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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, 2002
Commission file number 1-3605
KAISER ALUMINUM & CHEMICAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State of incorporation)
94-0928288
(I.R.S. Employer Identification No.)
5847 SAN FELIPE, SUITE 2500, HOUSTON, TEXAS 77057-3268
(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, 2002, the registrant had 46,171,365 shares of Common Stock
outstanding.
DIFFERENT SUITE NUMBER AT SAME STREET ADDRESS
(Former address)
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KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(Debtor-in-Possession)
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
September 30, December 31,
2002 2001
---------------- ---------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 93.9 $ 153.3
Receivables:
Trade, less allowance for doubtful receivables of $11.3 and $7.0,
respectively 117.3 124.1
Other 52.7 88.8
Inventories 298.9 313.3
Prepaid expenses and other current assets 38.1 86.2
---------------- ---------------
Total current assets 600.9 765.7
Investments in and advances to unconsolidated affiliates 68.7 63.0
Property, plant, and equipment - net 1,160.7 1,215.4
Other assets 677.9 706.1
---------------- ---------------
Total $ 2,508.2 $ 2,750.2
================ ===============
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities not subject to compromise - Current liabilities:
Accounts payable $ 133.8 $ 167.4
Accrued interest 2.5 35.4
Accrued salaries, wages, and related expenses 58.5 88.9
Accrued postretirement medical benefit obligation - current portion 54.0 62.0
Other accrued liabilities 40.4 222.0
Payable to affiliates 33.3 54.2
Long-term debt - current portion .9 173.5
---------------- ---------------
Total current liabilities 323.4 803.4
Long-term liabilities 95.0 920.0
Accrued postretirement medical benefit obligation - 642.2
Long-term debt 42.8 700.8
---------------- ---------------
461.2 3,066.4
Liabilities subject to compromise 2,592.3 -
Minority interests 119.2 117.8
Commitments and contingencies
Stockholders' equity:
Preference stock .7 .7
Common stock 15.4 15.4
Additional capital 2,454.7 2,437.6
Accumulated deficit (843.0) (645.2)
Accumulated other comprehensive income (loss) (100.6) (67.3)
Less: Note receivable from parent (2,191.7) (2,175.2)
---------------- ---------------
Total stockholders' equity (664.5) (434.0)
---------------- ---------------
Total $ 2,508.2 $ 2,750.2
================ ===============
The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
(In millions of dollars, except share amounts)
Quarter Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
2002 2001 2002 2001
----------------------- ----------------------
Net sales $ 348.0 $ 430.3 $ 1,104.9 $ 1,357.4
----------------------- ----------------------
Costs and expenses:
Cost of products sold 338.7 397.3 1,044.4 1,260.6
Depreciation and amortization 22.6 23.1 67.6 66.6
Selling, administrative, research and development, and general 27.0 24.5 97.5 77.1
Non-recurring operating charges (benefits), net 25.3 21.3 34.4 (198.9)
----------------------- ----------------------
Total costs and expenses 413.6 466.2 1,243.9 1,205.4
----------------------- ----------------------
Operating income (loss) (65.6) (35.9) (139.0) 152.0
Other income (expense):
Interest expense (excluding unrecorded contractual interest
expense of $23.8 and $60.3 in 2002) (2.2) (27.2) (18.2) (82.2)
Reorganization items (8.5) - (24.6) -
Gain on sale of interest in QAL - 163.6 - 163.6
Other - net (1.4) 16.3 1.1 (28.1)
----------------------- ----------------------
Income (loss) before income taxes and minority interests (77.7) 116.8 (180.7) 205.3
Provision for income taxes (7.0) (49.4) (21.4) (83.9)
Minority interests 1.4 1.2 4.3 3.0
----------------------- ----------------------
Net income (loss) $ (83.3) $ 68.6 $ (197.8) $ 124.4
======================= ======================
The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In millions of dollars)
For the Nine Months Ended September 30, 2002
Accumulated Note
Accu- Other Receivable
Preference Common Additional mulated Comprehensive From
Stock Stock Capital Deficit Income (Loss) Parent Total
- ----------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 $ .7 $ 15.4 $ 2,437.6 $ (645.2) $ (67.3) $ (2,175.2) $ (434.0)
Net loss - - - (197.8) - - (197.8)
Unrealized net decrease in value
of derivative instruments
arising during the period prior
to settlement - - - - (12.1) - (12.1)
Less reclassification adjustment
for net realized gains on
derivative instruments included
