SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
to
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-01430
REYNOLDS METALS COMPANY
A Delaware Corporation
(I.R.S. Employer Identification No. 54-0355135)
6601 West Broad Street, P. O. Box 27003, Richmond, Virginia 23261-7003
Telephone Number (804) 281-2000
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 ___
As of April 30, 1999, the Registrant had 64,507,259 shares of
Common Stock, no par value, outstanding and entitled to vote.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(millions, except per share amounts)
====================================================================
- --------------------------------------------------------------------
Quarters ended March 31 1999 1998
- --------------------------------------------------------------------
<S> <C> <C>
REVENUES $1,068 $1,532
COSTS AND EXPENSES
Cost of products sold 925 1,251
Selling, general and administrative expenses 82 93
Depreciation and amortization 57 70
Interest 20 34
- --------------------------------------------------------------------
1,084 1,448
- --------------------------------------------------------------------
EARNINGS
Income (loss) before income taxes and
cumulative effect of accounting change (16) 84
Taxes on income (credit) (6) 26
- --------------------------------------------------------------------
Income (loss) before cumulative effect
of accounting change (10) 58
Cumulative effect of accounting change - (23)
- --------------------------------------------------------------------
NET INCOME (LOSS) $ (10) $ 35
====================================================================
EARNINGS PER SHARE
Basic:
Average shares outstanding 64 73
Income (loss) before cumulative effect
of accounting change $(0.15) $ 0.78
Cumulative effect of accounting change - (0.32)
- --------------------------------------------------------------------
Net income (loss) $(0.15) $ 0.46
====================================================================
Diluted:
Average shares outstanding 64 74
Income (loss) before cumulative effect
of accounting change $(0.15) $ 0.78
Cumulative effect of accounting change - (0.32)
- --------------------------------------------------------------------
Net income (loss) $(0.15) $ 0.46
====================================================================
CASH DIVIDENDS PER COMMON SHARE $0.35 $ 0.35
====================================================================
The accompanying notes to consolidated financial statements are an
integral part of these statements.
</TABLE>
2
<PAGE> 3
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
==========================================================================
(millions) March 31 December 31
- --------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 191 $ 94
Receivables, less allowances of $10 (1998 - $14) 846 894
Inventories 545 500
Prepaid expenses and other 118 114
- --------------------------------------------------------------------------
Total current assets 1,700 1,602
Unincorporated joint ventures and associated
companies 1,510 1,478
Property, plant and equipment 4,271 4,282
Less allowances for depreciation and amortization 2,271 2,258
- --------------------------------------------------------------------------
2,000 2,024
Deferred taxes and other assets 897 1,030
- --------------------------------------------------------------------------
Total assets $6,107 $6,134
==========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued and other liabilities $ 844 $ 929
Short-term borrowings 155 116
Long-term debt 212 196
- --------------------------------------------------------------------------
Total current liabilities 1,211 1,241
Long-term debt 1,123 1,035
Postretirement benefits 1,031 1,029
Environmental, deferred taxes and other liabilities 600 635
Stockholders' equity:
Common stock 1,533 1,533
Retained earnings 1,189 1,222
Treasury stock, at cost (526) (526)
Accumulated other comprehensive income (54) (35)
- --------------------------------------------------------------------------
Total stockholders' equity 2,142 2,194
- --------------------------------------------------------------------------
Contingent liabilities (Note 7)
Total liabilities and stockholders' equity $6,107 $6,134
==========================================================================
The accompanying notes to consolidated financial statements are an
integral part of these statements.
</TABLE>
3
<PAGE> 4
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
==========================================================================
- --------------------------------------------------------------------------
Quarters ended March 31 (millions) 1999 1998
- --------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(10) $ 35
Adjustments to reconcile to net cash used in
operating activities:
Depreciation and amortization 57 70
Cumulative effect of accounting change - 23
Changes in operating assets and liabilities
net of effects of dispositions:
Accounts payable, accrued and other liabilities (18) (104)
Receivables (21) (17)
Inventories (56) -
Environmental and restructuring liabilities (9) (12)
Other (55) (44)
- --------------------------------------------------------------------------
Net cash used in operating activities (112) (49)
INVESTING ACTIVITIES
Capital investments:
Operational (26) (28)
Strategic (80) (29)
Sales of assets - operational restructuring 193 39
- --------------------------------------------------------------------------
Net cash provided by (used in) investing activities 87 (18)
FINANCING ACTIVITIES
Increase in short-term borrowings 41 117
Proceeds from long-term debt 150 100
Reduction of long-term debt (46) (23)
Cash dividends paid (23) (26)
Stock repurchases and other- net - (124)
- --------------------------------------------------------------------------
Net cash provided by financing activities 122 44
CASH AND CASH EQUIVALENTS
Net increase (decrease) 97 (23)
At beginning of period 94 70
- --------------------------------------------------------------------------
At end of period $191 $ 47
==========================================================================
The accompanying notes to consolidated financial statements are an integral
part of these statements.
