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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
Commission file number 1-9447
KAISER ALUMINUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-3030279
(State of incorporation) (I.R.S. Employer
Identification No.)
5847 SAN FELIPE, SUITE 2600, HOUSTON, TEXAS 77057-3010
(Address of principal executive offices) (Zip Code)
(713) 267-3777
(Registrant's telephone number, including area code)
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
----- ------
At July 31, 2000, the registrant had 79,543,061 shares of
Common Stock outstanding.
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------------------------
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 19.9 $ 21.2
Receivables:
Trade, net 177.7 154.1
Other 187.4 106.9
Inventories 479.6 546.1
Prepaid expenses and other current assets 106.8 145.6
------------------------------
Total current assets 971.4 973.9
Investments in and advances to unconsolidated affiliates 85.4 96.9
Property, plant, and equipment - net 1,078.1 1,053.7
Deferred income taxes 445.0 440.0
Other assets 619.5 634.3
------------------------------
Total $ 3,199.4 $ 3,198.8
==============================
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 243.6 $ 231.7
Accrued interest 37.6 37.7
Accrued salaries, wages, and related expenses 60.3 62.1
Accrued postretirement medical benefit obligation -
current portion 51.5 51.5
Other accrued liabilities 160.4 168.8
Payable to affiliates 84.1 85.8
Long-term debt - current portion 1.5 .3
------------------------------
Total current liabilities 639.0 637.9
Long-term liabilities 686.8 727.1
Accrued postretirement medical benefit obligation 672.0 678.3
Long-term debt 995.8 972.5
Minority interests 117.1 117.7
Commitments and contingencies
Stockholders' equity:
Common stock .8 .8
Additional capital 537.5 536.8
Accumulated deficit (448.4) (471.1)
Accumulated other comprehensive income - additional
minimum pension liability (1.2) (1.2)
------------------------------
Total stockholders' equity 88.7 65.3
------------------------------
Total $ 3,199.4 $ 3,198.8
==============================
</TABLE>
The accompanying notes to interim consolidated financial
statements are an integral part of these statements.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED INCOME (LOSS)
(Unaudited)
(In millions of dollars, except share amounts)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
Net sales $ 542.5 $ 525.0 $ 1,108.2 $ 1,004.4
------------------------------ ------------------------------
Costs and expenses:
Cost of products sold 443.4 473.9 924.1 933.8
Depreciation and amortization 20.3 24.1 39.9 48.5
Selling, administrative, research and
development, and general 27.3 26.3 55.8 54.4
------------------------------ ------------------------------
Total costs and expenses 491.0 524.3 1,019.8 1,036.7
------------------------------ ------------------------------
Operating income (loss) 51.5 .7 88.4 (32.3)
Other income (expense):
Interest expense (28.2) (27.4) (56.6) (55.1)
Other - net (6.5) 1.2 3.6 2.5
------------------------------ ------------------------------
Income (loss) before income taxes and minority
interests 16.8 (25.5) 35.4 (84.9)
(Provision) benefit for income taxes (6.4) 8.6 (13.7) 28.8
Minority interests .6 1.2 1.0 2.2
------------------------------ ------------------------------
Net income (loss) $ 11.0 $ (15.7) $ 22.7 $ (53.9)
============================== ==============================
Earnings (loss) per share:
Basic $ .14 $ (.20) $ .29 $ (.68)
Diluted $ .14 $ (.20) $ .29 $ (.68)
Weighted average shares outstanding (000):
Basic 79,541 79,377 79,474 79,266
Diluted 79,541 79,377 79,474 79,266
</TABLE>
The accompanying notes to interim consolidated financial
statements are an integral part of these statements.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(In millions of dollars)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------
2000 1999
------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 22.7 $ (53.9)
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Depreciation and amortization (including deferred
financing costs of $2.2 and $2.1) 42.1 50.6
Gain on sale of interest in AKW joint venture - (50.5)
Equity in loss (income) of unconsolidated
affiliates, net of distributions 7.9 (4.2)
Minority interests (1.0) (2.2)
(Increase) decrease in receivables (104.1) 11.0
Decrease in inventories 66.5 18.8
Decrease (increase) in prepaid expenses and other
current assets 30.4 (37.4)
Decrease in accounts payable (associated with
operating activities) and accrued interest (12.1) (25.2)
(Increase) decrease in payable to affiliates and
other accrued liabilities (10.1) 4.3
Increase (decrease) in accrued and deferred
income taxes 4.7 (36.5)
(Decrease) increase in net long-term assets and
liabilities (49.1) 11.1
Other 1.2 1.3
------------------------------
Net cash used by operating activities (.9) (112.8)
------------------------------
Cash flows from investing activities:
Capital expenditures (85.8) (30.3)
Accounts payable - Gramercy-related capital
expenditures 23.9 -
Gramercy-related property damage insurance recoveries 24.0 -
Net proceeds from disposition of property and
investments 15.5 70.9
Other 1.6 (.3)
------------------------------
Net cash provided (used) by investing
activities (20.8) 40.3
------------------------------
Cash flows from financing activities:
Borrowings under revolving credit facility, net 27.2 -
Repayments of long-term debt (4.3) (.3)
Capital stock issued - 1.3
Decrease in restricted cash, net - .8
Redemption of minority interests' preference stock (2.5) (1.4)
------------------------------
Net cash provided by financing activities 20.4 .4
------------------------------
Net decrease in cash and cash equivalents during the period (1.3) (72.1)
Cash and cash equivalents at beginning of period 21.2 98.3
------------------------------
Cash and cash equivalents at end of period $ 19.9 $ 26.2
==============================
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest $ 54.5 $ 53.0
Income taxes paid 7.6 8.8
</TABLE>
The accompanying notes to interim consolidated financial
statements are an integral part of these statements.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except prices and per share amounts)
1. GENERAL
Kaiser Aluminum Corporation (the "Company") is a subsidiary
of MAXXAM Inc. ("MAXXAM"). MAXXAM and one of its wholly owned
subsidiaries together own approximately 63% of the Company's
Common Stock with the remaining approximately 37% publicly held.
The Company operates through its subsidiary, Kaiser Aluminum &
Chemical Corporation ("KACC").
The foregoing unaudited interim consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial information
and the rules and regulations of the Securities and Exchange
Commission. Accordingly, these financial statements do not
include all of the disclosures required by generally accepted
accounting principles for complete financial statements. These
unaudited interim consolidated financial statements should be
read in conjunction with the audited consolidated financial
statements for the year ended December 31, 1999. In the opinion
of management, the unaudited interim consolidated financial
statements furnished herein include all adjustments, all of which
are of a normal recurring nature, necessary for a fair statement
of the results for the interim periods presented.
The preparation of financial statements in accordance with
generally accepted accounting principles requires the use of
estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and
liabilities known to exist as of the date the financial
statements are published, and the reported amounts of revenues
and expenses during the reporting period. Uncertainties with
respect to such estimates and assumptions are inherent in the
preparation of the Company's consolidated financial statements;
accordingly, it is possible that the actual results could differ
from these estimates and assumptions, which could have a material
effect on the reported amounts of the Company's consolidated
financial position and results of operations.
Operating results for the quarter and six-month periods
ended June 30, 2000, are not necessarily indicative of the
results that may be expected for the year ending December 31,
2000.
LABOR RELATED COSTS
KACC has been operating five of its U.S. facilities with
salaried employees and other workers as a result of the September
30, 1998, strike by the United Steelworkers of America ("USWA")
and the subsequent "lock-out" by KACC in January 1999. As
previously announced, in June 2000, KACC and USWA representatives
agreed to a methodology to resolve the remaining differences
between the parties. During July 2000, the USWA announced that
its members had voted to accept this methodology. Under the
agreement between KACC and the USWA, the parties continued to
negotiate certain matters until mid-August. Since KACC and the
USWA were unable to reach a complete agreement, the parties
will proceed with binding arbitration. The arbitration will be
completed by mid-September 2000 and it is expected that the USWA
workers will return to the plants during September and October 2000.
As certain financial terms remain to be arbitrated,
the Company cannot currently estimate the financial
statement impact of the pending labor settlement. While KACC
expects that many of its labor and financial objectives will be
achieved in the pending settlement, it is anticipated that the
labor settlement will result in certain one time charges and re-
integration costs.
The Company has continued to accrue certain benefits (such
as pension and other postretirement benefit costs/liabilities)
for the USWA members during the period of the strike and
subsequent lock-out. For purposes of computing the benefit-
related costs and liabilities to be reflected in the accompanying
interim consolidated financial statements, the Company based its
accruals on the terms of the previously existing (expired) USWA
contract. Any differences between the amounts accrued and the
amounts ultimately agreed to as a result of the above-described
process will be reflected in future results during the term of
any new contract.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 133 requires companies to recognize
all derivative instruments as assets or liabilities in the
balance sheet and to measure those instruments at fair value.
Under SFAS No. 133, the Company will be required to "mark-to-
market" its hedging positions at each period-end in advance of
recording the physical transactions to which the hedges relate.
Changes in the fair value of the Company's open hedging positions
will be reflected as an increase or reduction in stockholders'
equity through comprehensive income. The impact of the changes
in fair value of the Company's hedging positions will reverse out
of comprehensive income (net of any fluctuations in other "open"
positions) and will be reflected in traditional net income when
the subsequent physical transactions occur. Currently, the
dollar amount of the Company's comprehensive income adjustments
is not significant so there is not a significant difference
between "traditional" net income and comprehensive income.
However, differences between comprehensive income and traditional
net income may become significant in future periods as SFAS No.