in net income (including net
realized gains of $6.3 for the
quarter ended September 30,
2002) - - - - (21.2) - (21.2)
---------
Comprehensive income - - - - - - (231.1)
Interest on note receivable from
parent - - 16.5 - - (16.5) -
Contributions for LTIP shares - - .6 - - - .6
---------- ---------- ----------- ---------- ------------- ----------- ---------
BALANCE, September 30, 2002 $ .7 $ 15.4 $ 2,454.7 $ (843.0) $ (100.6) $ (2,191.7) $ (664.5)
========== ========== =========== ========== ============= =========== =========
For the Nine Months Ended September 30, 2001
Accumulated Note
Accu- Other Receivable
Preference Common Additional mulated Comprehensive From
Stock Stock Capital Deficit Income (Loss) Parent Total
- ----------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 $ .7 $ 15.4 $ 2,300.8 $ (188.1) $ (1.8) $ (2,040.0) $ 87.0
Net income - - - 124.4 - - 124.4
Cumulative effect of accounting
change, net of income tax
provision of $.5 - - - - 1.8 - 1.8
Unrealized net gain on derivative
instruments arising during the
period, net of income tax
provision of $16.8 (including
unrealized net gain of $.3,
net of tax, for the quarter
ended September 30, 2001) - - - - 28.8 - 28.8
Less reclassification adjustment
for net realized gains on
derivative instruments included
in net income, net of income tax
provision of $1.0 (including
realized net gain of $.3,
net of tax, for the quarter
ended September 30, 2001) - - - - (3.0) - (3.0)
---------
Comprehensive income - - - - - - 152.0
Interest on note receivable from
parent - - 100.9 - - (100.9) -
Contributions for LTIP shares - - 1.1 - - - 1.1
Dividends - - - (.1) - - (.1)
---------- ---------- ----------- ---------- ------------- ----------- ---------
BALANCE, September 30, 2001 $ .7 $ 15.4 $ 2,402.8 $ (63.8) $ 25.8 $ (2,140.9) $ 240.0
========== ========== =========== ========== ============= =========== =========
The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(In millions of dollars)
Nine Months Ended
September 30,
-----------------------
2002 2001
-----------------------
Cash flows from operating activities:
Net income (loss) $ (197.8) $ 124.4
Adjustments to reconcile net income (loss) to net cash (used) provided by
operating activities:
Depreciation and amortization (including deferred financing costs of $2.7 and $4.3) 70.3 70.9
Non-cash charges for reorganization items, non-recurring operating items and other 37.2 20.7
Gains - sale of real estate (2002); sale of QAL interest and real estate (2001) (4.0) (169.3)
Equity in (earnings) loss of unconsolidated affiliates, net of distributions (6.7) 5.4
Minority interests (4.3) (3.0)
Decrease in trade and other receivables 43.0 135.6
Decrease in inventories, excluding LIFO adjustments and non-recurring items 8.3 50.2
Decrease (increase) in prepaid expenses and other current assets 42.4 10.1
Increase (decrease) in accounts payable (associated with operating activities)
and accrued interest 31.3 (56.1)
Decrease (increase) in other accrued liabilities (36.4) (7.6)
Decrease in payable to affiliates (20.3) (2.0)
(Decrease) increase in accrued and deferred income taxes (11.2) 41.3
Net cash impact of changes in long-term assets and liabilities 14.5 18.7
Other (9.2) 6.4
-----------------------
Net cash provided by operating activities (42.9) 245.7
-----------------------
Cash flows from investing activities:
Capital expenditures (including $70.6 related to Gramercy facility in 2001) (29.2) (120.1)
Decrease in accounts payable - Gramercy-related capital expenditures - (29.9)
Net proceeds from disposition: equipment and other (2002);
QAL interest and real estate (2001) 20.8 170.1
-----------------------
Net cash provided by investing activities (8.4) 20.1
-----------------------
Cash flows from financing activities:
Incurrence of financing costs (8.1) -
Repayments under revolving credit facility, net - (30.4)
Repayments of long-term debt - (41.2)
Redemption of minority interests' preference stock - (5.5)
-----------------------
Net cash used by financing activities (8.1) (77.1)
-----------------------
Net (decrease) increase in cash and cash equivalents during the period (59.4) 188.7
Cash and cash equivalents at beginning of period 153.3 23.4
-----------------------
Cash and cash equivalents at end of period $ 93.9 $ 212.1
=======================
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest of $.9 and $3.3 $ 4.4 $ 91.1
Income taxes paid 31.3 41.6
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. REORGANIZATION PROCEEDINGS
General. On February 12, 2002, Kaiser Aluminum & Chemical Corporation (the
"Company"), its parent company, Kaiser Aluminum Corporation ("Kaiser") and 13 of