</TABLE>
4
<PAGE> 5
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
=========================================================================
- -------------------------------------------------------------------------
Quarters ended March 31 1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
SHARES (thousands):
Common stock
Balance at January 1 74,105 73,909
Issued under employee benefit plans - 33
- -------------------------------------------------------------------------
Balance at March 31 74,105 73,942
- -------------------------------------------------------------------------
Treasury stock
Balance at January 1 (9,648) -
Purchased and held as Treasury stock - (2,004)
- -------------------------------------------------------------------------
Balance at March 31 (9,648) (2,004)
- -------------------------------------------------------------------------
Net common shares outstanding 64,457 71,938
- -------------------------------------------------------------------------
DOLLARS (millions):
Common stock
Balance at January 1 $1,533 $1,521
Issued under employee benefit plans - 2
- -------------------------------------------------------------------------
Balance at March 31 $1,533 $1,523
- -------------------------------------------------------------------------
Retained earnings
Balance at January 1 $1,222 $1,253
Net income (loss) (10) 35
Cash dividends declared for common stock (23) (26)
- -------------------------------------------------------------------------
Balance at March 31 $1,189 $1,262
- -------------------------------------------------------------------------
Treasury stock
Balance at January 1 $ (526) $ -
Purchased and held as Treasury stock - (126)
- -------------------------------------------------------------------------
Balance at March 31 $ (526) $ (126)
- -------------------------------------------------------------------------
Accumulated other comprehensive income (loss)
Balance at January 1 $ (35) $ (35)
Foreign currency translation adjustments (19) (9)
Income taxes - 1
----------------------
Other comprehensive income (loss) (19) (8)
- -------------------------------------------------------------------------
Balance at March 31 $ (54) $ (43)
- -------------------------------------------------------------------------
Total stockholders' equity $2,142 $2,616
- -------------------------------------------------------------------------
COMPREHENSIVE INCOME (millions):
Net income (loss) $ (10) $ 35
Other comprehensive income (loss) (19) (8)
- -------------------------------------------------------------------------
Comprehensive income (loss) $ (29) $ 27
- -------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an
integral part of these statements.
</TABLE>
5
<PAGE> 6
REYNOLDS METALS COMPANY AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Quarters Ended March 31, 1999 and 1998
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the interim period of
1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. For further
information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1998. Certain amounts have
been reclassified to conform to the 1999 presentation. In the
tables, dollars are in millions, except per share and per pound
amounts, and shipments are in thousands of metric tons. A metric
ton is equivalent to 2,205 pounds.
2. ACCOUNTING POLICIES
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
In 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-5, "Reporting on the Costs of
Start-Up Activities." The SOP requires costs of start-up
activities and organization costs to be expensed as incurred.
The Company adopted the SOP in the second quarter of 1998 and
recognized a charge for the cumulative effect of accounting
change of $23 million. First quarter 1998 results have been
retroactively restated to reflect this accounting change.
ACCOUNTING FOR THE COSTS OF DEVELOPING OR OBTAINING INTERNAL-USE
SOFTWARE
In the first quarter of 1999, the Company adopted the Accounting
Standards Executive Committee of the American Institute of
Certified Public Accountants' Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." The SOP requires qualifying computer
software costs incurred in connection with obtaining or
developing software for internal use to be capitalized. In prior
years, the Company capitalized costs of purchased software and
expensed internal costs of developing software. The effect of
adopting this SOP was not material to first quarter 1999 results,
and is not expected to be material for the full year.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement establishes new accounting
and reporting standards for derivative instruments and hedging
activities. The Company must adopt this statement by January 1,
2000. The Company has not determined the impact this statement
will have on its financial position or results of operations.
3. OPERATIONAL RESTRUCTURING
In the first quarter of 1999, the sale of the Company's Alabama
can stock complex was finalized. This sale essentially completed
the Company's restructuring activities.
6
<PAGE> 7
4. EARNINGS PER SHARE
The following reconciles income and average shares for the basic
and diluted earnings per share computations for "Income (loss)
before cumulative effect of accounting change."
<TABLE>
<CAPTION>
Quarters ended March 31
---------------------------------
1999 1998
---------------------------------
<S> <C> <C>
Income (numerator):
Income (loss) before cumulative
effect of accounting change $(10) $58
Average shares (denominator):
Basic 64,475,000 73,174,000
Effect of dilutive securities:
Stock options - 372,000
---------------------------------
Diluted 64,475,000 73,546,000
---------------------------------
Per share amount:
Basic $(0.15) $0.78
Diluted $(0.15) $0.78
Antidilutive securities excluded:
Stock options 4,977,000 1,484,000
</TABLE>
5. FINANCING ARRANGEMENTS
In the first quarter of 1999, the Company borrowed $150 million
under its credit facilities. The borrowing bears interest at a
variable rate (5.3% at March 31, 1999) and requires repayment in
a lump sum in 2001. The variable rate is based on the London
Interbank Offer Rate.
