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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 SEPTEMBER 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 October 31, 2000, the registrant had 79,569,177 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>
September 30, December 31,
2000 1999
------------------------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 46.5 $ 21.2
Receivables:
Trade, net 200.9 154.1
Other 169.9 106.9
Inventories 433.8 546.1
Prepaid expenses and other current assets 111.5 145.6
------------------------------
Total current assets 962.6 973.9
Investments in and advances to unconsolidated affiliates 73.6 96.9
Property, plant, and equipment - net 1,128.1 1,053.7
Deferred income taxes 464.6 440.0
Other assets 679.2 634.3
------------------------------
Total $ 3,308.1 $ 3,198.8
==============================
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 258.3 $ 231.7
Accrued interest 24.8 37.7
Accrued salaries, wages, and related expenses 96.7 62.1
Accrued postretirement medical benefit obligation -
current portion 51.5 51.5
Other accrued liabilities 155.7 168.8
Payable to affiliates 74.7 85.8
Long-term debt - current portion 1.5 .3
------------------------------
Total current liabilities 663.2 637.9
Long-term liabilities 829.6 727.1
Accrued postretirement medical benefit obligation 668.9 678.3
Long-term debt 957.8 972.5
Minority interests 116.7 117.7
Commitments and contingencies
Stockholders' equity:
Common stock .8 .8
Additional capital 537.5 536.8
Accumulated deficit (465.2) (471.1)
Accumulated other comprehensive income - additional
minimum pension liability (1.2) (1.2)
------------------------------
Total stockholders' equity 71.9 65.3
------------------------------
Total $ 3,308.1 $ 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 Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
Net sales $ 537.1 $ 520.3 $ 1,645.3 $ 1,524.7
------------------------------ ------------------------------
Costs and expenses:
Cost of products sold 461.6 458.9 1,401.5 1,392.7
Depreciation and amortization 19.8 20.9 59.0 69.4
Selling, administrative, research and
development, and general 25.3 28.5 77.6 82.9
Labor settlement charge 38.5 - 38.5 -
Other non-recurring operating items, net (10.9) 24.1 (22.5) 24.1
------------------------------ ------------------------------
Total costs and expenses 534.3 532.4 1,554.1 1,569.1
------------------------------ ------------------------------
Operating income (loss) 2.8 (12.1) 91.2 (44.4)
Other income (expense):
Interest expense (27.0) (27.3) (83.6) (82.4)
Other - net (4.9) (21.8) (1.3) (19.3)
------------------------------ ------------------------------
Income (loss) before income taxes and minority
interests (29.1) (61.2) 6.3 (146.1)
Benefit (provision) for income taxes 11.2 21.1 (2.5) 49.9
Minority interests 1.1 .9 2.1 3.1
------------------------------ ------------------------------
Net income (loss) $ (16.8) $ (39.2) $ 5.9 $ (93.1)
============================== ==============================
Earnings (loss) per share:
Basic $ (.21) $ (.49) $ .07 $ (1.17)
Diluted $ (.21) $ (.49) $ .07 $ (1.17)
Weighted average shares outstanding (000):
Basic 79,556 79,404 79,502 79,312
Diluted 79,556 79,404 79,502 79,312
</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>
Nine Months Ended
September 30,
------------------------------
2000 1999
------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 5.9 $ (93.1)
Adjustments to reconcile net income (loss) to net cash used
by operating activities:
Depreciation and amortization (including deferred
financing costs of $3.3 and $3.2) 62.3 72.6
Non-cash impairment and restructuring charges 22.3 19.1
Gains - real estate related (2000); sale of interests
in AKW L.P. (1999) (39.0) (50.5)
Equity in loss (income) of unconsolidated affiliates,
net of distributions 17.2 (2.0)
Minority interests (2.1) (3.1)
Increase in receivables (109.8) (4.7)
Decrease (increase) in inventories 103.8 (10.7)
Decrease (increase) in prepaid expenses and other
current assets 21.6 (35.2)
(Decrease) increase in accounts payable (associated
with operating activities) and accrued interest (29.1) 10.3
Increase (decrease) in payable to affiliates and other
accrued liabilities 24.2 (1.1)
Increase in accrued and deferred income taxes (8.7) (58.7)
Net (used) provided by long-term assets and liabilities (27.2) 28.2
Other 14.0 1.0
------------------------------
Net cash provided (used) by operating activities 55.4 (127.9)
------------------------------
Cash flows from investing activities:
Capital expenditures (196.5) (40.3)
Increase in accounts payable - Gramercy-related capital
expenditures 42.9 -
Gramercy-related property damage insurance recoveries 73.0 -
Net proceeds from disposition of property and investments 66.5 70.4
Other 1.3 .1
------------------------------
Net cash (used) provided by investing activities (12.8) 30.2
------------------------------
Cash flows from financing activities:
(Repayments) borrowings under revolving credit facility, net (10.4) 7.7
Repayments of long-term debt (4.3) (.4)
Capital stock issued - 1.4
Decrease in restricted cash, net - .7
Redemption of minority interests' preference stock (2.6) (1.4)
------------------------------
Net cash (used) provided by financing activities (17.3) 8.0
------------------------------
Net increase (decrease) in cash and cash equivalents during the 25.3 (89.7)
period
Cash and cash equivalents at beginning of period 21.2 98.3
------------------------------
Cash and cash equivalents at end of period $ 46.5 $ 8.6
==============================
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest $ 93.2 $ 91.8
Income taxes paid 9.6 11.2
</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 nine-month periods
ended September 30, 2000, are not necessarily indicative of the
results that may be expected for the year ending December 31,
2000.
LABOR DISPUTE, SETTLEMENT AND RELATED COSTS
As previously reported, prior to the settlement of the labor
dispute discussed below, KACC was operating five of its U.S.
facilities with salaried employees and other employees 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. The labor dispute was settled in September
2000. A significant portion of the issues were settled through
direct negotiations between KACC and the USWA and the remaining
issues were settled pursuant to an agreed-upon arbitration
process. Under the terms of the settlement, USWA members
generally returned to the affected plants during October 2000.
The new labor contract, which expires in September 2005, provides
for a 2.6% average annual increase in the overall wage and
benefit packages, results in the reduction of at least 540 hourly
jobs at the five facilities (from approximately 2,800 on
September 30, 1998), allows KACC greater flexibility in using
outside contractors and provides for productivity gains by
allowing KACC to utilize the knowledge obtained during the labor
dispute without many of the work-rule restrictions that were a
part of the previous labor contract. The Company has recorded a
one-time pre-tax charge of $38.5 in its results for the quarter
ended September 30, 2000, to reflect the incremental, non-
recurring impacts of the labor settlement, including severance
and other contractual obligations for non-returning workers.