its wholly owned subsidiaries filed separate voluntary petitions in the United
States Bankruptcy Court for the District of Delaware (the "Court") for
reorganization under Chapter 11 of the United States Bankruptcy Code (the
"Code"). On March 15, 2002, two additional wholly owned subsidiaries of the
Company filed petitions. The Company and its 15 subsidiaries that have filed
petitions are collectively referred to herein as the "Debtors" and the Chapter
11 proceedings of these entities are collectively referred to herein as the
"Cases." For purposes of these financial statements, the term "Filing Date"
shall mean, with respect to any particular Debtor, the date on which such Debtor
filed its Case. The wholly owned subsidiaries of the Company included in the
Cases are: Kaiser Bellwood Corporation, Kaiser Aluminium International, Inc.,
Kaiser Aluminum Technical Services, Inc., Kaiser Alumina Australia Corporation
(and its wholly owned subsidiary, Kaiser Finance Corporation) and ten other
entities with limited balances or activities. None of the Company's non-U.S.
affiliates were included in the Cases. The Cases are being jointly administered
by the Court with the Debtors managing their businesses in the ordinary course
as debtors-in-possession, subject to the control and supervision of the Court.
The necessity for filing the Cases was attributable to the liquidity and cash
flow problems of the Company arising in late 2001 and early 2002. The Company
was facing significant near-term debt maturities at a time of unusually weak
aluminum industry business conditions, depressed aluminum prices and a broad
economic slowdown that was further exacerbated by the events of September 11,
2001. In addition, the Company had become increasingly burdened by asbestos
litigation (see Note 8) and growing legacy obligations for retiree medical and
pension costs. The confluence of these factors created the prospect of
continuing operating losses and negative cash flow, resulting in lower credit
ratings and an inability to access the capital markets.
The outstanding principal of, and accrued interest on, all long-term debt of the
Debtors became immediately due and payable as a result of the commencement of
the Cases. However, the vast majority of the claims in existence at the Filing
Date (including claims for principal and accrued interest and substantially all
legal proceedings) are stayed (deferred) during the pendency of the Cases. In
connection with the filing of the Cases, the Court, upon motion by the Debtors,
authorized the Debtors to pay or otherwise honor certain unsecured pre-Filing
Date claims, including employee wages and benefits and customer claims in the
ordinary course of business, subject to certain limitations. In July 2002, the
Court also issued a final order authorizing the Company to fund the cash
requirements of its foreign joint ventures in the ordinary course of business
and to continue using the Company's existing cash management systems. The
Debtors also have the right to assume or reject executory contracts existing
prior to the Filing Date, subject to Court approval and certain other
limitations. In this context, "assumption" means that the Debtors agree to
perform their obligations and cure certain existing defaults under an executory
contract and "rejection" means that the Debtors are relieved from their
obligations to perform further under an executory contract and are subject only
to a claim for damages for the breach thereof. Any claim for damages resulting
from the rejection of an executory contract is treated as a general unsecured
claim in the Cases.
Generally, pre-Filing Date claims, including certain contingent or unliquidated
claims, against the Debtors will fall into two categories: secured and
unsecured. Under the Code, a creditor's claim is treated as secured only to the
extent of the value of the collateral securing such claim, with the balance of
such claim being treated as unsecured. Unsecured and partially secured claims do
not accrue interest after the Filing Date. A fully secured claim, however, does
accrue interest after the Filing Date until the amount due and owing to the
secured creditor, including interest accrued after the Filing Date, is equal to
the value of the collateral securing such claim. The amount and validity of
pre-Filing Date contingent or unliquidated claims, although presently unknown,
ultimately may be established by the Court or by agreement of the parties. As a
result of the Cases, additional pre-Filing Date claims may be asserted, some of
which may be significant.