7
<PAGE> 8
6. COMPANY OPERATIONS
<TABLE>
<CAPTION>
Packaging Construction
Base and and
First Quarter 1999 Materials Consumer Distribution
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Customer aluminum shipments 212 33 47
Internal aluminum shipments 56 - -
- --------------------------------------------------------------------------
Total aluminum shipments 268 33 47
Customer revenues:
Aluminum $302 $178 $159
Nonaluminum 75 134 78
Intersegment revenues - aluminum 81 - -
- --------------------------------------------------------------------------
Total revenues $458 $312 $237
==========================================================================
Operating income (loss) $ 14 26 $ 8
Interest expense
- --------------------------------------------------------------------------
Loss before income taxes
==========================================================================
First Quarter 1998
- --------------------------------------------------------------------------
Customer aluminum shipments 145 30 46
Internal aluminum shipments 99 - -
- --------------------------------------------------------------------------
Total aluminum shipments 244 30 46
Customer revenues:
Aluminum $247 $175 $165
Nonaluminum 115 136 82
Intersegment revenues - aluminum 163 - -
- --------------------------------------------------------------------------
Total revenues $525 $311 $247
==========================================================================
Operating income (loss) $ 79 $ 22 8
Interest expense
- --------------------------------------------------------------------------
Income before income taxes
==========================================================================
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
First Quarter 1999 Transportation Restructuring Other
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Customer aluminum shipments 17 - 14
Internal aluminum shipments - - -
- --------------------------------------------------------------------------
Total aluminum shipments 17 - 14
Customer revenues:
Aluminum $94 - $ 37
Nonaluminum - - 11
Intersegment revenues - aluminum - -
- --------------------------------------------------------------------------
Total revenues $94 - $ 48
==========================================================================
Operating income (loss) (2) - $(44)
Interest expense
- --------------------------------------------------------------------------
Loss before income taxes
==========================================================================
First Quarter 1998
- --------------------------------------------------------------------------
Customer aluminum shipments 16 116 9
Internal aluminum shipments 2 -
- --------------------------------------------------------------------------
Total aluminum shipments 16 118 9
Customer revenues:
Aluminum $87 $477 $ 29
Nonaluminum - 5 14
Intersegment revenues - aluminum - 7 -
- --------------------------------------------------------------------------
Total revenues $87 $489 $ 43
==========================================================================
Operating income (loss) $ - $ 38 $(32)
Interest expense
- --------------------------------------------------------------------------
Income before income taxes
==========================================================================
</TABLE>
<TABLE>
<CAPTION>
Reconciling
First Quarter 1999 Items Consolidated
- --------------------------------------------------------------------------
<S> <C> <C>
Customer aluminum shipments - 323
Internal aluminum shipments (56) -
- --------------------------------------------------------------------------
Total aluminum shipments (56) 323
Customer revenues:
Aluminum $ - $ 770
Nonaluminum - 298
Intersegment revenues - aluminum (81) -
- --------------------------------------------------------------------------
Total revenues $ (81) $1,068
==========================================================================
Operating income (loss) $ 2 $ 4
Interest expense 20
- --------------------------------------------------------------------------
Loss before income taxes $ (16)
==========================================================================
First Quarter 1998
- --------------------------------------------------------------------------
Customer aluminum shipments - 362
Internal aluminum shipments (101) -
- --------------------------------------------------------------------------
Total aluminum shipments (101) 362
Customer revenues:
Aluminum $ - $1,180
Nonaluminum - 352
Intersegment revenues - aluminum (170) -
- --------------------------------------------------------------------------
Total revenues $(170) $1,532
==========================================================================
Operating income (loss) $ 3 $ 118
Interest expense 34
- --------------------------------------------------------------------------
Income before income taxes $ 84
==========================================================================
</TABLE>
RECONCILING ITEMS
Reconciling items for operating income (loss) consist of the
elimination of unrealized profits on sales between global
business units.
7. CONTINGENT LIABILITIES
As previously disclosed in the Company's 1998 Form 10-K, the
Company is involved in various worldwide environmental
improvement activities resulting from past operations, including
designation as a potentially responsible party (PRP), with
others, at various Environmental Protection Agency-designated
Superfund sites. The Company has recorded amounts (on an
undiscounted basis) which, in management's best estimate, will be
sufficient to satisfy anticipated costs of known remediation
requirements.
Estimated costs for future environmental compliance and
remediation are necessarily imprecise because of factors such as:
. continuing evolution of environmental laws and regulatory
requirements
. availability and application of technology
. identification of presently unknown remediation requirements
. cost allocations among PRPs
Further, it is not possible to predict the amount or timing of
future costs of environmental remediation that may subsequently
be determined. Based on information presently available, such
future costs are not expected to have a material adverse effect
on the Company's competitive or financial position. However,
such costs could be material to results of operations in a future
interim or annual reporting period.