During the period of the strike and subsequent lock-out, the
Company continued to accrue certain benefits (such as pension and
other postretirement benefit costs/liabilities) for the USWA
members, which accruals were based on the terms of the previous
USWA contract. The difference between the amounts accrued for
the returning workers and the amounts agreed to in the settlement
with the USWA will result in an approximate $33.6 increase in
KACC's accumulated pension obligation and an approximate $33.4
decrease in KACC's accumulated other postretirement benefit
obligations. In accordance with generally accepted accounting
principles, these amounts will be amortized to expense over the
employees' expected remaining years of service.
As a part of the USWA settlement agreement, KACC has agreed
to redeem all of its Cumulative (1985 Series A) and Cumulative
(1985 Series B) Preference Stock (approximately 353,800 shares
outstanding at September 30, 2000; included in Minority
interests). The total cash required to complete the redemption
is approximately $17.7. Approximately $12.0 has previously been
funded into redemption funds (included in Other assets). The
redemption is expected to be completed late in the first quarter
of 2001.
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
resulting from the "mark-to-market" process will represent
unrealized gains or losses. Such unrealized gains or losses
may change, based on prevailing market prices at each
subsequent balance sheet date, until the transaction date occurs.
Such changes will be reflected as an increase or reduction in
stockholders' equity through either comprehensive income or
net income, depending on the nature of the hedging instrument
used. To the extent that changes in fair value of the Company's
hedging positions are initially recorded in other comprehensive
income, such changes will reverse out of other comprehensive
income (net of any fluctuations in other "open" positions) and will
be reflected in net income when the subsequent physical
transactions occur. As of September 30, 2000, the amount
of the Company's other comprehensive income adjustments are not
significant so there is not a significant difference between
net income and comprehensive income. However, differences between
comprehensive income and net income may become significant in
future periods as a result of SFAS No. 133. In general,
SFAS No. 133 will result in material fluctuations in comprehensive
income, net 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 plans to 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 nine-month periods ended September 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 middle of the fourth
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 permits 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. The U.S. Mine Safety and Health
Administration ("MSHA") has issued 24 citations and 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 Other non-recurring operating items, net
(see Note 8) 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 $100.0. The amount was classified as a receivable in Other
assets, as such proceeds, when received, are being invested in
property, plant and equipment.
During the quarter and nine-month periods ended September
30, 2000, Gramercy-related capital spending was approximately
$102.0 and $159.0, respectively. During the quarter and nine-
month periods ended September 30, 2000, $49.0 and $73.0 of the
insurance proceeds received were recorded as a reduction of the
minimum property damage receivable based on the percentage of
minimum expected costs to be funded by insurance proceeds to the
total rebuild costs estimated at the beginning of the project.
The balance of the minimum property damage receivable of $27.0 is
expected to be reduced during the last three 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 $25.0, of which $.1 and $11.0 were
accrued during the quarter and nine-month periods ended September
30, 2000, respectively, 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 September 30, 2000, KACC had recorded
expected business interruption insurance recoveries totaling
$130.6, of which $23.8 and $89.6 were recorded during the quarter
and nine-month periods ended September 30, 2000, respectively, 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.
Depreciation expense for the first six months of 1999 was
approximately $6.0. KACC suspended depreciation at the facility
starting in July 1999 since production had been completely
curtailed. However, in accordance with an agreement with KACC's
insurers, during the third quarter of 2000, the Company recorded
a depreciation charge of $12.8 representing the previously
unrecorded depreciation related to the undamaged portion of the
facility for the period from July 1999 through September 2000.
However, this charge did not have any impact on the Company's
operating results as the Company has reflected (as a reduction of
depreciation expense) an equal and offsetting insurance
receivable (incremental to the amounts discussed in the preceding
paragraph) since the insurers have agreed to reimburse the
Company this amount. Once production at the facility is
restored, normal depreciation will commence. Such depreciation
is expected to exceed prior historical rates primarily due to the
capital costs on the newly constructed assets.
Liability. The incident has also resulted in more than
ninety individual and class action lawsuits being filed against
KACC and others alleging, among other things, property damage,
business interruption losses by other businesses and personal
injury. 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. While it is presently impossible to
determine the aggregate amount of claims that may be incurred,
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 September 30, 2000, KACC had expended
or incurred costs or losses associated with the Gramercy incident
(that were not capital expenditures) totaling $155.6, consisting
of clean-up, site preparation and business interruption costs.
From the date of the Gramercy incident through September 30,
2000, $134.0 of insurance recoveries related to these costs had
been received. In addition, during the second and third quarters
of 2000, KACC spent approximately $150.0 on Gramercy-related
construction activities and received insurance recoveries of
$73.0 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 remaining construction and business interruption costs on an
interim basis. However, no assurances can be given in this
regard.
Other. During the third quarter of 2000, KACC incurred
approximately $11.5 of normal recurring maintenance expenditures
for the Gramercy facility (which amounts were reflected in Other
non-recurring operating items, net - see Note 8) that otherwise
would have been incurred in the ordinary course of business over
the next 1 to 3 years. The Company chose to incur these
expenditures now to avoid normal operational outages that
otherwise would have occurred once the facility resumes
production.
3. INVENTORIES
The classification of inventories is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------------------------
<S> <C> <C>
Finished fabricated aluminum products $ 86.6 $ 118.5
Primary aluminum and work in process 134.9 189.4
Bauxite and alumina 91.8 124.1
Operating supplies and repair and maintenance parts 120.5 114.1
------------------------------
Total $ 433.8 $ 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.
Inventories at September 30, 2000, have been reduced by a
$7.5 LIFO charge primarily associated with KACC's exit from the
can body stock product line (which amount was reflected in Other
non-recurring operating items, net - see Note 8) in the third
quarter of 2000.
4. 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 September 30, 2000,
the balance of such accruals, which are primarily included in
Long-term liabilities, was $44.9. 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 $11.0 for the years 2000 through 2004 and an aggregate of
approximately $19.0 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 $43.0. 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 September 30, 2000, the number of such claims pending
was approximately 114,700, 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 nine-month periods ended September 30, 2000,
approximately 6,100 and 20,800 of such claims were received and
1,400 and 6,100 of such claims were settled or dismissed. The
foregoing claim and settlement figures as of and for the quarter
and nine-month periods ended September 30, 2000, do not reflect
the fact that as of September 30, 2000, KACC had reached
agreements under which it expects to settle approximately 74,200
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 2010). The
Company's estimate is based on the Company's view, at each
balance sheet date, of the current and an 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
2010 and, accordingly, no accrual has been recorded for any costs
which may be incurred beyond 2010, the Company expects that such
costs may continue beyond 2010, and that such costs could be
substantial. As of September 30, 2000, an estimated asbestos-
related cost accrual of $538.6, 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 be approximately $60.0
in the fourth quarter of 2000 and will range from approximately
$100.0 to $125.0 in the years 2001 and 2002, approximately $50.0
for each of the years 2003 and 2004, and an aggregate of
approximately $160.0 thereafter. For the period from inception
through September 30, 2000, before consideration of insurance
recoveries, a total of approximately $168.6 of asbestos-related
settlement and related legal costs have been paid, including
approximately $47.7 in the nine-month period ended September 30,
2000.