On October 29, 2002, the Court set January 31, 2003 as the last date by which
holders of pre-Filing Date claims against the Debtors (other than
asbestos-related personal injury claims and certain hearing loss claims) must
file their claims. Any holder of a claim that is required to file a claim by
such date and does not do so may be barred from asserting such claim against any
of the Debtors and, accordingly, may not be able to participate in any
distribution in any of the Cases on account of such claim. Because the January
31, 2003 bar date has not yet occurred, no provision has been included in the
accompanying financial statements for claims that may be filed. The January 31,
2003 bar date does not apply to asbestos-related personal injury claims, for
which the Debtors reserve the right to establish a separate bar date at a later
time. A separate bar date of June 30, 2003 has been set for certain hearing loss
claims.
The Company's objective in the Cases is to achieve the highest possible
recoveries for all creditors and stockholders and to continue the operation of
their businesses. However, there can be no assurance that the Debtors will be
able to attain these objectives or to achieve a successful reorganization.
Further, there can be no assurance that the liabilities of the Debtors will not
be found in the Cases to exceed the fair value of their assets. This could
result in claims being paid at less than 100% of their face value and the equity
of the Company's stockholders being diluted or cancelled.
Under the Code, the rights of and ultimate payments to pre-Filing Date creditors
and stockholders may be substantially altered. At this time, it is not possible
to predict the outcome of the Cases, in general, or the effect of the Cases on
the businesses of the Debtors or on the interests of creditors and stockholders.
Two creditors' committees, one representing the unsecured creditors and the
other representing the asbestos claimants, have been appointed in the Cases and,
in accordance with the provisions of the Code, will have the right to be heard
on all matters that come before the Court. The Debtors expect that the appointed
committees, together with a legal representative of potential future asbestos
claimants to be appointed by the Court, will play important roles in the Cases
and the negotiation of the terms of any plan or plans of reorganization. The
Debtors are required to bear certain of the committees' costs and expenses,
including those of their counsel and other advisors.
The Debtors anticipate that substantially all liabilities of the Debtors as of
the Filing Date will be resolved under one or more plans of reorganization to be
proposed and voted on in the Cases in accordance with the provisions of the
Code. Although the Debtors intend to file and seek confirmation of such a plan
or plans, there can be no assurance as to when the Debtors will file such a plan
or plans, or that such plan or plans will be confirmed by the Court and
consummated.
As provided by the Code, the Debtors had the exclusive right to propose a plan
of reorganization for 120 days following the Filing Date. The Court has
subsequently approved an extension of the exclusivity period through December
12, 2002. The Company intends to ask the Court for a further extension of the
exclusivity period to April 30, 2003. Extensions of this nature are believed to
be routine in complex cases such as the Debtors' Cases. However, no assurance
can be given that such extension, or any future extension requests, will be
granted by the Court. If the Debtors fail to file a plan of reorganization
during the exclusivity period, or if such plan is not accepted by the requisite
numbers of creditors and equity holders entitled to vote on the plan, other
parties in interest in the Cases may be permitted to propose their own plan(s)
of reorganization for the Debtors.
Financial Statement Presentation. The accompanying consolidated financial
statements have been prepared in accordance with Statement of Position 90-7
("SOP 90-7"), Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code, and on a going concern basis, which contemplates the
realization of assets and the liquidation of liabilities in the ordinary course
of business. However, as a result of the Cases, such realization of assets and
liquidation of liabilities are subject to a significant number of uncertainties.