133 will result in fluctuations in comprehensive income and
stockholders' equity in periods of price volatility, despite the
fact that the Company's cash flow and earnings will be "fixed" to
the extent hedged. This result is contrary to the intent of the
Company's hedging program, which is to "lock-in" a price (or
range of prices) for products sold/used so that earnings and cash
flows are subject to reduced risk of volatility.
Adoption of SFAS No. 133 is required on or before January 1,
2001. The Company will likely implement SFAS No. 133 as of
January 1, 2001.
EARNINGS (LOSS) PER SHARE
Basic - Basic earnings (loss) per share is computed by dividing
net income (loss) by the weighted average number of shares of
Common Stock outstanding during the period including the weighted
average impact of the shares of Common Stock issued during the
year from the date(s) of issuance.
Diluted - The impact of outstanding stock options was excluded
from the computation of diluted earnings (loss) per share for the
quarter and six-month periods ended June 30, 2000 and 1999, as
its effect would have been antidilutive.
2. INCIDENT AT GRAMERCY FACILITY
In July 1999, KACC's Gramercy, Louisiana alumina refinery
was extensively damaged by an explosion in the digestion area of
the plant. A number of employees were injured in the incident,
several of them severely. As a result of the incident, alumina
production at the facility was completely curtailed.
Construction on the damaged part of the facility began during the
first quarter of 2000. Initial production at the plant is
currently expected to commence during the third quarter of 2000.
Based on current estimates, full production is expected to be
achieved during the first quarter of 2001. KACC has received the
regulatory permit required to operate the plant once the facility
is ready to resume production.
The cause of the incident is under investigation by KACC and
governmental agencies. In January 2000, the U.S. Mine Safety and
Health Administration ("MSHA") issued 21 citations and in March
2000 proposed that KACC be assessed a penalty of $.5 in
connection with its investigation of the incident. The citations
allege, among other things, that certain aspects of the plant's
operations were unsafe and that such mode of operation
contributed to the explosion. KACC disagrees with the substance
of the citations and has challenged them and the associated
penalty. It is possible that other civil or criminal fines or
penalties could be levied against KACC. However, as more fully
explained below, based on what is known to date and discussions
with the Company's advisors, the Company believes that the
financial impact of this incident on operating results (in excess
of insurance deductibles and self-retention provisions) will be
largely offset by insurance coverage. Deductibles and self-
retention provisions under the insurance coverage for the
incident total $5.0, which amounts were charged to Cost of
products sold in the third quarter of 1999.
KACC has significant amounts of insurance coverage related
to the Gramercy incident. KACC's insurance coverage has five
separate components: property damage, clean-up and site
preparation, business interruption, liability and workers'
compensation. The insurance coverage components are discussed
below.
Property Damage. KACC's insurance policies provide that
KACC will be reimbursed for the costs of repairing or rebuilding
the damaged portion of the facility using new materials of like
kind and quality with no deduction for depreciation. In 1999,
based on discussions with the insurance carriers and their
representatives and third party engineering reports, KACC
recorded a minimum expected property damage reimbursement amount
of $100. The amount was classified as a receivable in Other
assets, as such proceeds, when received, will be invested in
property, plant and equipment.
During the quarter ended June 30, 2000, there was
approximately $48.0 of Gramercy-related capital spending. During
the quarter ended June 30, 2000, $24.0 of the insurance proceeds
received were reflected as a reduction of the minimum property
damage receivable based on the percentage of minimum expected
costs to be funded by insurance proceeds to total rebuild costs.
The balance of the minimum property damage receivable of $76.0
will be reduced during the last six months of 2000 as insurance
recoveries are received and construction continues.
Clean-up and Site Preparation. The Gramercy facility
incurred incremental costs for clean-up and other activities
during 1999 and has continued to incur such costs during 2000.
These clean-up and site preparation activities have been offset
by accruals of approximately $24.9, of which $6.6 and $10.9 were
accrued during the quarter and six-month periods ended June 30,
2000, for estimated insurance recoveries.
Business Interruption. KACC's insurance policies provide
for the reimbursement of specified continuing expenses incurred
during the interruption period plus lost profits (or less
expected losses) plus other expenses incurred as a result of the
incident. Operations at the Gramercy facility and a sister
facility in Jamaica, which supplies bauxite to Gramercy, will
continue to incur operating expenses until full production at the
Gramercy facility is restored. KACC will also incur increased
costs as a result of agreements to supply certain of Gramercy's
major customers with alumina, despite the fact that KACC had
declared force majeure with respect to the contracts shortly
after the incident. KACC is purchasing alumina from third
parties, in excess of the amounts of alumina available from other
KACC-owned facilities, to supply these customers' needs as well
as to meet intersegment requirements. The excess cost of such
open market purchases is expected to be substantially offset by
insurance recoveries. However, if certain sublimits within
KACC's insurance coverage were deemed to apply, the Company's and
KACC's results could be negatively affected. In consideration of
the foregoing items, as of June 30, 2000, KACC had recorded
expected business interruption insurance recoveries totaling
$106.8, of which $40.5 and $65.8 were recorded during the quarter
and six-month periods ended June 30, 2000, as a reduction of Cost
of products sold. These amounts substantially offset actual
expenses incurred during the periods. Such business interruption
insurance amounts represent estimates of KACC's business
interruption coverage based on discussions with the insurance
carriers and their representatives and are therefore subject to
change.
Since production has been completely curtailed at the
Gramercy facility, KACC has, for the time being, suspended
depreciation at the facility. Depreciation expense for the first
six months of 1999 was approximately $6.0. Once production of
the facility is restored, depreciation will re-commence. Such
depreciation is expected to exceed prior historical rates
primarily due to the increased capital costs on the newly
constructed assets.
Liability. The incident has also resulted in more than
sixty individual and class action lawsuits being filed against
KACC alleging, among other things, property damage and personal
injury. In addition, a claim for alleged business interruption
losses has been made by a neighboring business. The aggregate
amount of damages sought in the lawsuits and other claims cannot
be determined at this time; however, KACC does not currently
believe the damages will exceed the amount of coverage under its
liability policies.
Workers' Compensation. Claims relating to all of the
injured employees are expected to be covered under KACC's
workers' compensation or liability policies. However, the
aggregate amount of workers' compensation claims cannot be
determined at this time and it is possible that such claims could
exceed KACC's coverage limitations. While it is presently
impossible to determine the aggregate amount of claims that may
be incurred, or whether they will exceed KACC's coverage
limitations, KACC currently believes that any amount in excess of
the coverage limitations will not have a material effect on the
Company's consolidated financial position or liquidity. However,
it is possible that as additional facts become available,
additional charges may be required and such charges could be
material to the period in which they are recorded.
Timing of Insurance Recoveries. From the date of the
Gramercy incident through June 30, 2000, KACC had expended or
incurred costs or losses associated with the Gramercy incident
(that were not capital expenditures) totaling $131.7, consisting
of clean-up, site preparation and business interruption costs.
From the date of the Gramercy incident through June 30, 2000,
$88.1 of insurance recoveries related to these costs had been
received. In addition, during the second quarter of 2000, KACC
spent approximately $48.0 on Gramercy-related construction
activities and received insurance recoveries of $24.0 for capital
expenditures related to the minimum property damage receivable.
Gramercy-related capital spending prior to the second quarter of
2000 was not significant. KACC continues to work with the
insurance carriers to maximize the amount of recoveries and to
minimize, to the extent possible, the period of time between when
KACC expends funds and when it is reimbursed. However, KACC will
likely have to continue to fund an average of 30 - 60 days of
property damage and business interruption activity, unless some
other arrangement is agreed with the insurance carriers, and such
amounts will be significant. The Company believes it has
sufficient financial resources to fund the construction and
business interruption costs on an interim basis. However, no
assurances can be given in this regard.
3. WASHINGTON SMELTERS' OPERATING LEVEL
As previously announced, as a result of unprecedented high
market prices for power in the Pacific Northwest, the Company has
temporarily curtailed approximately 128,000 tons of its annual
primary aluminum production at the Tacoma and Mead, Washington
smelters and has sold 100 megawatts of power that it had under
contract through June 30, 2001. As a result of the curtailment,
the Company will avoid the need to purchase power on a variable
cost basis. Additionally, the sale of power is expected to
substantially mitigate the cash impact of the potline curtailment
over the contract period for which the power was sold. To
implement the curtailment, the Company has temporarily curtailed
the two and one-half operating potlines at its Tacoma smelter and
two and one-half out of a total of eight potlines at its Mead
smelter. One-half of a potline at the Tacoma smelter was already
curtailed.
As a result of the sale of the power, the Company recorded a
net pre-tax gain of approximately $15.8, which amount was
composed of gross proceeds of $31.3 offset by incremental excess
power costs in the second quarter, employee termination expenses
and other fixed commitments. The net gain was recorded as a
reduction of Cost of products sold.
4. INVENTORIES
The classification of inventories is as follows:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------------------------
<S> <C> <C>
Finished fabricated aluminum products $ 92.3 $ 118.5
Primary aluminum and work in process 166.0 189.4
Bauxite and alumina 96.0 124.1
Operating supplies and repair and maintenance parts 125.3 114.1
------------------------------
Total $ 479.6 $ 546.1
==============================
</TABLE>
Substantially all product inventories are stated at last-in,
first-out (LIFO) cost, not in excess of market. Replacement cost
is not in excess of LIFO cost.
5. CONTINGENCIES
ENVIRONMENTAL CONTINGENCIES
The Company and KACC are subject to a number of
environmental laws, to fines or penalties assessed for alleged
breaches of such environmental laws, and to claims and litigation
based upon such laws. KACC currently is subject to a number of
claims under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended by the
Superfund Amendments Reauthorization Act of 1986 ("CERCLA"), and,
along with certain other entities, has been named as a
potentially responsible party for remedial costs at certain
third-party sites listed on the National Priorities List under
CERCLA.