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. For the period from
inception through September 30, 2000, partial insurance
reimbursements for asbestos-related matters totaling
approximately $105.0 have been received, including $36.5 in the
nine-month period ended September 30, 2000. The timing and
amount of future recoveries from 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 additional
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 $428.0, determined on the same basis as the asbestos-related
cost accrual, is recorded primarily in Other assets at September
30, 2000. However, no assurance can be given that KACC will be
able to record 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. In the third quarter of 2000,
this process resulted in the Company reflecting a $43.0 charge
(included in Other income (expense) - see Note 8), for asbestos-
related claims, net of expected insurance recoveries, based on
recent cost and other trends experienced by KACC and other
companies. 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, which was settled in September 2000, certain allegations
of unfair labor practices ("ULPs") were 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 by the general counsel of the NLRB, 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. The
Company continues to believe that the charges are without merit.
While uncertainties are inherent in matters such as this and it
is presently impossible to determine the actual costs, if any,
that may ultimately arise in connection with this matter, the
Company does not believe that the ultimate outcome of this matter
will have a material adverse impact on the Company's liquidity or
financial position. However, amounts paid, if any, in
satisfaction of this matter could be significant to the results
of the period in which they are recorded.
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.
5. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING
PROGRAMS
At September 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 and option contracts, was
approximately $35.0 (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 September 30, 2000, KACC had entered into option contracts
that established a price range for 68,000, 362,000 and 183,000
tons* of primary aluminum with respect to 2000, 2001 and 2002,
respectively.
Additionally, as of September 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 October 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
----------------
* All references to tons in this report refer to metric tons of
2,204.6 pounds.
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. See Note 8 for mark-to-market
pre-tax gains (losses) associated with the transactions described
in this paragraph for the quarter and nine-month periods ended
September 30, 2000 and 1999.
As of September 30, 2000, KACC had sold forward virtually
all of the alumina available to it in excess of its projected
internal 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 September 30, 2000, KACC held option contracts for the
purchase of approximately 20,000 MMBtu of natural gas per day for
the period October 2000 through December 2000 and 30,000 MMBtu of
natural gas per day for the period January 2001 through June
2001. As of September 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 September 30, 2000, KACC had net forward foreign exchange
contracts for the purchase of 120.5 Australian dollars in respect
of its Australian dollar dominated commitments from October 2000
through June 2001. In addition, KACC has entered into option
contracts that establish a price range for the purchase of 24.0
Australian dollars for the period from October 2000 through June
2001 and option contracts that establish a ceiling on the
purchase of 224.0 Australian dollars for the period from August
2001 through December 2005.
See Note 11 of the Notes to Consolidated Financial
Statements for the year ended December 31, 1999.
6. CHANDLER ACQUISITION
In May 2000, KACC 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).
7. WASHINGTON SMELTERS' POWER SALES AND OPERATING LEVEL
As previously announced, during August 2000, KACC sold
certain power that it had under contract for the third quarter of
2001. The power sold was in excess of KACC's current and
expected future operating requirements and resulted in net
proceeds and a net pre-tax gain of approximately $40.5 in the
third quarter of 2000. This power sale had no impact on the
Company's current level of operations.
As previously reported, during June 2000, as a result of
unprecedented high market prices for power in the Pacific
Northwest, the Company temporarily curtailed approximately
128,000 tons of its 273,000 annual primary aluminum production
capacity at the Tacoma and Mead, Washington smelters and 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 market price basis. 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 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 this sale of the power, the Company recorded a net pre-tax
gain of approximately $15.8 in the second quarter of 2000, 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.
Both net gains have been reflected (in their respective
periods) in Other non-recurring operating items, net (see Note
8).
During October 2000, KACC signed a new power contract with
the Bonneville Power Administration ("BPA") under which the BPA
will provide KACC's operations in the State of Washington with
power during the period October 2001 through September 2006. The
contract will provide KACC with sufficient power to fully operate
KACC's Trentwood facility as well as approximately 40% of
capacity at KACC's Mead and Tacoma aluminum smelting operations.
Power costs under the new contract will exceed the cost of power
under KACC's current BPA contract by approximately 20%.
Additional provisions of the new BPA contract include a take-or-
pay requirement, an additional cost recovery mechanism under
which KACC's base power rate could be increased and a "good
corporate citizen" clause, under which KACC's power allocation
could be curtailed in certain instances. KACC has the right to
terminate the contract until certain pricing and other provisions
of the BPA contract are finalized, which is expected to be mid-
2001.
8. OTHER NON-RECURRING ITEMS
NON-RECURRING OPERATING ITEMS, NET (OTHER THAN LABOR SETTLEMENT)
The income (loss) impact associated with non-recurring
operating items, net, other than the labor settlement charge, for
the quarter and nine-month periods ended September 30, 2000 and
1999, was as follows:
<TABLE>
<CAPTION>
Quarter Ended Nine-Months Ended
September 30, September 30,
----------------------------- -----------------------------
Business Segment 2000 1999 2000 1999
-------------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net gains on power sales (Note 7) Primary Aluminum $ 40.5 $ - $ 56.3 $ -
Gramercy related items:
Incremental maintenance
spending (Note 2) Bauxite & Alumina (11.5) - (11.5) -
Insurance deductibles, etc. Bauxite & Alumina - (4.0) - (4.0)
(Note 2) Corporate - (1.0) - (1.0)
Impairment charges associated with
product line exits:
LIFO inventory charge (Note 3) Flat-Rolled Products (7.5) - (7.5) -
Other impairment charges Flat-Rolled Products (1.5) - (1.5) -
Engineered Products (4.0) - (4.7) -
Restructuring charges Primary Aluminum (3.1) - (3.1) -
Corporate (2.0) - (5.5) -
Micromill impairment Micromill - (19.1) - (19.1)
------------------------------ -----------------------------
$ 10.9 $ (24.1) $ 22.5 $ (24.1)
============== ============== ============== =============
</TABLE>
The $1.5 impairment charge reflected by KACC's Flat-Rolled
products segment in the third quarter of 2000 reduces the
carrying value of certain assets to their estimated net
realizable value as a result of the segment's previously
announced decision to exit the can body stock product line. The
$4.0 impairment charge recorded by KACC's Engineered products
segment in the third quarter of 2000 reduces the carrying value
of certain machining facilities and assets, which are no longer
required as a result of the segment's decision to exit a marginal
product line, to their estimated net realizable value. During
the second quarter of 2000, the Engineered products segment
recorded an additional severance-related charge of $.7 related to
this product line exit.
The restructuring charges recorded by KACC's Primary
aluminum segment in the third quarter of 2000 represent employee
benefit and other costs for approximately 50 job eliminations
reflecting a reduced emphasis on technology sales and reduced
salaried employee requirements at KACC's Tacoma facility, given
its current curtailment. The Corporate portion of the
restructuring charges recorded in the quarter and nine-month
periods ended September 30, 2000, represent employee benefit and
other costs associated with the consolidation or elimination of
certain corporate staff functions. The Corporate restructuring
initiatives in 2000 involve a group of approximately 50
employees.
