up to 6 million of its common shares,
approximately 10 percent of its then outstanding shares. Under that program, the
company purchased a total of 3.6 million of its common shares in 1997, at a
total cost of $292.9 million. In 1998 through November 9, the Corporation has
purchased 0.7 million shares under that authorization at a total cost of $35.4
million, leaving 1.7 million shares authorized for purchase under the new
program. There were 58.0 million common shares outstanding on September 30,
1998.
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
I. Reference is made to Paragraph II, section B.1 of Item 3, Legal
Proceedings of the Corporation's Form 10-K for the year ended December 31, 1997
regarding United States v. Gila Valley Irrigation District, et al., Globe Equity
No. 59 (D. Ariz.).
The Corporation recently purchased farmlands with associated water
rights that are the subject of this litigation. As a result, the Corporation has
been named and served as a party in this case. The lands and associated water
rights are not currently used in connection with any mining operation of the
Corporation.
II. On September 15, 1998, the Southwest Research and Information
Center and the United Steelworkers of America Local 890 (Plaintiffs) filed a
complaint in United Steel Workers, Local 890 and Southwest Research and
Information Center v. Chino Mines Company and Phelps Dodge Corporation, CIV
98-1123 LH (D. N.M.). The complaint alleges that Chino Mines Company (Chino)
(which is two-thirds owned by the Corporation) and the Corporation failed to
submit to the United States Environmental Protection Agency and the New Mexico
Emergency Response Commission toxic chemical release forms for some or all of
the calendar years 1987 through 1997 as required by Section 313 of the Emergency
Planning and Community Right-to-Know Act of 1986. This private litigant action
asks for, among other things, imposition of monetary penalties of $25,000 per
day of alleged violation up to and including December 31, 1996, and penalties of
$27,500 per day from January 1997 forward. The Plaintiffs also advised the
Corporation through a Notice of Intent to Sue that they intend to assert similar
claims against the Corporation's Hidalgo smelting operation near Playas, New
Mexico.
On October 6, 1998, Chino and the Corporation filed an answer to the
complaint denying all alleged violations of the Section 313 reporting
requirements.
Item 5. Other information
The advance notice deadline for a shareholder to notify the Corporation
of intent to introduce a proposal for consideration at an annual meeting of
shareholders is established by a provision in the Corporation's ByLaws. Article
II, Section 7 establishes that, to be timely, a shareholder's notice must be
delivered to or mailed and received at the principal office of the Corporation
not less than 60 days and not more than 90 days prior to the meeting. The next
Annual Meeting of Shareholders will be held on May 5, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Any exhibits required to be filed by the Corporation are
listed in the Index to Exhibits.
(b) No reports on Form 8-K were filed by the Corporation during
the quarter ended September 30, 1998.
<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, 1998 By: Gregory W. Stevens
------------------
Gregory W. Stevens
Vice President and Controller
(Principal Accounting Officer)
<PAGE>
PHELPS DODGE CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
12 Computation of ratios of total debt to total capitalization.
15 Letter from PricewaterhouseCoopers 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 millions)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Short-term debt $ 83.1 91.4
Current portion of long-term debt 61.5 54.8
Long-term debt 815.4 857.1
---------- ----------
Total debt 960.0 1,003.3
Minority interests in subsidiaries 96.7 113.3
Common shareholders' equity 2,624.5 2,510.4
---------- ----------
Total capitalization $ 3,681.2 3,627.0
========== ==========
Ratio of total debt to total
capitalization 26.1% 27.7%
========== ==========
</TABLE>
Exhibit 15
PRICEWATERHOUSECOOPERS LLP
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 12, 1998 (issued pursuant to the provisions of Statement on
Auditing Standards No. 71) appearing on page 7 of the Form 10-Q for the
quarterly period ended September 30, 1998 in the Prospectus constituting part of
its Registration Statement and Post-Effective Amendment No. 1 on Form S-3 (Nos.
33-44380 and 333-36415) and in the Registration Statements on Form S-8 (Nos.
33-26442, 33-6141, 33-26443, 33-29144, 33-19012, 2-67317, 33-34363, 33-34362,
33-62648, 333-42231 and 333-52175). We are also aware of our responsibilities
under the Securities Act of 1933.
Yours very truly,
PricewaterhouseCoopers LLP
Phoenix, Arizona
November 9, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1998 AND
THE RELATED CONSOLIDATED STATEMENTS OF INCOME AND OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 OF PHELPS DODGE
CORPORATION AND ITS SUBSIDIARIES AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 309,500
<SECURITIES> 0
<RECEIVABLES> 395,100
<ALLOWANCES> 0
<INVENTORY> 289,000
<CURRENT-ASSETS> 1,163,600
<PP&E> 3,512,900
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,031,000
<CURRENT-LIABILITIES> 637,500
<BONDS> 815,400
0
0
<COMMON> 362,600
<OTHER-SE> 2,261,900
<TOTAL-LIABILITY-AND-EQUITY> 5,031,000
<SALES> 2,356,700
<TOTAL-REVENUES> 2,356,700
<CGS> 1,790,800
<TOTAL-COSTS> 1,790,800
<OTHER-EXPENSES> 61,300
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 66,200
<INCOME-PRETAX> 376,200
<INCOME-TAX> 138,500
<INCOME-CONTINUING> 232,700
<DISCONTINUED> 0
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<NET-INCOME> 232,700
<EPS-PRIMARY> 3.98
<EPS-DILUTED> 3.97
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