9
<PAGE> 10
8. CANADIAN REYNOLDS METALS COMPANY, LTD. AND REYNOLDS ALUMINUM
COMPANY OF CANADA, LTD.
Financial statements and financial statement schedules for
Canadian Reynolds Metals Company, Ltd. and Reynolds Aluminum
Company of Canada, Ltd. have been omitted because certain
securities registered under the Securities Act of 1933, of which
these wholly owned subsidiaries of Reynolds Metals Company
(Reynolds) are obligors (thus subjecting them to reporting
requirements under Section 13 or 15(d) of the Securities Exchange
Act of 1934), are fully and unconditionally guaranteed by
Reynolds. Financial information relating to these companies is
presented herein in accordance with Staff Accounting Bulletin 53
as an addition to the footnotes to the financial statements of
Reynolds. Summarized financial information is as follows:
10
<PAGE> 11
8. CANADIAN REYNOLDS METALS COMPANY, LTD. AND REYNOLDS ALUMINUM
COMPANY OF CANADA, LTD. - continued
<TABLE>
<CAPTION>
Canadian Reynolds Metals Company, Ltd.
Quarters ended March 31
----------------------------
1999 1998
----------------------------
<S> <C> <C>
Net Sales:
Customers $ 110 $ 93
Parent and related companies 100 131
----------------------------
$ 210 $ 224
Cost of products sold 196 185
Net income $ 6 $ 28
<CAPTION>
March 31 December 31
1999 1998
----------------------------
<S> <C> <C>
Current assets $ 304 $ 155
Noncurrent assets 1,202 1,206
Current liabilities (98) (100)
Noncurrent liabilities (530) (379)
</TABLE>
<TABLE>
<CAPTION>
Reynolds Aluminum Company of Canada, Ltd.
Quarters ended March 31
----------------------------
1999 1998
----------------------------
<S> <C> <C>
Net Sales:
Customers $ 110 $ 119
Parent and related companies 100 125
----------------------------
$ 210 $ 244
Cost of products sold 195 201
Net income $ 7 $ 29
<CAPTION>
March 31 December 31
1999 1998
----------------------------
<S> <C> <C>
Current assets $ 296 $ 186
Noncurrent assets 1,217 1,228
Current liabilities (99) (103)
Noncurrent liabilities (540) (389)
</TABLE>
11
<PAGE> 12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the
consolidated financial statements and related footnotes included
in the Company's 1998 Form 10-K along with the consolidated
financial statements and related footnotes included in and
referred to in this report. In the tables, dollars are in
millions, except per share and per pound amounts, and shipments
are in thousands of metric tons. A metric ton is equivalent to
2,205 pounds.
Management's Discussion and Analysis contains forecasts,
projections, estimates, statements of management's plans,
objectives and strategies for the Company and other forward-
looking statements. Please refer to the "Risk Factors" section
beginning on page 19, where we have summarized factors that could
cause actual results to differ materially from those projected in
a forward-looking statement or affect the extent to which a
particular projection is realized.
RESULTS OF OPERATIONS
- ---------------------
Extremely low aluminum prices reduced operating results by $76
million in the first quarter of 1999 compared to the first
quarter of 1998 primarily affecting our Base Materials Global
Business Unit. During the quarter, aluminum prices reached an
all-time low adjusted for inflation and a five-year low on a
nominal basis. Our average realized price for primary aluminum
of $0.64 per pound in the 1999 first quarter was down 17%
compared to $0.77 per pound in the 1998 first quarter. The
impact of lower prices was partially offset by lower material and
conversion costs of $30 million, lower interest and SG&A expenses
of $25 million, and higher shipments from ongoing operations of
$2 million, especially value-added primary aluminum products. In
addition, our results include foreign currency related losses and
charges, principally in Brazil, of $12 million.