See Note 4 of the Notes to Consolidated Financial Statements
for the year ended December 31, 1999, for a discussion of the
write-down of Micromill assets.
OTHER INCOME (EXPENSE)
Amounts included in other income (expenses), other than
interest expense, for the quarter and nine-month periods ended
September 30, 2000 and 1999, included the following pre-tax gains
(losses):
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------------------- ----------------------------------
2000 1999 2000 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Asbestos-related charges (Note 4) $ (43.0) $ (15.2) $ (43.0) $ (53.2)
Gain on sale of Pleasanton complex 22.0 - 22.0 -
Lease obligation adjustment 17.0 - 17.0 -
Mark-to-market gains (losses) (Note 5) .9 (5.9) 9.6 (20.0)
Gain on sale of interests in AKW L.P. - - - 50.5
All other, net (1.8) (.7) (6.9) 3.4
---------------- ---------------- ---------------- ----------------
$ (4.9) $ (21.8) $ (1.3) $ (19.3)
================ ================ ================ ================
</TABLE>
During September 2000, KACC sold its Pleasanton, California,
office complex because the administrative and research and
development functions located there had been or are being
relocated to other Kaiser locations and the complex had become
surplus to the Company's needs. Net proceeds from the sale were
approximately $51.6.
The net lease obligation adjustment recorded in the third
quarter of 2000 relates to a building in which KACC has not
maintained offices for a number of years, but for which it is
responsible for lease payments as master tenant through 2008
under a 1983 sale-and-leaseback agreement. KACC's recorded
liability represents its long-term obligation under the master
lease, net of estimated sublease income (included in Long-term
liabilities). During the third quarter of 2000, KACC adjusted the
net lease obligation to reflect new third-party sublease
agreements in 2000 which resulted in occupancy and lease rates
above those previously projected.
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 nine-month period ended September 30, 2000 (included in
All other, net above).
See Note 3 of the Notes to Consolidated Financial Statements
for the year ended December 31, 1999, for a discussion of the
sale of interests in AKW L.P.
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 quarter and
nine-month periods ended September 30, 2000 and 1999 is as
follows:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2000 1999 2000 1999
-------------------------------------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Net Sales:
Bauxite and Alumina: (1)
Net sales to unaffiliated customers $ 106.7 $ 108.3 $ 327.7 $ 308.8
Intersegment sales 29.0 33.7 115.3 86.3
-------------- -------------- -------------- --------------
135.7 142.0 443.0 395.1
-------------- -------------- -------------- --------------
Primary Aluminum:
Net sales to unaffiliated customers 153.6 113.5 411.3 303.1
Intersegment sales 56.5 65.7 196.1 177.9
-------------- -------------- -------------- --------------
210.1 179.2 607.4 481.0
-------------- -------------- -------------- --------------
Flat-Rolled Products 115.4 140.8 390.5 444.4
Engineered Products 134.3 134.5 438.8 405.8
Minority interests 27.1 23.2 77.0 62.6
Eliminations (85.5) (99.4) (311.4) (264.2)
-------------- -------------- -------------- --------------
$ 537.1 $ 520.3 $ 1,645.3 $ 1,524.7
============== ============== ============== ==============
Operating income (loss): (4) (5)
Bauxite and Alumina (2) $ 6.3 $ 4.9 $ 36.2 $ (6.4)
Primary Aluminum (3) 21.3 10.0 65.4 (10.5)
Flat-Rolled Products 5.6 5.8 15.9 20.7
Engineered Products 7.3 12.2 33.2 29.8
Micromill - (3.2) (.6) (9.5)
Eliminations 4.1 1.1 1.2 6.6
Corporate and Other (14.2) (18.8) (44.1) (51.0)
Labor Settlement Charge (4) (38.5) - (38.5) -
Other Non-Recurring Operating Items, Net (5) 10.9 (24.1) 22.5 (24.1)
-------------- -------------- -------------- --------------
$ 2.8 $ (12.1) $ 91.2 $ (44.4)
============== ============== ============== ==============
Depreciation and amortization:
Bauxite and Alumina (6) $ 6.1 $ 6.0 $ 18.1 $ 23.8
Primary Aluminum 6.2 6.9 18.6 21.2
Flat-Rolled Products 4.1 4.0 12.3 12.2
Engineered Products 3.0 2.6 8.6 7.9
Micromill - .7 .2 2.1
Corporate and Other .4 .7 1.2 2.2
-------------- -------------- -------------- --------------
$ 19.8 $ 20.9 $ 59.0 $ 69.4
============== ============== ============== ==============
</TABLE>
(1) Net sales for the quarter and nine-month periods ended
September 30, 2000, included approximately 50,000 tons and
195,000 tons, respectively, of alumina purchased from third
parties and resold to certain unaffiliated customers of the
Gramercy facility and 54,000 tons of alumina purchased from
third parties for the nine-month period ended September 30,
2000, and transferred to the Company's Primary aluminum
business unit. There were no purchases of alumina from
third parties during the third quarter of 2000 for the
Company's Primary aluminum business unit. Net sales for
both the quarter and nine-month periods ended September 30,
1999, included approximately 190,000 tons of alumina
purchased from third parties and resold to certain
unaffiliated customers and 60,000 tons of alumina purchased
from third parties and transferred to the Company's Primary
aluminum business unit.
(2) Operating income (loss) for the quarter and nine-month
periods ended September 30, 2000, included estimated
business interruption insurance recoveries totaling $23.8
and $89.6, respectively. Operating income (loss) for both
the quarter and nine-month periods ended September 30, 1999,
included estimated business interruption insurance
recoveries totaling $22.0.
(3) Operating income (loss) for the quarter and nine-month
periods ended September 30, 1999, included potline restart
costs of $1.9 and $11.5, respectively.
(4) The allocation of the labor settlement charge to the
Company's business units is as follows: Bauxite and Alumina
- $2.1, Primary aluminum - $15.9, Flat-rolled products -
$18.2 and Engineered products - $2.3.
(5) See Note 8 of Notes to Interim Consolidated Financial
Statements for a summary of the components of non-recurring
operating items, net (other than the labor settlement
charges) and the business segment to which the items relate.
(6) Depreciation was suspended for the Gramercy facility for the
last six months of 1999 and the first nine 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. See Note 2 of Notes
to Interim Consolidated Financial Statements for additional
information.
Excluding the capital expenditures made during the first
nine 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 middle of the
fourth 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 permits 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 September 30,
2000, KACC had expended or incurred costs or losses associated
with the Gramercy incident (that were not capital expenditures)
totaling $155.6 million, consisting of clean-up, site preparation
and business interruption costs. From the date of the Gramercy
incident through September 30, 2000, $134.0 million of insurance
recoveries related to these costs had been received. In
addition, during the second and third quarters of 2000, KACC
spent approximately $150.0 million on Gramercy-related
construction activities and received $73.0 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.