Financial Information. Condensed consolidating financial statements of the
Debtors and non-Debtors are set forth below:
CONDENSED CONSOLIDATING BALANCE SHEETS
SEPTEMBER 30, 2002
Consolidation/
Elimination
Debtors Non-Debtors Entries Consolidated
---------------- --------------- ---------------- --------------
Current assets $ 433.6 $ 167.3 $ - $ 600.9
Investments in subsidiaries and affiliates 1,402.1 33.4 (1,366.8) 68.7
Intercompany receivables (payables) (977.0) 977.0 - -
Property and equipment, net 765.9 394.8 - 1,160.7
Deferred income taxes (65.5) 65.5 - -
Other assets 668.3 9.6 - 677.9
---------------- --------------- ---------------- --------------
$ 2,227.4 $ 1,647.6 $ (1,366.8) $ 2,508.2
================ =============== ================ ==============
Liabilities not subject to compromise -
Current liabilities $ 225.9 $ 109.3 $ (11.8) $ 323.4
Other long-term liabilities 52.9 42.1 - 95.0
Long-term debt 20.8 22.0 - 42.8
Liabilities subject to compromise 2,592.3 - - 2,592.3
Minority interests - 100.4 18.8 119.2
Stockholders' equity (664.5) 1,373.8 (1,373.8) (664.5)
---------------- --------------- ---------------- --------------
$ 2,227.4 $ 1,647.6 $ (1,366.8) $ 2,508.2
================ =============== ================ ==============
CONDENSED CONSOLIDATING STATEMENTS OF INCOME (LOSS)
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
Consolidation/
Elimination
Debtors Non-Debtors Entries Consolidated
---------------- --------------- ---------------- --------------
Net sales $ 309.5 $ 125.5 $ (87.0) $ 348.0
Costs and expenses 377.9 122.7 (87.0) 413.6
---------------- --------------- ---------------- --------------
Operating income (loss) (68.4) 2.8 - (65.6)
Interest expense (2.0) (.2) - (2.2)
Reorganization items (8.5) - - (8.5)
Other income (expense), net (.9) (.5) - (1.4)
Provision for income tax (2.3) (4.7) - (7.0)
Minority interests - 1.4 - 1.4
Equity in income of subsidiaries (1.2) - 1.2 -
---------------- --------------- ---------------- --------------
Net income (loss) $ (83.3) $ (1.2) $ 1.2 $ (83.3)
================ =============== ================ ==============
CONDENSED CONSOLIDATING STATEMENTS OF INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
Consolidation/
Elimination
Debtors Non-Debtors Entries Consolidated
---------------- --------------- ---------------- --------------
Net sales $ 996.2 $ 387.1 $ (278.4) $ 1,104.9
Costs and expenses 1,143.4 378.9 (278.4) 1,243.9
---------------- --------------- ---------------- --------------
Operating income (loss) (147.2) 8.2 - (139.0)
Interest expense (17.2) (1.0) - (18.2)
Reorganization items (24.6) - - (24.6)
Other income (expense), net 2.1 (1.0) - 1.1
Provision for income tax (6.0) (15.4) - (21.4)
Minority interests - 4.3 - 4.3
Equity in income of subsidiaries (4.9) - 4.9 -
---------------- --------------- ---------------- --------------
Net income (loss) $ (197.8) $ (4.9) $ 4.9 $ (197.8)
================ =============== ================ ==============
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
Consolidation/
Elimination
Debtors Non-Debtors Entries Consolidated
---------------- --------------- ---------------- --------------
Net cash provided (used) by:
Operating activities $ (67.2) $ 24.3 $ - $ (42.9)
Investing activities 15.1 (23.5) - (8.4)
Financing activities (8.1) - - (8.1)
---------------- --------------- ---------------- --------------
Net (decrease) increase in cash and cash equivalents
during the period (60.2) .8 - (59.4)
Cash and cash equivalents at beginning of period 151.6 1.7 - 153.3
---------------- --------------- ---------------- --------------
Cash and cash equivalents at end of period $ 91.4 $ 2.5 $ - $ 93.9
================ =============== ================ ==============
Classification of Liabilities as "Liabilities Not Subject to Compromise" Versus
"Liabilities Subject to Compromise." Liabilities not subject to compromise
include: (1) liabilities incurred after the Filing Date of the Cases; (2)
pre-Filing Date liabilities that the Debtors expect to pay in full, including
priority tax and employee claims and certain environmental liabilities, even
though certain of these amounts may not be paid until a plan of reorganization
is approved; and (3) pre-Filing Date liabilities that have been approved for
payment by the Court and that the Debtors expect to pay (in advance of a plan of
reorganization) over the next twelve month period in the ordinary course of
business, including certain employee related items (salaries, vacation and
medical benefits), claims subject to a currently existing collective bargaining
agreement, and post-retirement medical and other costs associated with retirees.