<TABLE>
<CAPTION>
First Quarter
-----------------------
1999 1998
-----------------------
<S> <C> <C>
RESULTS
Income (loss) before cumulative effect
of accounting change $ (10) $ 58
Cumulative effect of accounting
change (see Note 2) - (23)
-----------------------
Net income (loss) $ (10) $ 35
=======================
EARNINGS PER SHARE - BASIC
Income (loss) before cumulative effect
of accounting change $(0.15) $0.78
Cumulative effect of accounting change - (0.32)
-----------------------
Net income (loss) $(0.15) $0.46
=======================
</TABLE>
GLOBAL BUSINESS UNITS
The Company is organized into four market-based, global business
units. The four global business units and their principal
products are as follows:
. Base Materials - alumina, carbon products, primary aluminum
ingot and billet, and electrical rod
. Packaging and Consumer - aluminum and plastic packaging and
consumer products; printing products
. Construction and Distribution - architectural construction
products and the distribution of a wide variety of aluminum and
stainless steel products
. Transportation - aluminum wheels, heat exchangers and
automotive structures
12
<PAGE> 13
RESULTS OF OPERATIONS - continued
- ---------------------
GLOBAL BUSINESS UNITS - continued
<TABLE>
<CAPTION>
Base Materials
First Quarter
--------------------------
1999 1998
--------------------------
<S> <C> <C>
Aluminum shipments:
Customer 212 145
Internal 56 99
--------------------------
Total 268 244
==========================
Revenues:
Customer - aluminum $302 $247
- nonaluminum 75 115
Internal - aluminum 81 163
--------------------------
Total $458 $525
==========================
Operating income $ 14 $ 79
==========================
</TABLE>
Our base materials business is fundamentally very strong. The
increase in customer aluminum shipments in the first quarter of
1999 reflects strong demand for our value-added products (foundry
and sheet ingot, billet and rod), which made up 72% of the
primary aluminum shipments in the first quarter. Our available
supply to meet customer demand has increased because we no longer
need to supply downstream fabricating operations that have been
sold, and we restarted idled capacity in 1998.
In addition to reflecting the changes in shipping volume,
aluminum revenues in the first quarter of 1999 were significantly
affected by lower prices for primary aluminum.
Nonaluminum revenues were lower because of:
. significantly lower prices for alumina - approximately 20%
to 25% lower than the first quarter of 1998
. lower customer shipments of alumina and carbon products due
to weaker demand and greater internal use resulting from our
restart of idled primary aluminum capacity in 1998
The most significant factor affecting operating profit in the
first quarter of 1999 was lower prices for primary aluminum
products. We were able to offset some of the decline with higher
shipments of primary aluminum products, improved capacity
utilization, and lower material and conversion costs.
<TABLE>
<CAPTION>
Packaging and Consumer
First Quarter
------------------------
1999 1998
------------------------
<S> <C> <C>
Customer aluminum shipments 33 30
Revenues:
Customer - aluminum $178 $175
- nonaluminum 134 136
------------------------
Total $312 $311
========================
Operating income $ 26 $ 22
========================
</TABLE>
Customer aluminum shipments and revenues were higher in the first
quarter of 1999 because of strong demand for consumer foil
products in domestic and foreign markets. Prices were lower
because of competition.
Operating income was higher because of the higher shipping volume
and lower material and conversion costs.
13
<PAGE> 14
RESULTS OF OPERATIONS - continued
- ---------------------
GLOBAL BUSINESS UNITS - continued
Packaging and Consumer - continued
We have established a new manufacturing facility in Brazil that
will produce foodservice packaging and consumer products. We
will focus initially on the Brazilian market with plans to expand
throughout South America.
<TABLE>
<CAPTION>
Construction and Distribution
First Quarter
-------------------------
1999 1998
-------------------------
<S> <C> <C>
Customer aluminum shipments 47 46
Revenues:
Customer - aluminum $159 $165
- nonaluminum 78 82
-------------------------
Total $237 $247
=========================
Operating income $ 8 $ 8
=========================
</TABLE>
Shipments increased in the first quarter of 1999 because of
strong demand for most distribution products.
Revenues decreased because of lower prices for most products.
The decline in prices for aluminum products reflected the general
global weakening of aluminum prices. Prices for stainless steel
products were lower due to global supply/demand imbalances and
lower material costs.
Operating income remained flat. The benefits of increased volume
and lower material costs were offset by lower prices and the
continuing absorption of the cost of our market expansions in
southeast Europe and China.
Our outlook is for continued strong activity levels for
distribution products, especially in the transportation and
kitchen equipment markets. For construction products, we are
cautiously optimistic about signs of strengthening in the
depressed markets of Asia and Latin America.
<TABLE>
<CAPTION>
Transportation
First Quarter
-------------------------
1999 1998
-------------------------
<S> <C> <C>
Customer aluminum shipments 17 16
Customer revenues $94 $87
Operating loss (2) -
=========================
</TABLE>
Shipments and revenues were higher in the first quarter of 1999
because of strong demand for cast and forged aluminum wheels.
Our available supply increased due to improved capacity
utilization and the completion of the expansion of our Virginia
forged aluminum wheel plant in February 1999.
14
<PAGE> 15
RESULTS OF OPERATIONS - continued
- ---------------------
GLOBAL BUSINESS UNITS - continued
Transportation - continued
Operating profit was lower because of non-recurring start-up
costs relating to an engine cradle program at our Indiana
automotive structures plant (see below). This effect was
partially offset by lower material costs, improved shipping
volume and capacity utilization in wheel and heat exchanger
operations, and significant operating improvements at our Beloit,
Wisconsin wheel plant.
The Company and an automobile manufacturer are pioneering the
first, mass-produced, high-volume, all-aluminum engine cradle.