Based on the Company's evaluation of these and other
environmental matters, the Company has established environmental
accruals primarily related to potential solid waste disposal and
soil and groundwater remediation matters. At June 30, 2000, the
balance of such accruals, which are primarily included in Long-
term liabilities, was $46.6. These environmental accruals
represent the Company's estimate of costs reasonably expected to
be incurred based on presently enacted laws and regulations,
currently available facts, existing technology, and the Company's
assessment of the likely remediation actions to be taken. The
Company expects that these remediation actions will be taken over
the next several years and estimates that annual expenditures to
be charged to these environmental accruals will be approximately
$3.0 to $9.0 for the years 2000 through 2004 and an aggregate of
approximately $20.0 thereafter.
As additional facts are developed and definitive remediation
plans and necessary regulatory approvals for implementation of
remediation are established or alternative technologies are
developed, changes in these and other factors may result in
actual costs exceeding the current environmental accruals. The
Company believes that it is reasonably possible that costs
associated with these environmental matters may exceed current
accruals by amounts that could range, in the aggregate, up to an
estimated $41.0. As the resolution of these matters is subject
to further regulatory review and approval, no specific assurance
can be given as to when the factors upon which a substantial
portion of this estimate is based can be expected to be resolved.
However, the Company is currently working to resolve certain of
these matters.
The Company believes that KACC has insurance coverage
available to recover certain incurred and future environmental
costs and is actively pursuing claims in this regard. No
assurances can be given that the Company will be successful in
attempts to recover incurred or future costs from insurers or
that the amount of recoveries received will ultimately be
adequate to cover costs incurred.
While uncertainties are inherent in the final outcome of
these environmental matters, and it is presently impossible to
determine the actual costs that ultimately may be incurred,
management currently believes that the resolution of such
uncertainties should not have a material adverse effect on the
Company's consolidated financial position, results of operations,
or liquidity.
ASBESTOS CONTINGENCIES
KACC is a defendant in a number of lawsuits, some of which
involve claims of multiple persons, in which the plaintiffs
allege that certain of their injuries were caused by, among other
things, exposure to asbestos during, and as a result of, their
employment or association with KACC or exposure to products
containing asbestos produced or sold by KACC. The lawsuits
generally relate to products KACC has not sold for at least 20
years. At June 30, 2000, the number of such claims pending was
approximately 110,000, as compared with 100,000 at December 31,
1999. During 1999, approximately 29,300 of such claims were
received and 15,700 were settled or dismissed. During the
quarter and six-month periods ended June 30, 2000, approximately
8,300 and 14,700 of such claims were received and 3,600 and 4,700
of such claims were settled or dismissed. The foregoing claim
and settlement figures as of and for the quarter and six-month
periods ended June 30, 2000, do not reflect the fact that as of
June 30, 2000, KACC had reached agreements under which it expects
to settle approximately 71,800 of the pending asbestos-related
claims over an extended period.
The Company maintains a liability for estimated asbestos-
related costs for claims filed to date and an estimate of claims
to be filed over a 10 year period (i.e., through 2009). The
Company's estimate is based on the Company's view, at each
balance sheet date, of the current and anticipated number of
asbestos-related claims, the timing and amounts of asbestos-
related payments, the status of ongoing litigation and settlement
initiatives, and the advice of Wharton Levin Ehrmantraut Klein &
Nash, P.A., with respect to the current state of the law related
to asbestos claims. However, there are inherent uncertainties
involved in estimating asbestos-related costs and the Company's
actual costs could exceed the Company's estimates due to changes
in facts and circumstances after the date of each estimate.
Further, while the Company does not presently believe there is a
reasonable basis for estimating asbestos-related costs beyond
2009 and, accordingly, no accrual has been recorded for any costs
which may be incurred beyond 2009, the Company expects that such
costs may continue beyond 2009, and that such costs could be
substantial. As of June 30, 2000, an estimated asbestos-related
cost accrual of $377.8, before consideration of insurance
recoveries, has been reflected in the accompanying interim
consolidated financial statements primarily in Long-term
liabilities. The Company estimates that annual future cash
payments for asbestos-related costs will range from approximately
$75.0 to $100.0 in the years 2000 to 2002, approximately $35.0
for each of the years 2003 and 2004, and an aggregate of
approximately $50.0 thereafter.
The Company believes that KACC has insurance coverage
available to recover a substantial portion of its asbestos-
related costs. Although the Company has settled asbestos-related
coverage matters with certain of its insurance carriers, other
carriers have not yet agreed to settlements. The timing and
amount of future recoveries from these and other insurance
carriers will depend on the pace of claims review and processing
by such carriers and on the resolution of any disputes regarding
coverage under such policies. The Company believes that
substantial recoveries from the insurance carriers are probable.
The Company reached this conclusion after considering its prior
insurance-related recoveries in respect of asbestos-related
claims, existing insurance policies, and the advice of Heller
Ehrman White & McAuliffe LLP with respect to applicable insurance
coverage law relating to the terms and conditions of those
policies. Accordingly, an estimated aggregate insurance recovery
of $319.9, determined on the same basis as the asbestos-related
cost accrual, is recorded primarily in Other assets at June 30,
2000. However, no assurance can be given that KACC will be able
to project similar recovery percentages for future asbestos-
related claims or that the amounts related to future asbestos-
related claims will not exceed KACC's aggregate insurance
coverage.
Management continues to monitor claims activity, the status
of lawsuits (including settlement initiatives), legislative
developments, and costs incurred in order to ascertain whether an
adjustment to the existing accruals should be made to the extent
that historical experience may differ significantly from the
Company's underlying assumptions. While uncertainties are
inherent in the final outcome of these asbestos matters and it is
presently impossible to determine the actual costs that
ultimately may be incurred and insurance recoveries that will be
received, management currently believes that, based on the
factors discussed in the preceding paragraphs, the resolution of
asbestos-related uncertainties and the incurrence of asbestos-
related costs net of related insurance recoveries should not have
a material adverse effect on the Company's consolidated financial
position or liquidity. However, as the Company's estimates are
periodically re-evaluated, additional charges may be necessary
and such charges could be material to the results of the period
in which they are recorded.
LABOR MATTERS
In connection with the USWA strike and subsequent lock-out
by KACC, certain allegations of unfair labor practices ("ULPs")
have been filed with the National Labor Relations Board ("NLRB")
by the USWA. As previously disclosed, KACC responded to all such
allegations and believes that they were without merit. In July
1999, the Oakland, California, regional office of the NLRB
dismissed all material charges filed against KACC. In September
1999, the union filed an appeal of this ruling with the NLRB
general counsel's office in Washington, D.C. In April 2000, KACC
was notified by the general counsel of the NLRB of the dismissal
of twenty-two of twenty-four allegations of ULPs previously
brought against it by the USWA. In June 2000, the general
counsel of the NLRB directed the Oakland Regional Office to issue
a complaint on two allegations for trial before an administrative
law judge. The Regional Office issued such a complaint in late
June 2000. A trial date has been set for November 2000. Any
outcome from the trial before the administrative law judge would
be subject to an additional appeal either by the USWA or KACC.
This process could take months or years. If these proceedings
eventually resulted in a definitive ruling against KACC, it could
be obligated to provide back pay to USWA members at the five
plants and such amount could be significant. However, while
uncertainties are inherent in the final outcome of such matters,
the Company believes that the resolution of the alleged ULPs
should not result in a material adverse effect on the Company's
consolidated financial position, results of operations, or
liquidity.
OTHER CONTINGENCIES
The Company or KACC is involved in various other claims,
lawsuits, and other proceedings relating to a wide variety of
matters. While uncertainties are inherent in the final outcome
of such matters, and it is presently impossible to determine the
actual costs that ultimately may be incurred, management
currently believes that the resolution of such uncertainties and
the incurrence of such costs should not have a material adverse
effect on the Company's consolidated financial position, results
of operations, or liquidity.
See Note 10 of Notes to Consolidated Financial Statements
for the year ended December 31, 1999.
6. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING
PROGRAMS
At June 30, 2000, the net unrealized loss on KACC's position
in aluminum forward sales and option contracts, (excluding the
impact of those contracts discussed below which have been marked
to market), energy forward purchase and option contracts, and
forward foreign exchange contracts, was approximately $24.9
(based on applicable quarter-end published market prices). As
KACC's hedging activities are generally designed to lock-in a
specified price or range of prices, gains or losses on the
derivative contracts utilized in these hedging activities will
generally be offset by losses or gains, respectively, on the
transactions being hedged.
ALUMINA AND ALUMINUM
The Company's earnings are sensitive to changes in the
prices of alumina, primary aluminum and fabricated aluminum
products, and also depend to a significant degree upon the volume
and mix of all products sold. Primary aluminum prices have
historically been subject to significant cyclical price
fluctuations. Alumina prices as well as fabricated aluminum
product prices (which vary considerably among products) are
significantly influenced by changes in the price of primary
aluminum but generally lag behind primary aluminum price changes
by up to three months. Since 1993, the Average Midwest United
States transaction price for primary aluminum has ranged from
approximately $.50 to $1.00 per pound.