LABOR DISPUTE, SETTLEMENT AND RELATED COSTS
As previously reported, prior to the settlement of the labor
dispute, KACC was operating five of its U.S. facilities with
salaried employees and other employees as a result of the
September 30, 1998, strike by the United Steelworkers of America
("USWA") and the subsequent "lockout" by KACC in January 1999.
The labor dispute was settled in September 2000. A significant
portion of the issues were settled through direct negotiations
between KACC and the USWA and the remaining issues were settled
pursuant to an agreed-upon arbitration process. Under the terms
of the settlement, USWA members generally returned to the
affected plants during October 2000. The new labor contact,
which expires in September 2005, provides for a 2.6% average
annual increase in the overall wage and benefit packages, results
in the reduction of at least 540 hourly jobs at the five
facilities (from approximately 2,800 on September 30, 1998),
allows KACC greater flexibility in using outside contractors and
provides for productivity gains by allowing KACC to utilize the
knowledge obtained during the labor dispute without many of the
work-rule restrictions that were part of the previous labor
contract. The Company has recorded a one-time pre-tax labor
settlement charge of $38.5 million in its results for the quarter
ended September 30, 2000, to reflect the incremental, non-
recurring impacts of the labor settlement, including severance
and other contractual obligations for non-returning workers. See
Note 1 of Notes to Interim Consolidated Financial Statements for
additional discussions on the labor settlement.
As more fully discussed in Note 4 of Notes to Interim
Consolidated Financial Statements, in connection with the strike
and subsequent lock-out, certain allegations of unfair labor
practices ("ULPs") were filed with the National Labor Relations
Board ("NLRB") by the USWA. Twenty-two of the twenty-four
allegations brought by the USWA have been dismissed. A trial
date has been set for November 2000 for the remaining two
allegations. Any outcome from the trial before the
administrative law judge would be subject to an additional appeal
by the general counsel of the NLRB, 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. The Company
continues to believe that the charges are without merit. While
uncertainties are inherent in matters such as this and it is
presently impossible to determine the actual costs, if any, that
may ultimately arise in connection with this matter, the Company
does not believe that the ultimate outcome of this matter will
have a material adverse impact on the Company's liquidity or
financial position. However, amounts paid, if any, in
satisfaction of this matter could be significant to the results
of the period in which they are recorded.
WASHINGTON SMELTERS' POWER SALES AND OPERATING LEVEL
During 2000, as a result of unprecedented high market prices
for power in the Pacific Northwest, the Company temporarily
curtailed approximately 128,000 tons of its annual primary
aluminum production at the Tacoma and Mead, Washington, smelters
and sold certain power that it had under contract through
September 30, 2001. To implement the curtailment, the Company
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. KACC is currently
operating the Mead and Tacoma smelters at approximately 50% of
their capacity.
During October 2000, KACC signed a new power contract with
the Bonneville Power Administration ("BPA") under which the BPA
will provide KACC's operations in the State of Washington with
power during the period October 2001 through September 2006. The
contract will provide KACC with sufficient power to fully operate
KACC's Trentwood facility as well as approximately 40% of
capacity at KACC's Mead and Tacoma aluminum smelting operations.
Power costs under the new contract will exceed the cost of power
under KACC's current BPA contract by approximately 20%.
Additional provisions of the new BPA contract include a take-or-
pay requirement, an additional cost recovery mechanism under
which KACC's base power rate could be increased and a "good
corporate citizen" clause, under which KACC's power allocation
could be curtailed in certain instances. KACC has the right to
terminate the contract until certain pricing and other provisions
of the BPA contract are finalized, which is expected to be mid-
2001.
See Note 7 of Notes to Interim Consolidated Financial
Statements for additional information on the power sales and BPA
contract.
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. During the first nine months of 2000, KACC
sold certain non-operating properties, its Micromill assets and
technology and its Pleasanton, California, office complex and
purchased the assets of a drawn tube aluminum fabricating
operation. The dispositions were part of the Company's
initiative to monetize non-strategic or underperforming assets.
The acquisition was 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 recoveries
in this regard. For the period from inception through September
30, 2000, the Company has paid approximately $168.6 million for
asbestos-related settlements and associated defense costs and has
received partial insurance reimbursements during this same period
totaling $105.0 million. 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.
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 nine-month periods ended
September 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. Average realized prices for the Company's Flat-
rolled products and Engineered products segments are not
presented in the following table as such prices are subject to
fluctuations due to changes in product mix. Average realized
third party sales prices for alumina and aluminum in the
following table includes the impact of hedging activities.
SELECTED OPERATIONAL AND FINANCIAL INFORMATION
(Unaudited)
(In millions of dollars, except shipments and prices)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
-------------------------------------------------------------- -------------- --------------------------
<S> <C> <C> <C> <C>
Shipments: (000 tons)
Alumina (1)
Third Party 484.0 572.4 1,460.4 1,670.8
Intersegment 149.8 191.4 584.1 531.0
------------ ------------ ------------ ------------
Total Alumina 633.8 763.8 2,044.5 2,201.8
------------ ------------ ------------ ------------
Primary Aluminum
Third Party 96.3 75.4 261.8 207.3
Intersegment 34.0 44.6 119.4 130.4
------------ ------------ ------------ ------------
Total Primary Aluminum 130.3 120.0 381.2 337.7
------------ ------------ ------------ ------------
Flat-Rolled Products 34.9 54.3 125.7 165.8
------------ ------------ ------------ ------------
Engineered Products 40.3 42.9 132.3 127.8
------------ ------------ ------------ ------------
Average Realized Third Party Sales Price:
Alumina (per ton) $ 204 $ 177 $ 204 $ 173
Primary Aluminum (per pound) $ .72 $ .68 $ .71 $ .66
Net Sales:
Bauxite and Alumina (1)
Third Party (includes net sales of
bauxite) $ 106.7 $ 108.3 $ 327.7 $ 308.8
Intersegment 29.0 33.7 115.3 86.3
------------ ------------ ------------ ------------
Total Bauxite & Alumina 135.7 142.0 443.0 395.1
------------ ------------ ------------ ------------
Primary Aluminum
Third Party 153.6 113.5 411.3 303.1
Intersegment 56.5 65.7 196.1 177.9
------------ ------------ ------------ ------------
Total Primary Aluminum 210.1 179.2 607.4 481.0
------------ ------------ ------------ ------------
Flat-Rolled Products 115.4 140.8 390.5 444.4
Engineered Products 134.3 134.5 438.8 405.8
Minority Interests 27.1 23.2 77.0 62.6
Eliminations (85.5) (99.4) (311.4) (264.2)
------------ ------------ ------------ ------------
Total Net Sales $ 537.1 $ 520.3 $ 1,645.3 $ 1,524.7
============ ============ ============ ============
Operating Income (Loss): (4) (5)
Bauxite & Alumina (2) $ 6.3 $ 4.9 $ 36.2 $ (6.4)
Primary Aluminum (3) 21.3 10.0 65.4 (10.5)
Flat-Rolled Products 5.6 5.8 15.9 20.7
Engineered Products 7.3 12.2 33.2 29.8
Micromill - (3.2) (.6) (9.5)
Eliminations 4.1 1.1 1.2 6.6
Corporate (14.2) (18.8) (44.1) (51.0)
Labor Settlement Charge (4) (38.5) - (38.5) -
Other Non-Recurring Operating Items, Net (5) 10.9 (24.1) 22.5 (24.1)
------------ ------------ ------------ ------------
Total Operating Income (Loss) $ 2.8 $ (12.1) $ 91.2 $ (44.4)
============ ============ ============ ============
Net Income (Loss) $ (16.8) $ (39.2) $ 5.9 $ (93.1)
============ ============ ============ ============
Capital Expenditures $ 110.7 $ 10.0 $ 196.5 $ 40.3
============ ============ ============ ============
</TABLE>
(1) Net sales for the quarter and nine-month periods ended
September 30, 2000, included approximately 50,000 tons and
195,000 tons, respectively, of alumina purchased from third
parties and resold to certain unaffiliated customers and
54,000 tons of alumina purchased from third parties for the
nine-month period ended September 30, 2000, and transferred
to the Company's Primary aluminum business unit. There were
no purchases of alumina from third parties during the third
quarter of 2000 for the Company's Primary aluminum business
unit. Net sales for both the quarter and nine-month periods
ended September 30, 1999, included approximately 190,000
tons of alumina purchased from third parties and resold to
certain unaffiliated customers and 60,000 tons of alumina
purchased from third parties and transferred to the
Company's Primary aluminum business unit.