The engine cradle offers significant weight savings, reduces
noise and vibration, and provides important safety features. We
have incurred high start-up costs because of the complexity of
the production process and our acceleration of the timetable to
begin production. No other manufacturer has yet produced this
particular component, so we expect to maintain a competitive
advantage.
Restructuring
As of December 31, 1998, the only assets remaining in this
category related to the Alabama can stock complex. We finalized
the sale of the Alabama can stock complex at the end of the first
quarter of 1999. As a result, no revenues or operating results
are included in the Restructuring category in 1999.
Other
The decline in operating profit in the first quarter of 1999 was
due to foreign currency related losses and charges, principally
in Brazil.
For additional information concerning the global business units,
see Note 6 to the consolidated financial statements.
INTEREST EXPENSE
Interest expense decreased in the first quarter of 1999 compared
to the first quarter of 1998 due to lower amounts of debt
outstanding.
TAXES ON INCOME
The effective tax rates reflected in the income statement differ
from the U.S. federal statutory rate principally because of the
following:
. foreign taxes at different rates
. the effects of percentage depletion allowances
. credits and other tax benefits
YEAR 2000 READINESS DISCLOSURE
Issue
The year 2000 issue results from computer programs and systems
that rely on two digits rather than four to define the applicable
year. Such systems may treat a date using "00" as the year 1900
rather than the year 2000. As a result, computer systems could
fail to operate or make miscalculations, causing disruption of
business operations.
Left unrepaired, many of the Company's systems, including
information and computer systems and automated equipment, could
be affected by the year 2000 issue. Failure to adequately
address the issue could result in, among other things, the
temporary inability to manufacture products, process
transactions, send invoices, and/or engage in normal business
activities. We do not believe the products we sell require
remediation to address the year 2000 issue since they do not
depend on the calendar function in the electronic components.
15
<PAGE> 16
RESULTS OF OPERATIONS - continued
- ---------------------
YEAR 2000 READINESS DISCLOSURE - continued
Goal
The Company has a formal program to address and resolve potential
exposure associated with information and non-information
technology systems arising from the year 2000 issue. Our goal is
that none of the Company's critical business operations or
computer processes we share with our suppliers and customers will
be substantially impaired by the advent of the year 2000.
Our program is led by our Year 2000 Program Management Office,
which recommends processes and tools for year 2000 remediation to
the Company's business units and monitors progress. The Program
Management Office consolidates progress information into monthly
status reports for review by management, the Company's internal
auditors and the Board of Directors. The Audit Committee of the
Board of Directors is also given periodic briefings on progress
and plans from the Program Management Office.
Year 2000 Remediation Project
We have substantially completed preparation of our critical, date-
sensitive computer systems, processes and interfacing software
for the year 2000. Our preparation included five phases: (1)
inventory, (2) planning,
(3) conversion, (4) pre-installation testing and (5)
installation. We measure progress on remediation projects as a
percentage of actual staff hours expended to staff hours
projected. As of March 31, 1999, our overall remediation efforts
were approximately 98% complete; remediation of information
systems was approximately 99% complete while remediation of non-
information systems (e.g., manufacturing and mechanical systems)
was approximately 96% complete. We continue to monitor our
computer and software vendors' readiness statements to assure
that readiness changes in their products do not negatively affect
our systems.
Quality Assurance
In addition to completing our year 2000 remediation project, we
are validating our remediation efforts with post-installation
testing of certain critical computer systems. We also expect to
respond to and initiate requests to test with certain suppliers,
customers and government agencies after they ready their systems.
Contingency Planning
An ongoing key aspect of the Company's contingency planning for
the year 2000 focuses on assessment of the business impact on the
Company resulting from the possible failure of our suppliers to
provide needed products and services. We are assessing the year
2000 readiness of all our suppliers who are deemed to be critical
to each of our operating locations, even though the products or
services they provide may not be material to the Company's
business as a whole. We have surveyed over 2,000 suppliers and
rated them low, medium or high risk in their progress toward
being ready for the year 2000. Critical suppliers rated as high
risk are receiving our immediate attention for contingency
planning or other measures such as identifying additional sources
of supply for critical materials.
As of March 31, 1999, we were on schedule with our third party
evaluation, having completed approximately 45% of the projected
total effort that we currently estimate will be needed. Early in
the fourth quarter of 1999, we plan to have ranked our critical
suppliers as low risk, identified additional sources of supply or
developed other contingency plans with respect to those critical
suppliers who are not ranked as low risk. We will continue
monitoring these suppliers into the year 2000. In addition, we
are responding to customer inquiries regarding our year 2000
program and our progress in addressing the issue. We also expect
to evaluate the year 2000 readiness of certain of our largest
customers. We have not determined the potential costs of
business disruptions from supplier or customer non-performance.