From time to time in the ordinary course of business, KACC
enters into hedging transactions to provide price risk management
in respect of the net exposure of earnings and cash flows
resulting from (I) anticipated sales of alumina, primary aluminum
and fabricated aluminum products, less (ii) expected purchases of
certain items, such as aluminum scrap, rolling ingot, and
bauxite, whose prices fluctuate with the price of primary
aluminum. Forward sales contracts are used by KACC to
effectively fix the price that KACC will receive for its
shipments. KACC also uses option contracts (I) to establish a
minimum price for its product shipments, (ii) to establish a
"collar" or range of prices for KACC's anticipated sales, and/or
(iii) to permit KACC to realize possible upside price movements.
As of June 30, 2000, KACC had entered into option contracts that
established a price range for 136,000, 362,000 and 161,000 tons*
of primary aluminum with respect to 2000, 2001 and 2002,
respectively.
Additionally, as of June 30, 2000, KACC had also entered
into a series of transactions with a counterparty that will
provide KACC with a premium over the forward market prices at the
date of the transaction for 2,000 tons of primary aluminum per
month during the period July 2000 through June 2001. KACC also
contracted with the counterparty to receive certain fixed prices
(also above the forward market prices at the date of the
transaction) on 4,000 tons of primary aluminum per month over a
three year period commencing October 2001, unless market prices
during certain periods decline below a stipulated "floor" price,
in which case, the fixed price sales portion of the transactions
terminate. The price at which the October 2001 and later
transactions terminate is well below current market prices.
While the Company believes that the October 2001 and later
transactions are consistent with its stated hedging objectives,
these positions do not qualify for treatment as a "hedge" under
current accounting guidelines. Accordingly, these positions will
be "marked-to-market" each period. For the quarter ended June
30, 2000, the Company recorded mark-to-market pre-tax charges of
$6.0 and for the six months ended June 30, 2000, recorded mark-
to-market pre-tax gains of $8.4 in Other income (expense)
associated with the transactions described in this paragraph.
As of June 30, 2000, KACC had sold forward virtually all of
the alumina available to it in excess of its projected internal
-----------------
* All references to tons in this report refer to metric tons of
2,204.6 pounds.
smelting requirements for 2000, 2001 and 2002 at prices indexed
to future prices of primary aluminum.
ENERGY
KACC is exposed to energy price risk from fluctuating prices
for fuel oil, diesel oil and natural gas consumed in the
production process. KACC from time to time in the ordinary
course of business enters into hedging transactions with major
suppliers of energy and energy related financial instruments. As
of June 30, 2000, KACC held option contracts for the purchase of
approximately 13,500 MMBtu of natural gas per day for the period
October 2000 through December 2000 and 9,500 MMBtu of natural
gas per day for the period January 2001 through June 2001. As of
June 30, 2000, KACC also held a combination of fixed price
purchase and option contracts for an average of 232,000 barrels
per month of fuel oil for the remainder of 2000.
FOREIGN CURRENCY
KACC enters into forward exchange contracts to hedge
material cash commitments to foreign subsidiaries or affiliates.
At June 30, 2000, KACC had net forward foreign exchange contracts
for the purchase of 149.5 Australian dollars from July 2000
through July 2001, in respect of its Australian dollar dominated
commitments from July 2000 through July 2001. In addition, KACC
has entered into option contracts that establish a price range
for the purchase of 30.0 Australian dollars for the period July
2000 through June 2001.
See Note 11 of the Notes to Consolidated Financial
Statements for the year ended December 31, 1999.
7. SIGNIFICANT ACQUISITIONS AND DISPOSITIONS
In May 2000, KACC, through a wholly-owned subsidiary,
acquired the assets of a drawn tube aluminum fabricating
operation in Chandler, Arizona. Total consideration for the
acquisition was $16.1, consisting of cash payments of $15.1 and
assumed current liabilities of $1.0. The purchase price was
allocated to the assets acquired based on their estimated fair
values, of which approximately $1.1 was allocated to property,
plant and equipment and $2.8 was allocated to receivables,
inventory and prepaid expenses. The excess of the purchase price
over the fair value of the assets acquired (goodwill) was
approximately $12.2 and is being amortized on a straight-line
basis over 20 years. The acquisition is part of the Company's
continued emphasis on its Engineered products business unit.
Total revenues for the Chandler facility were approximately $13.8
for the year ended December 31, 1999 (unaudited).
During the quarter ended March 31, 2000, KACC, in the
ordinary course of business, sold certain non-operating
properties for total proceeds of approximately $12.0. The sale
did not have a material impact on the Company's operating results
for the six-month period ended June 30, 2000.
In February 2000, KACC completed the previously announced
sale of its Micromill assets and technology to a third party for
a nominal payment at closing and future payments based on
subsequent performance and profitability of the Micromill
technology. The sale did not have a material impact on the
Company's operating results for the six-month period ended June
30, 2000.
8. SUBSEQUENT EVENT
During August 2000, KACC agreed to sell certain power that
it had under contract for the third quarter of 2001.
The power being sold is in excess of KACC's current and expected
future operating requirements. The power sale, which is subject
to final documentation, will yield net proceeds, and is
expected to result in a pre-tax gain, of approximately $40.0
during the third quarter of 2000.
9. INTERIM OPERATING SEGMENT INFORMATION
The Company uses a portion of its bauxite, alumina and
primary aluminum production for additional processing at its
downstream facilities. Transfers between business units are made
at estimated market prices. The accounting policies of the
segments are the same as those described in Note 1 of Notes to
Consolidated Financial Statements for the year ended December 31,
1999. Business unit results are evaluated internally by
management before any allocation of corporate overhead and
without any charge for income taxes or interest expense. See
Note 12 of Notes to Consolidated Financial Statements for the
year ended December 31, 1999.
Financial information by operating segment for the quarters ended
June 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
2000 1999 2000 1999
---------------------------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Net Sales:
Bauxite and Alumina:
Net sales to unaffiliated
customers $ 120.2 $ 110.8 $ 221.0 $ 200.5
Intersegment sales 29.5 29.6 86.3 52.6
------------------------------ ------------------------------
149.7 140.4 307.3 253.1
------------------------------ ------------------------------
Primary Aluminum:
Net sales to unaffiliated
customers 130.6 100.5 257.7 189.6
Intersegment sales 57.5 63.1 139.6 112.2
------------------------------ ------------------------------
188.1 163.6 397.3 301.8
------------------------------ ------------------------------
Flat-Rolled Products 121.4 155.3 275.1 303.6
Engineered Products 145.0 137.8 304.5 271.3
Minority interests 25.3 20.6 49.9 39.4
Eliminations (87.0) (92.7) (225.9) (164.8)
------------------------------ ------------------------------
$ 542.5 $ 525.0 $ 1,108.2 $ 1,004.4
============================== ==============================
Operating income (loss):
Bauxite and Alumina $ 13.5 $ (3.5) $ 29.9 $ (11.3)
Primary Aluminum (3) 34.4 1.6 59.9 (20.5)
Flat-Rolled Products 7.2 7.5 10.3 14.9
Engineered Products 11.9 10.7 25.2 17.6
Micromill (5) - (3.0) (.6) (6.3)
Eliminations 1.2 1.9 (2.9) 5.5
Corporate and Other (16.7) (14.5) (33.4) (32.2)
------------------------------ ------------------------------
$ 51.5 $ .7 $ 88.4 $ (32.3)
============================== ==============================
Depreciation and amortization:
Bauxite and Alumina $ 6.0 $ 8.9 $ 12.0 $ 17.8
Primary Aluminum 6.2 7.0 12.4 14.3
Flat-Rolled Products 4.1 4.1 8.2 8.2
Engineered Products 3.5 2.6 6.3 5.3
Micromill (5) - .7 .2 1.4
Corporate and Other .5 .8 .8 1.5
------------------------------ ------------------------------
$ 20.3 $ 24.1 $ 39.9 $ 48.5
============================== ==============================
</TABLE>
(1) Net sales for the quarter and six-month periods ended June
30, 2000, included approximately 68,000 tons and 145,000
tons, respectively, of alumina purchased from third parties
and resold to certain unaffiliated customers of the Gramercy
facility and 15,000 tons and 54,000 tons, respectively, of
alumina purchased from third parties and transferred to the
Company's Primary aluminum business unit.
(2) Operating income (loss) for the quarter and six-month
periods ended June 30, 2000, included estimated business
interruption insurance recoveries totaling $40.5 and $65.8,
respectively.
(3) Operating income (loss) for the quarter and six-month
periods ended June 30, 2000, included a non-recurring pre-
tax gain of $15.8 relating to the sale of power. Operating
income (loss) for the quarter and six-month periods ended
June 30, 1999, included potline restart costs of $2.5 and
$9.6, respectively.
(4) Operating income (loss) for the quarter and six-month
periods ended June 30, 2000, included $.7 of non-recurring
pre-tax costs related to a product line exit.
(5) KACC's Micromill assets and technology were sold to a third
party in February 2000.
(6) Operating income (loss) for the quarter and six-month
periods ended June 30, 2000, included approximately $1.5 and
$3.5, respectively, of non-recurring expenses related to
Corporate staff cost reduction and efficiency initiatives.
(7) Depreciation was suspended for the Gramercy facility for the
last six months of 1999 and the first six months of 2000, as
a result of the July 5, 1999, incident. Depreciation
expense for the Gramercy facility for the six months ended
June 30, 1999, was approximately $6.0.
Excluding the capital expenditures made during the first six
months of 2000 related to the rebuilding of the Gramercy
facility, which affected the Bauxite and Alumina segment, and the
purchase of the capital assets of a drawn tube aluminum
fabricating operation, which affected the Engineering Products
segment, there were no material changes in segment assets since
December 31, 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
This section should be read in conjunction with the response
to Item 1, Part I, of this Report.