During October 2002, the Company announced that it intended to meet with the
Pension Benefit Guaranty Corporation ("PBGC") and its labor unions to discuss
alternative solutions to pension plan funding issues that would help facilitate
the Company's emergence from the Cases (see Note 11). As a result, pension
amounts that were previously expected to be funded within the next twelve months
and which were, therefore, previously classified as liabilities not subject to
compromise in the consolidated balance sheet as of June 30, 2002, are now
classified as liabilities subject to compromise in the accompanying consolidated
balance sheet as of September 30, 2002.
Liabilities subject to compromise refer to all other pre-Filing Date liabilities
of the Debtors. The amounts of the various categories of liabilities that are
subject to compromise are set forth below. These amounts represent the Company's
estimates of known or probable pre-Filing Date claims that are likely to be
resolved in connection with the Cases. Such claims remain subject to future
adjustments. There can be no assurance that the liabilities of the Debtors will
not be found in the Cases to exceed the fair value of their assets. This could
result in claims being paid at less than 100% of their face value and the equity
of the Company's stockholders being diluted or cancelled.
The amounts subject to compromise at September 30, 2002 consisted of the
following items:
Items, absent the Cases, that would have been considered current at September 30, 2002:
Accounts payable $ 54.1
Accrued interest 44.0
Accrued salaries, wages and related expenses(2) 48.0
Other accrued liabilities (including asbestos liability of $130.0 - Note 8) 175.0
Items,absent the Cases, that would have been considered long-term at September
30, 2002:
Accrued post-retirement medical obligation 649.4
Long-term liabilities(1) 791.6
Debt (Note 5) 830.2
------------
$ 2,592.3
============
(1) Long-term liabilities include pension liabilities of $196.2, environmental
liabilities of $21.7 (Note 8) and asbestos liabilities of $480.1 (Note 8).
(2) Accrued salaries, wages and related expenses represents estimated minimum
pension contributions for the twelve months ending September 30, 2003. See
above and Note 11.
The classification of liabilities "not subject to compromise" versus liabilities
"subject to compromise" is based on currently available information and
analysis. As the Cases proceed and additional information and analysis is
completed or, as the Court rules on relevant matters, the classification of
amounts between these two categories may change. The amount of any such changes
could be significant.
Reorganization Items. Reorganization items under the Cases are expense or income
items that are incurred or realized by the Company because it is in
reorganization. These items include, but are not limited to, professional fees
and similar types of expenses incurred directly related to the Cases, loss
accruals or gains or losses resulting from activities of the reorganization
process, and interest earned on cash accumulated by the Debtors because they are
not paying their pre-petition liabilities. For the quarter and nine-month
periods ended September 30, 2002, reorganization items were as follows:
Quarter Nine Months
-------------- --------------
Professional fees $ 8.9 $ 19.8
Accelerated amortization of certain deferred financing costs - 4.5
Interest income (.5) (1.6)
Other .1 1.9
-------------- --------------
$ 8.5 $ 24.6
============== ==============
As required by SOP 90-7, in the first quarter of 2002, the Company recorded the
Debtors' pre-petition debt that is subject to compromise at the allowed amount,
as defined by SOP 90-7. Accordingly, the Company accelerated the amortization of
debt-related premium, discount and costs attributable to this debt and recorded
a net expense of approximately $4.5 in Reorganization items during the first
quarter of 2002.
2. GENERAL
This Quarterly Report on Form 10-Q should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
Going Concern. The interim consolidated financial statements of the Company have
been prepared on a "going concern" basis which contemplates the realization of
assets and the liquidation of liabilities in the ordinary course of business;
however, as a result of the commencement of the Cases, such realization of
assets and liquidation of liabilities are subject to a significant number of
uncertainties. Specifically, the interim consolidated financial statements do
not present: (a) the realizable value of assets on a liquidation basis or the
availability of such assets to satisfy liabilities, (b) the amount which will
ultimately be paid to settle liabilities and contingencies which may be allowed
in the Cases, or (c) the effect of any changes which may occur in connection
with the Debtors' capitalizations or operations of the Debtors as a result of a
plan of reorganization. Because of the ongoing nature of the Cases, the
discussions and consolidated financial statements contained herein are subject
to material uncertainties.