(2) Operating income (loss) for the quarter and nine-month
periods ended September 30, 2000, included estimated
business interruption insurance recoveries totaling $23.8
and $89.6, respectively. Operating income (loss) for both
the quarter and nine-month periods ended September 30, 1999,
included estimated business interruption insurance
recoveries totaling $22.0. 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. See Note 2 of Notes to Interim
Consolidated Financial Statements for additional
information.
(3) Operating income (loss) for the quarter and nine-month
periods ended September 30, 1999, included potline restart
costs of $1.9 and $11.5, respectively.
(4) The allocation of the labor settlement charges to the
Company's business units is as follows: Bauxite and Alumina
- $2.1, Primary aluminum - $15.9, Flat-rolled products -
$18.2 and Engineered products - $2.3.
(5) See Note 8 of Notes to Interim Consolidated Financial
Statements for a detail summary of the components of non-
recurring operating items, net (other than the labor
settlement charges) and the business segment to which the
items are applicable.
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 5 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 both the quarter
and nine-month periods ended September 30, 2000, the average AMT
price was $.76 per pound. The average AMT price for primary
aluminum for the week ended October 27, 2000, was approximately
$.71 per pound.
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2000, COMPARED TO
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1999
SUMMARY
The Company reported a net loss of $16.8 million, or $.21 of
basic loss per common share, for the third quarter of 2000,
compared to a net loss of $39.2 million, or $.49 of basic loss
per common share, for the same period of 1999. For the nine-
month period ended September 30, 2000, the Company reported net
income of $5.9 million, or $.07 of basic income per common share,
compared to a net loss of $93.1 million, or $1.17 of basic loss
per common share, for the nine-month period ended September 30,
1999.
However, results for the quarter and nine-month periods
ended September 30, 2000 and 1999 included material non-recurring
gains and losses as summarized below:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------------------------ --------------- --------------
-
<S> <C> <C> <C> <C>
As reported, income (loss) per common share $ (.21) $ (.49) $ .07 $ (1.17)
Less material non-recurring (gains) losses:
Labor settlement charge .30 - .30 -
Asbestos-related charges .33 .12 .33 .44
Net gains from power sales (.31) - (.43) -
Gains related to real estate transactions (.30) - (.30) -
Other non-recurring operating charges .14 - .17 -
Gramercy-related items:
Incremental maintenance spending .09 - .09 -
Charge for insurance deductible - .04 - .04
Mark-to-market (gains) losses (.01) .05 (.07) .16
Micromill impairment - .16 - .16
Gain on sale of interests in AKW L.P. - - - (.42)
-------------- -------------- ------------- --------------
-
$ .03 $ (.12) $ .16 $ (.79)
============== ============== ============= ==============
</TABLE>
Net sales in the third quarter of 2000 totaled $537.1
million compared to $520.3 million in the third quarter of 1999.
Net sales for the nine-month period ended September 30, 2000,
totaled $1,645.3 million compared to $1,524.7 million for the
nine-month period ended September 30, 1999.
BAUXITE AND ALUMINA
Third party net sales of alumina were slightly lower for the
quarter ended September 30, 2000, as compared to the same period
in 1999 as a 14% increase in third party average realized prices
was more than offset by a 15% decrease in third party shipments.
The increase in average realized prices was due to an increase in
primary aluminum market prices because the sales price for
alumina under the Company's third-party alumina sales contracts
are linked to primary aluminum prices. This increase was
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 50,000 tons of alumina purchased
by KACC in 2000 from third parties to fulfill third party sales
contracts.
Intersegment net sales of alumina for the quarter ended
September 30, 2000, decreased 14% as compared to the same period
in 1999. A 22% decrease in intersegment shipments was partially
offset by a 9% increase in the intersegment average realized
price. The decrease in shipments was primarily due to the
potline curtailments at the Company's Washington smelters in mid-
June 2000, as discussed above, and, to lessor extent, the timing
of 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 primary aluminum market prices on a lagged basis of one month.
No alumina was purchased from third parties in the third quarter
of 2000 for the Primary aluminum business unit as the June 2000
potline curtailments alleviated the need for such purchases.
For the nine-month period ended September 30, 2000, third
party net sales of alumina were 6% higher than the comparable
period in 1999 as an 18% increase in third party average realized
prices was partially offset by a 13% decrease in third party
shipments. The increase in average realized prices and decrease
in third party shipments during the first nine months of 2000 as
compared to 1999 was attributable to the same price and volume
factors discussed above. Third party net sales included
approximately 195,000 tons of alumina purchased by KACC from
third parties to fulfill third party sales contracts.
Intersegment net sales for the nine-month period ended
September 30, 2000, increased 34% as compared to the same period
in 1999. The increase was due to a 21% increase in the
intersegment average realized price and a 10% 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 primary aluminum 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 half of 2000 as compared to the same period in
1999 offset, in part, by the unfavorable impact of the potline
curtailments at the Company's Washington smelters in mid-June
2000 discussed above. Intersegment net sales for the year to
date 2000 period included approximately 54,000 tons of alumina
purchased during the first six months of 2000 from third-parties
and transferred to the Primary aluminum business unit.
Segment operating income (before non-recurring items) for
the quarter ended September 30, 2000, was essentially flat as
compared to the comparable period in 1999 as the increase in the
average realized sales prices was offset by energy price
increases as well as decreases in shipments. Segment operating
income (before non-recurring items) for the nine-month period
ended September 30, 2000, increased from the comparable period in
1999 primarily as the result of the increase in the average
realized sales prices which was offset in part by the net
decrease in shipments as discussed above.