The Company currently has in place operating procedures and
business continuity plans at its operating locations for
responding to unusual, disruptive situations such as power
shortages, failures by major suppliers and natural disasters.
These existing procedures and plans provide a solid foundation
for addressing many year 2000 issues. As unique risks are
identified and deemed sufficiently likely to occur, we will make
necessary adaptations or additions to our existing procedures and
plans.
16
<PAGE> 17
RESULTS OF OPERATIONS - continued
- ---------------------
YEAR 2000 READINESS DISCLOSURE - continued
Contingency Planning - continued
Contingency planning and monitoring to determine realistic year
2000 issues beyond those already addressed will continue
throughout the year. Several reasonably likely worst case
scenarios involve shortages or unanticipated outages of energy
requirements. Our operations, particularly in the Base Materials
business, require significant quantities of energy. Curtailments
or disruptions of energy supplies would result in full or partial
shutdowns of these operations until energy availability could be
restored. In addition, an unanticipated loss of energy supply
could result in damage to production equipment. We continue to
assess these and other business disruption risks.
Costs
The total cost of our Year 2000 remediation project is currently
expected to be approximately $22 million. As of March 31, 1999,
we had incurred approximately $20 million, which includes labor,
equipment and license costs. Our cost projections include
approximate costs for post-installation testing and contingency
planning.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
<TABLE>
<CAPTION>
WORKING CAPITAL
March 31 December 31
1999 1998
---------------------------
<S> <C> <C>
Working capital $489 $361
Ratio of current assets to current liabilities 1.4/1 1.3/1
</TABLE>
The increase in working capital was due principally to higher
cash and cash equivalents. The cash was received from the sale
of assets late in the first quarter of 1999.
OPERATING ACTIVITIES
Cash used in operating activities in the first quarter of 1999
was supplemented with funds from financing activities. We used
these funds principally to increase inventories in anticipation
of improved shipping levels in the second quarter of 1999.
INVESTING ACTIVITIES
Capital investments totaled $106 million in the first quarter of
1999. This amount includes $26 million for operating
requirements (replacement equipment, environmental control
projects, etc.). The remainder was for strategic projects
(performance improvements, investments, etc.) principally carried
forward from 1998, including:
. expansion of the Worsley Alumina Refinery in Australia
. modernization of U.S. foil plants
. acquisition of a producer of flexographic separations and
plates for the packaging industry in Canada
. establishment of a foodservice packaging and consumer
products subsidiary in Brazil
. expansion of a plant in Europe that will produce composite
architectural products
. construction of a new, larger metals distribution center in
Seattle to replace the current leased facility
. expansion of a forged wheel plant in Virginia (completed in
February 1999)
. expansion and modification of an automotive structures plant
in Indiana
Capital investments planned for 1999 (approximately $450 million)
are primarily for those strategic projects now under way and
continuing operating requirements. We expect to fund these
capital investments primarily with cash provided by operating
activities. While the projected 1999 capital investments do not
include amounts for acquisitions, we will evaluate opportunities
that arise. We do have small packaging and consumer acquisitions
in process or under review.
17
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES - continued
- -------------------------------
FINANCING ACTIVITIES
The significant financing activities for the first quarter of
1999 were borrowings of $150 million under our revolving credit
facilities (see Note 5). We used the proceeds to supplement cash
used in operating activities.
Early in the second quarter of 1999, we repaid approximately $130
million of short-term borrowings with available cash.
PORTFOLIO REVIEW
In the first quarter of 1999, we completed the sale of our can
stock complex in Alabama. With this sale, our restructuring is
essentially complete.
OUTLOOK
Our outlook for the second quarter of 1999 is a significant
improvement from the first quarter. While we expect pricing
pressures to cause results to be below the second quarter of
1998, the recent strengthening of the aluminum market should
serve to enhance our anticipated performance improvement. For the
year, we expect to benefit from increased sales of our packaging
and consumer products.
18
<PAGE> 19
RISK FACTORS
- ------------
This section should be read in conjunction with Part I, Items
1(Business) and 7 (Management's Discussion and Analysis of
Financial Condition and Results of Operations) of the Company's
1998 Form 10-K and the preceding portions of this Item.
This report contains (and oral communications made by or on
behalf of the Company may contain) forecasts, projections,
estimates, statements of management's plans, objectives and
strategies for the Company and other forward-looking statements<F1>.
The Company's expectations for the future and related forward-
looking statements are based on a number of assumptions and
forecasts, including:
. world economic growth and other economic indicators
(including rates of inflation, industrial production, housing
starts and light vehicle sales)
. trends in the Company's key markets
. global aluminum supply and demand conditions
. primary aluminum prices
By their nature, forward-looking statements involve risk and
uncertainty, and various factors could cause the Company's actual
results to differ materially from those projected in a forward-
looking statement or affect the extent to which a particular
projection is realized.