Principles of Consolidation. The Company is the principal operating subsidiary
of Kaiser. Kaiser is a subsidiary of MAXXAM Inc. ("MAXXAM"). MAXXAM and one of
its wholly owned subsidiaries together own approximately 62% of Kaiser's common
stock, with the remaining approximately 38% publicly held.
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles ("GAAP")
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 GAAP for complete financial
statements. 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 unless otherwise noted, necessary for a fair
statement of the results for the interim periods presented.
The preparation of financial statements in accordance with GAAP 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,
2002, are not necessarily indicative of the results that may be expected for the
year ending December 31, 2002.
Derivative Financial Instruments. Hedging transactions using derivative
financial instruments are primarily designed to mitigate the Company's exposure
to changes in prices for certain of the products which the Company sells and
consumes and, to a lesser extent, to mitigate the Company's exposure to change
in foreign currency exchange rates. The Company does not utilize derivative
financial instruments for trading or other speculative purposes. The Company's
derivative activities are initiated within guidelines established by management
and approved by the Company's board of directors. Hedging transactions are
executed centrally on behalf of all of the Company's business segments to
minimize transaction costs, monitor consolidated net exposure and allow for
increased responsiveness to changes in market factors.
See Note 2 of Notes to Consolidated Financial Statements in the Company's Form
10-K for the year ended December 31, 2001 and Note 9 for additional information
regarding derivative financial instruments.
3. INVENTORIES
The classification of inventories is as follows:
September 30, December 31,
2002 2001
-------------- --------------
Finished fabricated aluminum products $ 31.7 $ 30.4
Primary aluminum and work in process 73.6 108.3
Bauxite and alumina 92.8 77.7
Operating supplies and repair and maintenance parts 100.8 96.9
-------------- --------------
Total $ 298.9 $ 313.3
============== ==============
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, 2002, have been reduced by (a) a third quarter 2002
LIFO inventory charge of $3.0 (included in cost of products sold) as reductions
in inventory volumes were in inventory layers with higher costs than current
market prices , (b) a third quarter 2002 net charge of $1.5 (in non-recurring
operating charges (benefits), net - see Note 12) to write-down certain alumina
inventories at the Company's Northwest smelters to their net realizable values
based on the Company's intent to sell such inventories because they did not have
any economic near-term use, and (c) a LIFO inventory charge of $1.6 (included in
non-recurring operating charges (benefits), net in the second quarter of 2002 -
see Note 12) which resulted from the exit of the lid and tab stock and brazing
sheet product lines at the Company's Trentwood facility. See Note 5 of Notes to
Consolidated Financial Statements in the Company's Form 10-K for the year ended
December 31, 2001 for additional information regarding the product lines exit.
4. PACIFIC NORTHWEST OPERATING LEVEL
Future Power Supply and its Impact on Future Operating Rate. During October
2000, the Company signed a new power contract with the Bonneville Power
Administration ("BPA") under which the BPA, starting October 1, 2001, was to
provide the Company's operations in the State of Washington with approximately
290 megawatts of power through September 2006. The contract provided the Company
with sufficient power to fully operate the Company's Trentwood facility (which
requires up to approximately 40 megawatts), as well as approximately 40% of the
combined capacity of the Company's Mead and Tacoma aluminum smelting operations,
which have been curtailed since the last half of 2000.
Rates under the BPA contract during the period October 2001 through September
2002 were approximately 46% higher than power costs under the prior contract and
such rates were subject to changes in future periods. As such, the Company could
not predict what rates would be charged in future periods. The contract also
included a take-or-pay requirement and clauses under which the Company's power
allocation could be curtailed, or its costs increased, in certain instances.