This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements appear in a
number of places in this section (see, for example, "Recent
Events and Developments," "Results of Operations," and "Liquidity
and Capital Resources"). Such statements can be identified by
the use of forward-looking terminology such as "believes,"
"expects," "may," "estimates," "will," "should," "plans" or
"anticipates" or the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy.
Readers are cautioned that any such forward-looking statements
are not guarantees of future performance and involve significant
risks and uncertainties, and that actual results may vary
materially from those in the forward-looking statements as a
result of various factors. These factors include the
effectiveness of management's strategies and decisions, general
economic and business conditions, developments in technology, new
or modified statutory or regulatory requirements, and changing
prices and market conditions. This section and Part I, Item 1.
"Business - Factors Affecting Future Performance" in the
Company's Annual Report on Form 10-K for the year ended December
31, 1999, each identify other factors that could cause actual
results to vary. No assurance can be given that these are all of
the factors that could cause actual results to vary materially
from the forward-looking statements.
RECENT EVENTS AND DEVELOPMENTS
INCIDENT AT GRAMERCY FACILITY
In July 1999, KACC's Gramercy, Louisiana alumina refinery
was extensively damaged by an explosion in the digestion area of
the plant. See Note 2 of Notes to Interim Consolidated Financial
Statements for a full discussion regarding the incident at the
Gramercy facility.
Construction on the damaged part of the facility began
during the first quarter of 2000. Initial production at the
plant is currently expected to commence during the third quarter
of 2000. Based on current estimates, full production is expected
to be achieved during the first quarter of 2001. KACC has
received the regulatory permit required to operate the plant once
the facility is ready to resume production.
In March 2000, the U.S. Mine Safety and Health
Administration ("MSHA") proposed that KACC be assessed a penalty
of $.5 million in connection with the citations issued from its
investigation of the incident. KACC disagrees with the substance
of the previously issued MSHA citations and has challenged them
and the associated penalty. However, it is possible that other
civil or criminal fines or penalties could be levied against
KACC.
From the date of the Gramercy incident through June 30,
2000, KACC had expended or incurred costs or losses associated
with the Gramercy incident totaling $131.7 million, consisting of
clean-up, site preparation and business interruption costs. From
the date of the Gramercy incident through June 30, 2000, $88.1
million of insurance recoveries related to these costs had been
received. In addition, during the second quarter of 2000, KACC
spent approximately $48.0 million on Gramercy-related
construction activities and received $24.0 million of insurance
recoveries for capital expenditures related to the rebuilding of
the Gramercy facility. Gramercy-related capital spending prior
to the second quarter of 2000 was not significant.
WASHINGTON SMELTERS' OPERATING LEVEL
As previously announced, as a result of unprecedented high
market prices for power in the Pacific Northwest, the Company
has temporarily curtailed approximately 128,000 tons of its
annual primary aluminum production at the Tacoma and Mead,
Washington smelters and has sold 100 megawatts of power that it
had under contract through June 30, 2001. As a result of the
curtailment, the Company will avoid the need to purchase power on
a variable cost basis. Additionally, the sale of power is
expected to substantially mitigate the cash impact of the potline
curtailment over the contract period for which the power was
sold. To implement the curtailment, the Company has temporarily
curtailed the two and one-half operating potlines at its Tacoma
smelter and two and one-half out of a total of eight potlines at
its Mead smelter. One-half of a potline at the Tacoma smelter
was already curtailed.
As a result of the sale of the power, the Company recorded a
net pre-tax gain of approximately $15.8 million, which amount was
composed of gross proceeds of $31.3 million offset by incremental
excess power costs in the second quarter, employee termination
expenses and other fixed commitments. The net gain was recorded
as a reduction of Cost of products sold.
LABOR MATTERS
Substantially all of KACC's hourly workforce at its
Gramercy, Louisiana, alumina refinery, Mead and Tacoma,
Washington, aluminum smelters, Trentwood, Washington, rolling
mill, and Newark, Ohio, extrusion facility were covered by a
master labor agreement with the United Steelworkers of America
(the "USWA") which expired on September 30, 1998. The parties
did not reach an agreement prior to the expiration of the master
agreement and the USWA chose to strike. In January 1999, KACC
declined an offer by the USWA to have the striking workers return
to work at the five plants without a new agreement. KACC imposed
a lock-out to support its bargaining position and continues to
operate the plants with salaried employees and other workers as
it has since the strike began.
As previously announced, in June 2000, KACC and USWA
representatives agreed to a methodology to resolve the remaining
differences between the parties. During July 2000, the USWA
announced that its members had voted to accept this methodology.
Under the agreement between KACC and the USWA, the parties
continued to negotiate certain matters until mid-August. Since
KACC and the USWA were unable to reach a complete agreement,
the parties will proceed with binding arbitration. The
arbitration will be completed by mid-September 2000 and
it is expected that the USWA workers will return to the
plants during September and October 2000.
As certain financial terms remain to be arbitrated, the
Company cannot currently estimate the financial statement
impact of the pending labor settlement. While KACC
expects that many of its labor and financial objectives will be
achieved in the pending settlement, it is anticipated that the
labor settlement will result in certain one time charges and re-
integration costs.
In connection with the USWA strike and subsequent lock-out
by KACC, certain allegations of unfair labor practices ("ULPs")
have been filed with the National Labor Relations Board ("NLRB")
by the USWA. As previously disclosed, KACC responded to all such
allegations and believes that they were without merit. In July
1999, the Oakland, California, regional office of the NLRB
dismissed all material charges filed against KACC. In September
1999, the union filed an appeal of this ruling with the NLRB
general counsel's office in Washington, D.C. In April 2000, KACC
was notified by the general counsel of the NLRB of the dismissal
of twenty-two of twenty-four allegations of ULPs previously
brought against it by the USWA. In June 2000, the general
counsel of the NLRB directed the Oakland Regional Office to issue
a complaint on two allegations for trial before an administrative
law judge. The Regional Office issued such a complaint in late
June 2000. A trial date has been set for November 2000. Any
outcome from the trial before the administrative law judge would
be subject to an additional appeal either by the USWA or KACC.
This process could take months or years. If these proceedings
eventually resulted in a definitive ruling against KACC, it could
be obligated to provide back pay to USWA members at the five
plants and such amount could be significant. However, while
uncertainties are inherent in the final outcome of such matters,
the Company believes that the resolution of the alleged ULPs
should not result in a material adverse effect on the Company's
consolidated financial position, results of operations, or
liquidity.
STRATEGIC INITIATIVES
KACC's strategy is to improve its financial results by:
increasing the competitiveness of its existing plants; continuing
its cost reduction initiatives; adding assets to businesses it
expects to grow; pursuing divestitures of its non-core
businesses; and strengthening its financial position.
In addition to working to improve the performance of the
Company's existing assets, the Company has devoted significant
efforts analyzing its existing asset portfolio with the intent of
focusing its efforts and capital in sectors of the industry that
are considered most attractive and in which the Company believes
it is well positioned to capture value. This process has
continued in 2000. In the first quarter of 2000, KACC, in the
ordinary course of business, sold certain non-operating
properties and its Micromill assets and technology. In June
2000, KACC purchased the assets of a drawn tube aluminum
fabricating operation. This acquisition is part of the Company's
continued focus on growing its Engineered products operations.
Another area of emphasis has been a continuing focus on
managing the Company's legacy liabilities. The Company believes
that KACC has insurance coverage available to recover certain
incurred and future environmental costs and a substantial portion
of its asbestos-related costs and is actively pursuing claims in
this regard. The timing and amount of future recoveries of
asbestos-related claims from insurance carriers remain a major
priority of the Company, but will depend on the pace of claims
review and processing by such carriers and the resolution of any
disputes regarding coverage under the insurance policies.
Additional portfolio analysis and initiatives are
continuing.
FLAT-ROLLED PRODUCTS
In December 1999, the Company announced that its Flat-rolled
products business unit expects to accelerate its product mix
shift toward higher value-added product lines such as heat-treat,
beverage can lid and tab stock, automotive and other niche
businesses, and away from beverage can body stock. This process
should be completed during the fourth quarter of 2000, at which
point the Company will assess related issues such as employment
levels at the Trentwood facility. Although the shift in product
mix is expected to have a favorable impact on the Company's
results and financial position over the long term, it is possible
that such a product mix shift may result in certain one-time
charges.
SUBSEQUENT EVENT
During August 2000, KACC agreed to sell certain power that it
had under contract for the third quarter of 2001. The power being
sold is in excess of KACC's current and expected future operating
requirements. The power sale, which is subject to final
documentation, will yield net proceeds, and is expected to result
in a net pre-tax gain, of approximately $40.0 million during the
third quarter of 2000.
RESULTS OF OPERATIONS
As an integrated aluminum producer, the Company uses a
portion of its bauxite, alumina, and primary aluminum production
for additional processing at certain of its downstream
facilities. Intersegment transfers are valued at estimated
market prices. The following table provides selected operational
and financial information on a consolidated basis with respect to
the Company for the quarters and six-month periods ended June 30,
2000 and 1999. The following data should be read in conjunction
with the Company's interim consolidated financial statements and
the notes thereto, contained elsewhere herein. See Note 12 of
Notes to Consolidated Financial Statements for the year ended
December 31, 1999, for further information regarding segments.
Interim results are not necessarily indicative of those for
a full year.