Segment operating income for the quarter and nine-month
periods ended September 30, 2000, discussed above, excludes non-
recurring labor settlement charges of $2.1 million and
incremental maintenance spending of $11.5 million. Segment
operating income for the quarter and nine-month periods ended
September 30, 1999, excludes the segment's allocated share of the
expense of insurance deductibles related to the Gramercy incident
of $4.0 million.
See Note 2 of Notes to Interim Consolidated Financial
Statements for additional 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 35% for
the third quarter of 2000 as compared to the same period in 1999
as a result of a 28% increase in third party shipments and a 6%
increase in third party averaged realized prices. The increase
in shipments was primarily due to the timing of shipments and the
favorable impact of the increased operating rate at the Company's
90%-owned Volta Aluminium Company Limited ("Valco") offset, only
modestly, by the mid-June 2000 curtailment of the potlines at the
Washington smelters discussed above as the business unit
purchased primary aluminum from third-parties to meet its third-
party and internal commitments (see additional discussion below.)
The increase in the average realized prices reflects the 11%
increase in primary aluminum market prices, partially offset by
allocated net losses from the Company's hedging activities.
Intersegment net sales were down approximately 14% between the
third quarter of 2000 and the third quarter of 1999. This
decrease was the result of a 24% decrease in intersegment
shipments offset, in part, by a 12% increase in intersegment
average realized prices. The decrease in shipments was primarily
due to the potline curtailment at the Washington smelters. The
increase in the intersegment average realized price was due to
higher market prices for primary aluminum as intersegment
transfers are made on the basis of primary aluminum market
prices.
For the nine-month period ended September 30, 2000, third
party sales of primary aluminum increased approximately 36% from
the comparable period in 1999, reflecting a 26% increase in third
party shipments and an 8% 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 nine-month
period ended September 30, 2000 were up 10% as compared to the
same period in 1999. This increase primarily resulted from a 19%
increase in intersegment average realized prices, reflecting
higher market prices for primary aluminum offset, in part, by a
8% decrease in intersegment shipments, which was primarily due to
the potline curtailments at the Washington smelters.
Segment operating income (before non-recurring items) for
the quarter and nine-month periods ended September 30, 2000, was
up from the comparable periods in 1999. The primary reason for
the increases was the improvements in average realized prices and
net shipments discussed above. However, segment operating income
for the quarter and nine-month periods ended September 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 Pacific Northwest, power costs
have generally increased. As previously reported, new agreements
entered into in both Ghana and Wales provide for increased power
stability but at increased costs. Additionally, the quarter and
nine-month periods ended September 30, 1999, also included costs
of approximately $1.9 million and $11.5 million, respectively,
associated with preparing and restarting potlines at Valco and
the Washington smelters.
Third party and intersegment shipments for the quarter and
nine-month periods ended September 30, 2000, also include
approximately 26,000 tons of primary aluminum purchased from
third parties to meet the business unit's internal and third
party shipment commitments because production was insufficient to
meet such needs as a result of the aforementioned potline
curtailments. Such volumes were sold by the business unit at
cost. However this had an adverse impact on its operating
income, as compared to having produced such primary aluminum in
prior quarters.
Segment operating income for the quarter and nine-month
periods ended September 30, 2000, discussed above, excludes non-
recurring net power sales gains of $40.5 million and $56.3
million, respectively. Segment operating income for the quarter
and nine-month period ended September 30, 2000, also exclude the
segment's share of the non-recurring labor settlement charge of
$15.9 million and costs related to staff reduction initiatives of
$3.1 million.
FLAT-ROLLED PRODUCTS
Net sales of flat-rolled products decreased by 18% during
the third quarter 2000 as compared to 1999 as a 36% decrease in
shipments was partially offset by a 27% 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 exit from this product line. Offsetting the reduced can
body stock shipments was a modest quarter over quarter
improvement in shipments of heat-treat products. The increase in
average realized prices primarily reflects the change in product
mix (resulting from the can body stock exit) as well as the pass
through to customers of increased market prices for primary
aluminum.
For the nine-month period ended September 30, 2000, net
sales of flat-rolled products decreased by 12% as compared to the
same period in 1999 as a 24% decrease in shipments was partially
offset by a 16% 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 a decline in prices for aerospace
heat-treat products subsequent to the first quarter of 1999 due
to reduced demand.
Segment operating income (before non-recurring items) for
the quarter ended September 30, 2000, was essentially flat when
compared to the comparable period in 1999 as the increase in
heat-treat products was offset by the can body stock exit. The
decrease in segment operating income (before non-recurring items)
in the nine-month period ended September 30, 2000, compared to
the comparable period in 1999 was attributable to the same
factors described above.
Segment operating income for the quarter and nine-month
periods ended September 30, 2000, discussed above, excludes the
segment's share of the non-recurring labor settlement charge of
$18.2 million. Segment operating income also excludes a $7.5
million LIFO inventory charge and $1.5 million of impairment
charges associated with KACC's exit from the can body stock
product line.
Results for the fourth quarter of 2000 for the flat-rolled
products segment may be modestly adversely affected by a routine
maintenance outage of certain equipment, which could cause heat-
treat product shipments to be less than they would be otherwise.
ENGINEERED PRODUCTS
Net sales of engineered products were essentially flat for
the third quarter 2000 as compared to 1999, as a 6% increase in
average realized prices was offset by a 6% decrease in product
shipments. The increase in average realized prices reflects
increased prices for soft alloy extrusions offset, in part, by a
shift in product mix. The decrease in product shipments was the
result of reduced ground transportation shipments due to
softening market demand.
For the nine-month period ended September 30, 2000, net
sales of engineered products increased approximately 8% as
compared to the same period in 1999 as the result of a 3%
increase in product shipments and a 5% increase in average
realized prices. The increase in product shipments in 2000 over
1999 reflects a strong first half of 2000 offset by a weakening
ground transportation market in the third quarter of 2000. In
addition to the factors described above, the changes in average
realized prices for the nine-month period ended September 30,
2000, also reflect the pass through to customers of increased
market prices for primary aluminum.
The changes in segment operating income (before non-
recurring items) for the quarter and nine-months periods ended
September 30, 2000, as compared to the comparable periods in 1999
were attributable to the same factors described above.
Segment operating income for the quarter ended September 30,
2000, discussed above, excludes a non-recurring impairment charge
associated with product line exit of $4.0 million and labor
settlement charges of $2.3 million. In addition to these items,
segment operating results for the nine-month period ended
September 30, 2000, excluded a $.7 severance-related charge
(reflected in the second quarter of 2000) with respect to the
same product line exit.
Segment operating income for the nine months ended September
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 (excluding non-recurring items)
represent corporate general and administrative expenses which are
not allocated to the Company's business segments.
Corporate operating results for the quarter and nine-month
periods ended September 30, 2000, exclude costs related to staff
reduction and efficiency initiatives of $2.0 million and $5.5
million, respectively. Corporate operating results for the
quarter and nine-month periods ended September 30, 1999, exclude
the expense of insurance deductibles related to the Gramercy
incident allocated to the Corporate segment of $1.0 million.