The Company is cautiously optimistic about the demand for
aluminum for 1999. There are signs that the economies in Asia
are beginning to recover. The economic situation in South
America is also improving. The Company's outlook is for an
increase in global primary aluminum consumption for 1999 of 2%.
If the global economy completes its recovery in 2000 to 2001, we
expect global aluminum consumption to grow by approximately 5%
per year.
Economic and/or market conditions other than those forecasted by
the Company in the preceding paragraph could cause the Company's
actual results to differ materially from those projected in a
forward-looking statement or affect the extent to which a
particular projection is realized. The Company's outlook for
1999 and beyond could be jeopardized by a further delay of
economic recovery in Asia and Brazil, as well as in other
emerging markets.
The following factors also could affect the Company's results:
. Primary aluminum is an internationally traded commodity.
The price of primary aluminum is subject to worldwide market
forces of supply and demand and other influences. Prices can be
volatile. Because primary aluminum makes up a significant
portion of the Company's shipments, changes in aluminum pricing
have a rapid effect on the Company's operating results. The
Company's use of contractual arrangements, including fixed-price
sales contracts, fixed-price supply contracts, and forward,
futures and option contracts, reduces its exposure to price
volatility but does not eliminate it.
________________________
<F1>Forward-looking statements can be identified generally as those
containing words such as "should," "will," "will likely result,"
"hope," "forecast," "outlook," "project," "estimate," "expect,"
"anticipate," or "plan" and words of similar effect.
19
<PAGE> 20
RISK FACTORS - continued
- ------------
. The markets for most aluminum products are highly
competitive. Certain of the Company's competitors are larger
than the Company in terms of total assets and operations and have
greater financial resources. Certain foreign governments are
involved in the operation and/or ownership of certain competitors
and may be motivated by political as well as economic
considerations. In addition, aluminum competes with other
materials, such as steel, plastics and glass, among others, for
various applications in the Company's key markets. Plastic
products compete with similar products made by the Company's
competitors, as well as with products made of glass, aluminum,
steel, paper, wood and ceramics, among others. Unanticipated
actions or developments by or affecting the Company's competitors
and/or the willingness of customers to accept substitutions for
the products sold by the Company could affect results.
. The Company spends substantial capital and operating amounts
relating to ongoing compliance with environmental laws. In
addition, the Company is involved in remedial investigations and
actions in connection with past disposal of wastes. Estimating
future environmental compliance and remediation costs is
imprecise due to:
- continuing evolution of environmental laws and
regulatory requirements and uncertainties about their
application to the Company's operations
- availability and application of technology
- identification of currently unknown remediation sites
- allocation of costs among potentially responsible parties
. The Company has investments and activities in various
emerging markets, including Russia, China, India and Brazil.
While emerging markets offer strong growth potential, they also
present a higher degree of risk than more developed markets. In
addition to the business risks inherent in developing and
servicing new markets, economic conditions may be more volatile,
legal systems less developed and predictable, and the possibility
of various types of adverse government action more pronounced.
. Unanticipated material legal proceedings or investigations,
or the disposition of those currently pending against the Company
other than as anticipated by management and counsel, could affect
the Company's results.
. Changes in the costs of power, resins, caustic soda, green
coke and other raw materials can affect results.
. A number of the Company's operations are cyclical and can be
influenced by economic conditions.
. A failure to complete the Company's major capital projects,
such as expansion of the Worsley Alumina Refinery, as scheduled
and within budget or a failure to launch successfully new growth
or strategic business programs, such as the engine cradle
program, could affect the Company's results.
. The Company's results may be adversely affected if it fails
to meet its year 2000 readiness goals. While the Company
believes it has prepared substantially all of its information and
non-information systems for the advent of the year 2000, a
failure to locate and correct all relevant computer codes could
result in disruptions of Company operations, some of which may be
significant. Also, there can be no guarantee that other
companies with which the Company does business will be converted
on a timely basis or their failure to be year 2000 compliant will
not have an adverse effect on the Company.
. A strike at a customer facility or a significant downturn in
the business of a key customer supplied by the Company could
affect the Company's results.
20
<PAGE> 21
RISK FACTORS - continued
- ------------
In addition to the factors referred to above, the Company is
exposed to general financial, political, economic and business
risks in connection with its worldwide operations. The Company
continues to evaluate and manage its operations in a manner to
mitigate the effects from exposure to such risks. In general,
the Company's expectations for the future are based on the
assumption that conditions relating to costs, currency values,
competition and the legal, regulatory, financial, political and
business environments in the worldwide economies and markets in
which the Company operates will not change significantly overall.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this Amendment No. 1 to
be signed on its behalf by the undersigned thereunto duly
authorized.
REYNOLDS METALS COMPANY
By ALLEN M. EAREHART
-----------------------
Allen M. Earehart
Senior Vice President and Controller
(Chief Accounting Officer)
DATE: October 20, 1999
22