SELECTED OPERATIONAL AND FINANCIAL INFORMATION
(Unaudited)
(In millions of dollars, except shipments and prices)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
2000 1999 2000 1999
--------------------------------------------------------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Shipments: (000 tons)
Alumina
Third Party 538.9 (1) 611.4 976.4 (1) 1,098.4
Intersegment 156.7 (1) 189.3 434.3 (1) 339.6
-------------- -------------- -------------- --------------
Total Alumina 695.6 800.7 1,410.7 1,438.0
-------------- -------------- -------------- --------------
Primary Aluminum
Third Party 86.1 69.0 165.5 131.9
Intersegment 37.5 46.3 85.4 85.8
-------------- -------------- -------------- --------------
Total Primary Aluminum 123.6 115.3 250.9 217.7
-------------- -------------- -------------- --------------
Flat-Rolled Products 39.0 59.0 90.8 111.5
-------------- -------------- -------------- --------------
Engineered Products 44.3 43.5 91.6 84.9
-------------- -------------- -------------- --------------
Average Realized Third Party Sales Price: (2)
Alumina (per ton) $ 204 $ 170 $ 204 $ 171
Primary Aluminum (per pound) $ .69 $ .66 $ .71 $ .65
Net Sales:
Bauxite and Alumina
Third Party (includes net sales of
bauxite) $ 120.2 (1)$ 110.8 $ 221.0 (1)$ 200.5
Intersegment 29.5 (1) 29.6 86.3 (1) 52.6
-------------- -------------- -------------- --------------
Total Bauxite & Alumina 149.7 140.4 307.3 253.1
-------------- -------------- -------------- --------------
Primary Aluminum
Third Party 130.6 100.5 257.7 189.6
Intersegment 57.5 63.1 139.6 112.2
-------------- -------------- -------------- --------------
Total Primary Aluminum 188.1 163.6 397.3 301.8
-------------- -------------- -------------- --------------
Flat-Rolled Products 121.4 155.3 275.1 303.6
Engineered Products 145.0 137.8 304.5 271.3
Minority Interests 25.3 20.6 49.9 39.4
Eliminations (87.0) (92.7) (225.9) (164.8)
-------------- -------------- -------------- --------------
Total Net Sales $ 542.5 $ 525.0 $ 1,108.2 $ 1,004.4
============== ============== ============== ==============
Operating Income (Loss):
Bauxite & Alumina $ 13.5 (3)$ (3.5) $ 29.9 (3)$ (11.3)
Primary Aluminum (4) 34.4 1.6 59.9 (20.5)
Flat-Rolled Products 7.2 7.5 10.3 14.9
Engineered Products 11.9 (5) 10.7 25.2 (5) 17.6
Micromill (6) - (3.0) (.6) (6.3)
Eliminations 1.2 1.9 (2.9) 5.5
Corporate (16.7)(7) (14.5) (33.4)(7) (32.2)
-------------- -------------- -------------- --------------
Total Operating Income (Loss) $ 51.5 $ .7 $ 88.4 $ (32.3)
============== ============== ============== ==============
Net Income (Loss) $ 11.0 $ (15.7) $ 22.7 $ (53.9)
============== ============== ============== ==============
Capital Expenditures $ 69.1 $ 13.8 $ 85.8 $ 30.3
============== ============== ============== ==============
</TABLE>
(1) Net sales for the quarter and six-month periods ended June
30, 2000, included approximately 68,000 tons and 145,000
tons of alumina purchased from third parties and resold to
certain unaffiliated customers and 15,000 tons and 54,000
tons, respectively, of alumina purchased from third parties
and transferred to the Company's Primary aluminum business
unit.
(2) Average realized prices for the Company's Flat-rolled
products and Engineered products segments are not presented
as such prices are subject to fluctuations due to changes in
product mix. Average realized third party sales prices for
alumina and primary aluminum include the impact of hedging
activities.
(3) Operating income (loss) for the quarter and six-month
periods ended June 30, 2000, included estimated business
interruption insurance recoveries totaling $40.5 and $65.8,
respectively. Additionally, depreciation was suspended for
the Gramercy facility, as a result of the July 5, 1999,
incident. Depreciation expense for the Gramercy facility
for the six months ended June 30, 1999, was approximately
$6.0.
(4) Operating income (loss) for the quarter and six-month
periods ended June 30, 2000, included a non-recurring pre-
tax gain of $15.8 relating to the sale of power. Operating
income (loss) for the quarter and six-month periods ended
June 30, 1999, included potline restart costs of $2.5 and
$9.6, respectively.
(5) Operating income (loss) for the quarter and six-month
periods ended June 30, 2000, included $.7 of non-recurring
pre-tax costs related to product line exit.
(6) KACC's Micromill assets and technology were sold to a third
party in February 2000.
(7) Operating income (loss) for the quarter and six-month
periods ended June 30, 2000, included approximately $1.5 and
$3.5, respectively, of non-recurring expenses related to
Corporate staff cost reduction and efficiency initiatives.
OVERVIEW
The Company's operating results are sensitive to changes in
prices of alumina, primary aluminum, and fabricated aluminum
products, and also depend to a significant degree on the volume
and mix of all products sold and on KACC's hedging strategies.
Primary aluminum prices have historically been subject to
significant cyclical price fluctuations. See Note 6 of Notes to
Interim Consolidated Financial Statements for a discussion of
KACC's hedging activities.
Changes in global, regional, or country-specific economic
conditions can have a significant impact on overall demand for
aluminum-intensive fabricated products in the transportation,
distribution, and packaging markets. Such changes in demand can
directly affect the Company's earnings by impacting the overall
volume and mix of such products sold. To the extent that these
end-use markets weaken, demand can also diminish for what the
Company sometimes refers to as the "upstream" products: alumina
and primary aluminum.
During 1999, the Average Midwest United States transaction
price ("AMT price") per pound of primary aluminum declined from
the low $.60 range at the beginning of the year to a low of
approximately $.57 per pound in February and then began a steady
increase ending 1999 at $.79 per pound. During the first quarter
of 2000, the average AMT price was $.79 per pound. During the
second quarter of 2000, the average AMT price was $.72 per pound,
however, in mid-June the price began to increase ending the
second quarter at approximately $.77 per pound. The average AMT
price for primary aluminum for the week ended July 28, 2000, was
approximately $.76 per pound.
QUARTER AND SIX MONTHS ENDED JUNE 30, 2000, COMPARED TO QUARTER
AND SIX MONTHS ENDED JUNE 30, 1999
SUMMARY
The Company reported net income of $11.0 million, or $.14 of
basic income per common share, for the second quarter of 2000,
compared to a net loss of $15.7 million, or $.20 of basic loss
per common share, for the same period of 1999. However, second
quarter 2000 results included a non-recurring pre-tax gain of
$15.8 million, or $.12 of basic income per share, relating to the
sale of power discussed above offset by certain non-recurring
pre-tax severance and relocation costs associated with Corporate
restructuring initiatives and product line exit of $2.0 million,
or $.02 of basic loss per common share. Results for the quarter
ended June 30, 2000, also included pre-tax losses of $6.0
million, ($.05 of basic loss per common share) to reflect mark-
to-market adjustments on certain primary aluminum hedging
transactions.
For the six-month period ended June 30, 2000, the Company
reported net income of $22.7 million, or $.29 of basic income per
common share, compared to a net loss of $53.9 million, or $.68 of
basic loss per common share, for the six-month period ended June
30, 1999. In addition to the second quarter 2000 non-recurring
items described above, results for the six months ended June 30,
2000, included pre-tax gains of $8.4 million ($.6 of basic income
per common share) to reflect mark-to-market adjustments on
certain primary aluminum hedging transactions.
Results for the quarter and six-month periods ended June 30,
1999, included three essentially offsetting items. A favorable
$50.5 million pre-tax gain on the sale of the Company's interests
in AKW L.P., an aluminum wheel joint venture, was offset by a
non-cash pre-tax charge of $38.0 million for asbestos-related
claims and a pre-tax charge of $13.5 million to reflect a mark-
to-market adjustment on certain primary aluminum hedging
transactions.
Net sales in the second quarter of 2000 totaled $542.5
million compared to $525.0 million in the second quarter of 1999.
Net sales for the six-month period ended June 30, 2000, totaled
$1,108.2 million compared to $1,004.4 million for the six-month
period ended June 30, 1999.
BAUXITE AND ALUMINA
Third party net sales of alumina increased 8% for the
quarter ended June 30, 2000, as compared to the same period in
1999 as a 20% increase in third party average realized prices was
partially offset by a 12% decrease in third party shipments. The
increase in average realized prices was due to an increase in
primary aluminum market prices related to the Company's primary
aluminum-linked customers sales contracts, partially offset by
allocated net losses from the Company's hedging activities. The
decrease in quarter-over-quarter shipments resulted primarily
from differences in the timing of shipments and, to a lesser
extent, the net effect of the Gramercy incident, after
considering the 68,000 tons of alumina purchased by KACC in 2000
from third parties to fulfill third party sales contracts.
Intersegment net sales of alumina were essentially flat for
the quarter ended June 30, 2000, as compared to the same period
in 1999. A 23% increase in the intersegment average realized
price was offset by a 17% decrease in intersegment shipments.
The increase in the intersegment average realized price is the
result of increases in primary aluminum prices from period to
period as intersegment transfers are made on the basis of market
prices on a lagged basis of one month. The decrease in shipments
was due to the timing of shipments as well as the unfavorable
impact of the curtailments of the potlines at the Company's
Washington smelters in mid-June 2000 as discussed above.
Intersegment net sales for the second quarter 2000 included
approximately 15,000 tons of alumina purchased from third-parties
and transferred to the Primary aluminum business unit.
For the six-month period ended June 30, 2000, third party
net sales of alumina were 10% higher than the comparable period
in 1999 as a 19% increase in third party average realized prices
was partially offset by an 11% decrease in third party shipments.