Corporate operating results for the third quarter of 1999 also
included an approximate $3.0 million non-cash re-allocation of
certain employee benefit costs between the Corporate and other
business units.
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 September 30, 2000, the Company had working capital of
$299.4 million, compared with working capital of $336.0 million
at December 31, 1999. The decrease in working capital primarily
resulted from decreases in inventories, prepaid expenses and
other current assets and increases in accounts payable and
accrued salaries, wages and related expenses offset by an
increase in trade and other receivables. 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. The decrease in prepaid expenses and other current assets
was driven by a reduction in margin deposits associated with the
Company's hedging positions. The increase in accounts payable
was primarily due to increased capital spending related to the
Gramercy incident. The increase in accrued salaries, wages and
related expenses were primarily due to the labor settlement with
the USWA (see Note 1 of Notes to Interim Financial Statements).
The increase in trade receivables reflects the increased market
prices for primary aluminum. The increase in other receivables
was primarily due to 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). Changes in trade receivables and
inventories also reflect the factors described in "Results of
Operations."
INVESTING ACTIVITIES
Capital expenditures during the nine-month period ended
September 30, 2000, were $196.5 million, consisting primarily of
$159.0 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 6 of
Notes to Interim Consolidated Financial Statements). The
remainder of the 2000 capital expenditures were incurred to
improve production efficiency and reduce operating costs at the
Company's other facilities. Total consolidated capital
expenditures, excluding the capital 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
SHORT-TERM:
In addition to normal operating items, 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.
KACC will continue to incur substantial business
interruption costs and capital spending until all construction
activity at the Gramercy facility is completed and full
production is restored. Business interruption costs are expected
to be substantially offset by insurance recoveries. A minimum of
an additional $27.0 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, the elapsed time of the rebuild, and
negotiations with the insurance carriers. The Company had
previously estimated that the cost of the Gramercy rebuild would
be approximately $200.0 million and that at least 50% would be
funded by insurance recoveries. The Company now believes that
the total cost of the rebuild will be somewhat higher than
previously estimated. The Company continues to believe that at
least 50% of the total cost will be funded by insurance
recoveries. However, the Company has not yet reflected an
increase in the minimum expected property damage recovery amount
pending further discussions with KACC's insurers.
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 remaining construction and business
interruption costs on an interim basis. However, no assurances
can be given in this regard.
During the first nine months of 2000, KACC paid $47.7
million of asbestos-related settlement and defense costs and
received insurance reimbursements of $36.5 million for asbestos-
related matters. KACC's future cash payments, prior to insurance
recoveries, for asbestos-related costs is estimated to be
approximately $60.0 million in the fourth quarter of 2000 and to
be between $100.0 million and $125.0 million in each of the years
2001 and 2002. The Company believes that KACC will recover a
substantial portion of asbestos payments from insurance.
However, insurance reimbursements have historically lagged KACC's
payments. Delays in receiving 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, as amended (the "Credit
Agreement") - (which the Company intends to extend or replace
prior to its August 2001 expiration date), will be sufficient to
satisfy its working capital and capital expenditure requirements
for the next year.
LONG-TERM:
As of September 30, 2000, the Company's total consolidated
indebtedness was $959.3 million, compared with $972.8 million at
December 31, 1999.
At September 30, 2000, $235.6 million (of which $64.7
million could have been used for letters of credit) was available
to KACC under the Credit Agreement and no borrowings were
outstanding. As of October 31, 2000, $16.2 million of borrowings
were outstanding under the Credit Agreement. During the first
nine months of 2000, amounts outstanding at the end of a month
have been as high as approximately $53.4 million, which occurred
in August 2000 primarily as a result of costs incurred and
capital spending related to the Gramercy rebuild, net of
insurance reimbursements. The average amount of borrowings
outstanding under the Credit Agreement during the nine-month
period ended September 30, 2000, was approximately $28.0 million.
The average per annum interest rate on loans outstanding under
the Credit Agreement during the nine-month period ended September
30, 2000, was approximately 10.2%.
The Credit Agreement expires in August 2001. It is the
Company's and KACC's intent to extend or replace the Credit
Agreement prior to its expiration. However, in order for the
Credit Agreement to be extended beyond January 2002, it is likely
that the $225.0 million of 9-7/8% Senior Notes, due February
2002, (the "9-7/8% Senior Notes"), will have to be retired or
that both the 9-7/8% Senior Notes and the $400.0 million of
12-3/4% Senior Subordinated Notes, due February 2003, will have
to be simultaneously retired and/or refinanced.
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. 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, financing
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 stocks.
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. The
U.S. Mine Safety and Health Administration issued 24 citations
and 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 ninety
lawsuits, many of which were styled as class action suits, being
filed against KACC and others since July 1999 on behalf of more
than 16,000 claimants. Such lawsuits allege, among other things,
property damage, business interruption loss by other businesses
and personal injury. Such lawsuits generally are pending in the
Fortieth Judicial District Court for the Parish of St. John the
Baptist, State of Louisiana and in the Twenty-Third Judicial
District Court for the Parish of St. James or the Parish of
Ascension, State of Louisiana, although a few of the lawsuits are
pending in the United States District Court, Eastern District of
Louisiana, or in the United States Court of Appeals for the Fifth
Circuit. Discovery has begun in the cases. The aggregate amount
of damages sought in the lawsuits cannot be determined at this
time.
In connection with the incident at Gramercy, KACC entered
into a Consent Agreement and Final Order with the U.S.
Environmental Protection Agency in July 2000 pursuant to which
KACC agreed to pay a penalty of $200,000 and to implement an
Operational Management System.
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 Form 10-Q for the quarter
ended June 30, 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 4 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 6. EXHIBITS AND REPORTS ON FORM 8-K
---------------------------------
(a) Exhibits.
Exhibit No. Exhibit
----------- -------
*4.1 Agreement dated August 18, 2000, among the
Company, Kaiser Aluminum & Chemical Corporation
("KACC"), the financial institutions party to the
Credit Agreement dated as of February 15, 1994, as
amended, and Bank of America, N.A., as agent,
regarding the Sale of the Center for Technology.
*10.1 Stock Option Grant Pursuant to the Kaiser 1997
Omnibus Stock Incentive Plan to Jack A. Hockema.
*10.2 Restricted Stock Agreement between Raymond J.
Milchovich, the Company and KACC pursuant to the
Kaiser 1997 Omnibus Stock Incentive Plan.
*10.3 Form of Enhanced Severance Agreement between KACC
and key executive personnel.
*10.4 Time-Based Stock Option Grant Pursuant to the
Kaiser 1997 Omnibus Stock Incentive Plan to
Raymond J. Milchovich.
*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 September 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)
KAISER ALUMINUM CORPORATION
/s/ Daniel D. Maddox
By:____________________________
Daniel D. Maddox
Vice President and Controller
(Principal Accounting Officer)
Dated: November 9, 2000