The increase in average realized prices and decrease in third
party shipments during the first six months of 2000 as compared
to 1999 was attributable to the same price and volume factors
discussed above. Third party net sales included approximately
145,000 tons of alumina purchased by KACC from third parties to
fulfill third party sales contracts.
Intersegment net sales for the six-month period ended June
30, 2000, increased 64% as compared to the same period in 1999.
The increase was due to a 28% increase in the intersegment
average realized price and a 28% increase in intersegment
shipments. The increase in the intersegment average realized
price is the result of increases in primary aluminum prices from
period to period as intersegment transfers are made on the basis
of market prices on a lagged basis of one month. The increase in
shipments was due to the favorable impact of operating more
potlines at the Company's smelters during the first four months
of 2000 as compared to the same months in 1999. Intersegment net
sales for the year to date 2000 period included approximately
54,000 tons of alumina purchased from third-parties and
transferred to the Primary aluminum business unit.
Segment operating income for the quarter and six-month
periods ended June 30, 2000, increased from the comparable
periods in 1999 primarily as the result of the increases in the
average realized prices offset in part by the net decrease in
shipments as discussed above.
See Note 2 of Notes to Interim Consolidated Financial
Statements for a discussion of the effect of the Gramercy
incident on the Bauxite and Alumina business unit's operations.
PRIMARY ALUMINUM
Third party net sales of primary aluminum were up 30% for
the second quarter of 2000, as compared to the same period in
1999 as a result of a 25% increase in third party shipments and a
5% increase in third party averaged realized prices. The
increase in shipments was primarily due to the favorable impact
of the increased operating rate at the Company's 90%-owned Volta
Aluminium Company Limited ("Valco") and Washington smelters
offset, in part, by the mid-June 2000 curtailment of the potlines
at the Washington smelters discussed above. The increase in the
average realized prices reflects the 13% increase in primary
aluminum market prices, partially offset by allocated net losses
from the Company's hedging activities. Intersegment net sales
were down approximately 9% between the second quarter of 2000 and
the second quarter of 1999. This decrease was the result of a
19% decrease in intersegment shipments offset, in part, by a 13%
increase in intersegment average realized prices. The increase
in the intersegment average realized price was due to higher
market prices for primary aluminum.
For the six-month period ended June 30, 2000, third party
sales of primary aluminum increased approximately 36% from the
comparable period in 1999, reflecting a 25% increase in third
party shipments and a 9% increase in third party average realized
prices. The increases in year-to-date 2000 shipments and prices
compared to 1999 were attributable to the same factors described
above. Intersegment net sales for the first half of 2000 were up
24% as compared to the same period in 1999. This increase
primarily resulted from a 25% increase in average realized prices
reflecting higher market prices for primary aluminum.
Intersegment shipments were essentially flat.
Segment operating income for the quarter and six-month
periods ended June 30, 2000, was up from the comparable periods
1999. The primary reason for the increases was the improvements
in average realized prices and net shipments discussed above.
However, both years' operating results included several non-
recurring transactions. The quarter and six-month periods ended
June 30, 2000, results included a net gain of $15.8 million
associated with the sale of power described above; while the
quarter and six-month periods ended June 30, 1999, results
included costs of approximately $2.5 million and $9.6 million,
respectively, associated with preparing and restarting potlines
at Valco and the Washington smelters. In addition, segment
operating income for the quarter and six-month periods ended June
30, 2000, have been adversely affected by increases in alumina
and electric power costs. Even after excluding the excess power
costs experienced by the Company in the second quarter in the
Pacific Northwest, power costs have increased. As previously
reported, new agreements entered into in both Ghana and Wales
will provide for increased power stability but at increased
costs.
FLAT-ROLLED PRODUCTS
Net sales of flat-rolled products decreased by 22% during
the second quarter 2000 as compared to 1999 as a 34% decrease in
shipments was offset by an 18% increase in average realized
prices. The decrease in shipments was primarily due to reduced
shipments of can body stock as a part of the Company's planned
stock shipments was a modest quarter over quarter improvement in
heat-treat products. The increase in average realized prices
primarily reflects the change in product mix (resulting from the
can stock body exit) as well as the pass through to customers of
increased market prices for primary aluminum.
For the six-month period ended June 30, 2000, net sales of
flat-rolled products decreased by 9% as compared to the same
period in 1999 as a 19% decrease in shipments was offset by a 11%
increase in average realized prices. The decline in year-to-date
2000 shipments is primarily attributable to the aforementioned
decline in can body stock offset, in part, by increased shipments
of general engineering heat-treat products. The increase in the
average realized price reflects the pass-through to customers of
increased market prices for primary aluminum offset, in part, by
the substantial decline in the demand for aerospace heat-treat
products subsequent to the first quarter of 1999.
The decrease in segment operating income in the quarter and
the six-month periods ended June 30, 2000, were attributable to
the same factors described above. Segment operating income also
reflects the benefit of lower plant overhead and reduced major
maintenance spending.
ENGINEERED PRODUCTS
Net sales of engineered products increased approximately 5%
during the second quarter 2000 as compared to 1999, reflecting a
2% increase in product shipments and a 3% increase in average
realized prices. Increased product shipments are the result of
increased demand in the distribution market offset by reduced
engineered component deliveries resulting from a product line
exit. The increase in average realized prices reflects increased
prices for soft alloy extrusions offset, in part, by a shift in
product mix. For the six-month period ended June 30, 2000, net
sales of engineered products increased approximately 12% as
compared to the same period in 1999 as the result of an 8%
increase in product shipments and a 4% increase in average
realized prices. In addition to the factors described above for
the quarter ended June 30, 2000, the price and value factors for
the six-month period ended June 30, 2000, also reflect a short-
term market related spike in certain hard alloy extrusion
products. The changes in average realized prices for the quarter
and six-month periods ended June 30, 2000, also reflect the pass
through to customers of increased market prices for primary
aluminum.
Segment operating income increased in the quarter and six-
month period ended June 30, 2000, as compared to the comparable
periods in 1999. These increases primarily reflect the impact of
the demand in the distribution and redraw rod markets. Segment
operating income for the quarter and six month periods ended June
30, 2000, included non-recurring severance charges of $.7 million
related to a product line exit. Segment operating income for the
six months ended June 30, 1999, included equity in earnings of
$2.5 million from the Company's 50% interest in AKW L.P., which
was sold in April 1999.
ELIMINATIONS
Eliminations of intersegment profit vary from period to
period depending on fluctuations in market prices as well as the
amount and timing of the affected segments' production and sales.
CORPORATE AND OTHER
Corporate operating expenses represent corporate general and
administrative expenses which are not allocated to the Company's
business segments. Corporate operating expenses for the quarter
and six-month period ended June 30, 2000, included approximately
$1.5 million and $3.5 million, respectively, of non-recurring
expenses related to ongoing Corporate staff cost reduction and
efficiency initiatives.
LIQUIDITY AND CAPITAL RESOURCES
See Note 5 of Notes to Consolidated Financial Statements for
the year ended December 31, 1999, for a listing of the Company's
indebtedness and information concerning certain restrictive debt
covenants.
OPERATING ACTIVITIES
At June 30, 2000, the Company had working capital of $332.4
million, compared with working capital of $336.0 million at
December 31, 1999. The decrease in working capital primarily
resulted from an increase in trade and other receivables offset
by decreases in inventories, prepaid expenses and other current
assets and an increase in accounts payable. The increase in
trade receivables reflects the increased market prices for
primary aluminum. The increase in other receivables was
primarily due to the sale of power (see Note 3 of Notes to
Interim Consolidated Financial Statements) and an increase in the
estimated business interruption insurance recoveries related to
the Gramercy facility incident (see Note 2 of Notes to Interim
Consolidated Financial Statements). The decrease in inventories
reflects a planned focus on inventory reduction and efficiency
initiatives and the previously announced exit from production of
can body stock at the Flat-rolled products business unit.
Changes in trade receivables and inventories also reflect the
factors described in "Results of Operations." The decrease in
prepaid expenses and other current assets resulted primarily from
receipts by KACC of margin deposits resulting from reduced margin
requirements due to lower end of period primary aluminum market
prices. The increase in accounts payable was primarily due to
the timing of payments for third party alumina purchases as well
as increased capital spending related to the Gramercy incident.
INVESTING ACTIVITIES
Capital expenditures during the six-month period ended June
30, 2000, were $85.8 million, consisting primarily of $54.9
million for the rebuilding of the Gramercy facility and $13.3
million for the purchase of the non-working capital assets of a
drawn tube aluminum fabricating operation (see Note 7 of Notes to
Interim Consolidated Financial Statements). The remainder of the
2000 capital expenditures were used to improve production
efficiency and reduce operating costs at the Company's other
facilities. Total consolidated capital expenditures, excluding
the expenditures for the rebuilding of the Gramercy facility (see
Note 2 of Notes to Interim Consolidated Financial Statements),
are expected to be between $80.0 and $115.0 million per annum in
each of 2000 through 2002 (of which approximately 10% is expected
to be funded by the Company's minority partners in certain
foreign joint ventures). See "- Financing Activities and
Liquidity" below for a discussion of Gramercy-related capital
spending. Management continues to evaluate numerous projects all
of which would require substantial capital, both in the United
States and overseas. The level of capital expenditures may be
adjusted from time to time depending on the Company's price
outlook for primary aluminum and other products, KACC's ability
to assure future cash flows through hedging or other means, the
Company's financial position and other factors.
FINANCING ACTIVITIES AND LIQUIDITY
As of June 30, 2000, the Company's total consolidated
indebtedness was $997.3 million, including $37.6 million of
borrowings under KACC's credit agreement, as amended (the "Credit
Agreement"), compared with $972.8 million at December 31, 1999.
As of July 31, 2000, $25.3 million of borrowings were outstanding
under the Credit Agreement.
At June 30, 2000, $207.8 million (of which $59.7 million
could have been used for letters of credit) was available to KACC
under the Credit Agreement. Loans under the Credit Agreement
bear interest at a spread (which varies based on the results of a
financial test) over either a base rate or LIBOR at the Company's
option. During the six-month period ended June 30, 2000, the
average per annum interest rate on loans outstanding under the
Credit Agreement was approximately 9.78%.
The Company's and KACC's near-term liquidity will be, as
more fully discussed below, affected by the Gramercy incident and
the amount of net payments for asbestos liabilities.
From the date of the Gramercy incident through June 30,
2000, KACC had expended or incurred costs or losses associated
with the Gramercy incident totaling $131.7 million, consisting of
clean-up, site preparation and business interruption costs. From
the date of the Gramercy incident through June 30, 2000, $88.1
million of insurance recoveries related to these costs had been
received. In addition, during the second quarter of 2000, KACC
spent approximately $48.0 million on Gramercy-related
construction activities and received $24.0 million of insurance
recoveries for capital expenditures related to the rebuilding of
the Gramercy facility, which amount reduced the minimum property
damage receivable recorded in the fourth quarter of 1999. Until
all construction activity at the Gramercy facility is completed
and full production is restored, KACC will continue to incur
substantial business interruption costs and capital spending.
Business interruption costs are expected to be substantially
offset by insurance recoveries. A minimum of an additional $76.0
million of capital spending is expected to be funded by insurance
recoveries. The remainder of the Gramercy-related capital
expenditures will be funded by KACC using existing cash
resources, funds from operations and/or borrowings under KACC's
Credit Agreement. The amount of capital expenditures to be
funded by KACC will depend on, among other things, the ultimate
cost and timing of the rebuild and negotiations with the
insurance carriers. KACC continues to work with the insurance
carriers to maximize the amount of recoveries and to minimize, to
the extent possible, the period of time between when KACC expends
funds and when it is reimbursed. KACC will likely have to
continue to fund an average of 30 - 60 days of property damage
and business interruption activity, unless some other arrangement
is agreed with the insurance carriers, and such amounts will be
significant. The Company believes it has sufficient financial
resources to fund the construction and business interruption
costs on an interim basis. However, no assurances can be given
in this regard.
KACC's estimated annual cash payments, prior to insurance
recoveries, for asbestos-related costs will be approximately
$75.0 million to $100.0 million for each of the years 2000
through 2002. The Company believes that KACC will recover a
substantial portion of these payments from insurance. However,
delays in receiving these or future insurance repayments would
have an adverse impact on KACC's liquidity.
While no assurance can be given that existing cash sources
will be sufficient to meet the Company's short-term liquidity
requirements, management believes that the Company's existing
cash resources, together with cash flows from operations and
borrowings under the Credit Agreement, will be sufficient to
satisfy its working capital and capital expenditure requirements
for the next year.
KACC's ability to make payments on and to refinance its debt
on a long-term basis depends on its ability to generate cash in
the future. This, to a certain extent, is subject to general
economic, financial, competitive, legislative, regulatory and
other factors beyond KACC's control. KACC will need to refinance
all or a substantial portion of its debt on or before its
maturity. No assurance can be given that KACC will be able to
refinance its debt on acceptable terms. However, with respect to
long-term liquidity, management believes that operating cash
flow, together with the ability to obtain both short and long-
term financing, should provide sufficient funds to meet KACC's
and the Company's working capital and capital expenditure
requirements.
CAPITAL STRUCTURE
MAXXAM Inc. ("MAXXAM") and one of its wholly owned
subsidiaries collectively own approximately 63% of the Company's
Common Stock, with the remaining approximately 37% of the
Company's Common Stock being publicly held. Certain of the
shares of the Company's Common Stock beneficially owned by MAXXAM
are subject to a pledge agreement by MAXXAM and its subsidiary.
The Company has an effective "shelf" registration statement
covering the offering from time to time of up to $150.0 million
of equity securities. Any such offering will only be made by
means of a prospectus. The Company also has an effective "shelf"
registration statement covering the offering of up to 10,000,000
shares of the Company's Common Stock that are owned by MAXXAM.
The Company will not receive any of the net proceeds from any
transaction initiated by MAXXAM pursuant to this registration
statement.
The Credit Agreement does not permit the Company, and
significantly restricts KACC's ability, to pay any dividends on
their common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
-----------------------------------------------------
RISK
----
The information included under Item 3. "QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK" in the Company's Form
10-Q for the quarterly period ended March 31, 2000, is
incorporated by reference.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
Gramercy Litigation
On July 5, 1999, KACC's Gramercy, Louisiana, alumina
refinery was extensively damaged by an explosion in the digestion
area of the plant. The cause of the accident is under
investigation by KACC and various governmental agencies. In
January 2000, the U.S. Mine Safety and Health Administration
issued 21 citations and in March 2000 proposed KACC be assessed a
penalty of $.5 million in connection with its investigation of
the Gramercy incident. The citations allege, among other things,
that certain aspects of the plant's operations were unsafe and
that such mode of operation contributed to the explosion. KACC
has previously announced that it disagrees with the substance of
the citations and has challenged them and the associated penalty.
It is possible that other civil or criminal fines or penalties
could be levied against KACC.
A number of employees were injured in the incident, several
of them severely. KACC may be liable for claims relating to the
injured employees. The incident has resulted in more than sixty
lawsuits, many of which were styled as class action suits, being
filed against KACC and others on behalf of more than 16,000
claimants. Such lawsuits allege, among other things, property
damage, business interruption loss and personal injury. Such
lawsuits were filed, on dates ranging from July 5, 1999, through
July 9, 2000, principally in the Fortieth Judicial District Court
for the Parish of St. John the Baptist, State of Louisiana or in
the Twenty-Third Judicial District Court for the Parish of St.
James or the Parish of Ascension, State of Louisiana. Two of
such lawsuits were filed in the United States District Court,
Eastern District of Louisiana. Discovery has begun in such
cases. The aggregate amount of damages sought in the lawsuits
cannot be determined at this time.
See Part I, Item 3. "LEGAL PROCEEDINGS - Gramercy
Litigation" in the Company's Form 10-K for the year ended
December 31, 1999, and Part II, Item 1. "LEGAL PROCEEDINGS -
Gramercy Litigation" in the Company's From 10-Q for the quarter
ended March 31, 2000.
Asbestos-related Litigation
KACC is a defendant in a number of lawsuits, some of which
involve claims of multiple persons, in which the plaintiffs
allege that certain of their injuries were caused by, among other
things, exposure to asbestos during, and as a result of, their
employment or association with KACC or exposure to products
containing asbestos produced or sold by KACC. The portion of
Note 5 of Notes to Interim Consolidated Financial Statements
contained in this report under the heading "Asbestos
Contingencies" is incorporated herein by reference. See Part I,
Item 3. "LEGAL PROCEEDINGS - Asbestos-related Litigation" in the
Company's Form 10-K for the year ended December 31, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The annual meeting of stockholders of the Company was held
on May 24, 2000, at which meeting the stockholders voted to elect
management's slate of nominees as directors of the Company. The
nominees for election as directors of the Company are listed
below, together with the number of votes cast for, against, and
withheld with respect to each such nominees, as well as the
number of abstentions and broker nonvotes with respect to each
such nominee:
Robert J. Cruikshank
Votes For: 76,406,961
Votes Against:
Votes Withheld: 263,986
Abstentions:
Broker Nonvotes:
James T. Hackett
Votes For: 76,405,833
Votes Against:
Votes Withheld: 265,114
Abstentions:
Broker Nonvotes:
George T. Haymaker, Jr.
Votes For: 76,409,092
Votes Against:
Votes Withheld: 261,855
Abstentions:
Broker Nonvotes:
Charles E. Hurwitz
Votes For: 76,384,487
Votes Against:
Votes Withheld: 286,460
Abstentions:
Broker Nonvotes:
Ezra G. Levin
Votes For: 74,676,890
Votes Against:
Votes Withheld: 1,994,057
Abstentions:
Broker Nonvotes:
Raymond J. Milchovich
Votes For: 76,407,239
Votes Against:
Votes Withheld: 263,708
Abstentions:
Broker Nonvotes:
James D. Woods
Votes For: 76,412,312
Votes Against:
Votes Withheld: 258,635
Abstentions:
Broker Nonvotes:
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits.
Exhibit No. Exhibit
----------- -------
*10.1 Time-Based Stock Option Grant pursuant to the
Kaiser 1997 Omnibus Stock Incentive Plan to Joseph
A. Bonn, effective September 9, 1999.
*10.2 Time-Based Stock Option Grant pursuant to the
Kaiser 1997 Omnibus Stock Incentive Plan to J.
Kent Friedman, effective December 1, 1999.
*10.3 Form of Non-Employee Director Stock Option
Agreement pursuant to the Kaiser 1997 Omnibus
Stock Incentive Plan.
*27 Financial Data Schedule.
(b) Reports on Form 8-K.
No Report on Form 8-K was filed by the Company during the
quarter ended June 30, 2000.
---------------
* Filed herewith
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, who
have signed this report on behalf of the registrant as the
principal financial officer and principal accounting officer of
the registrant, respectively.
KAISER ALUMINUM CORPORATION
/s/ John T. La Duc
By:---------------------------
John T. La Duc
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ Daniel D. Maddox
By:---------------------------
Daniel D. Maddox
Vice President and Controller
(Principal Accounting Officer)
Dated: August 11, 2000