Under the contract, the Company could only remarket its power allocation to
reduce or eliminate take-or-pay obligations. The Company was not entitled to
receive any profits from any such remarketing efforts. During October 2001, the
Company and the BPA reached an agreement whereby: (a) the Company would not be
obligated to pay for potential take-or-pay obligations in the first year of the
contract; and (b) the Company retained its rights to restart its smelter
operations at any time. In return for the foregoing, the Company granted the BPA
certain limited power interruption rights in the first year of the contract if
the Company operated its Northwest smelters. Under the BPA contract, the Company
could have been liable for take-or-pay costs under the BPA contract beginning in
October 2002 and such amounts could have been significant. The Company estimated
that, based on recent market prices for electricity, the monthly take-or-pay
obligation beginning October 2002 would have been in the range of up to $1.0 to
$2.0. The actual amount of any such obligation would be dependent upon the then
prevailing prices of electricity during the contract period.
As a part of the reorganization process, the Company concluded that it was in
its best interest to reject the BPA contract as permitted by the Code. As such,
with the authorization of the Court, the Company rejected the BPA contract on
September 30, 2002. The contract rejection gives rise to a pre-petition claim by
the BPA that is expected to be settled in the overall context of the Debtors'
plan of reorganization. Accordingly, any payments that may be required as a
result of the rejection of the BPA contract are expected to only be made upon
the Company's emergence from the Cases. The amount of the BPA's claim in respect
of the contract rejection has not been determined and, as such, no provision has
been made for the claim in the accompanying financial statements. The amount of
the BPA claim will be determined either through a negotiated settlement,
litigation or a computation of prevailing power prices over the contract period.
The Company has entered into a short-term contract (pending the completion of a
longer term arrangement) with an alternate supplier to provide the power
necessary to operate its Trentwood facility.
The restart of a portion of the Company's Northwest smelters' capacity would
require the purchase of additional power from available sources. For the Company
to make such a decision, it would have to be able to purchase such power at a
reasonable price in relation to current and expected market conditions for a
sufficient term to justify its restart costs, which could be significant
depending on the number of lines restarted and the length of time between the
shutdown and restart. Given recent primary aluminum prices and the forward price
of power in the Northwest, it is unlikely that the Company would operate more
than a portion of its Northwest smelter capacity in the near future. If the
Company were to restart all or a portion of its Northwest smelting capacity, it
would take between three to six months to reach the full operating rate for such
operations, depending upon the number of lines restarted. Even after achieving
the full operating rate, operating only a portion of the Northwest capacity
would result in production/cost inefficiencies such that operating results
would, at best, be breakeven to modestly negative at long-term primary aluminum
prices. However, operating at such a reduced rate could, depending on prevailing
economics, result in improved cash flows as opposed to remaining curtailed and
incurring the Company's fixed and continuing labor and other costs. This is
because the Company is contractually liable for certain severance, supplemental
unemployment benefits and early retirement benefits for laid-off workers under
the Company's contract with the United Steelworkers of America ("USWA") during
periods of curtailment. All such contractual compensation costs have been
accrued for all USWA workers in excess of those expected to be required to run
the Northwest smelters at an operating rate of up to 40%. These costs were
triggered periodically through September 2002. Costs associated with the USWA
workers that the Company estimates would be required to operate the smelters at
an operating rate of up to 40% ($3.3 of which was reflected in the third quarter
of 2001) have been accrued through early 2003, as the Company does not currently
expect to restart the Northwest smelters prior to that date. If such workers are
not recalled prior to the end of the first quarter of 2003, the Company could
become liable for additional early retirement costs. Such costs could be
significant and could adversely impact the Company's operating results and, over
the long-term, its liquidity. The present value of such costs, which would
likely be paid over an extended period of time, could be in the $60.0 to $65.0
range.
The Company continues to evaluate its options for minimizing the near-term
negative cash flow at its Mead and Tacoma facilities. The Company is also
exploring how to optimize the use and/or value of the facilities (which had a
carrying value of approximately $143.0 at September 30, 2002) in connection with
the development of a plan of reorganization. The Company is conducting a study
of the long-term competitive position of the Mead and Tacoma facilities and
potential options for these facilities. A preliminary draft report from this
study is expected to be completed during November 2002. Once the Company has
received the preliminary results of the study, it plans to analyze the findings
and expects to meet with the USWA and other parties prior to making its
determination as to any appropriate action(s). It is possible that the outcome
of this study and the Company's ongoing work on developing a plan of
reorganization could impact the Company's view of the recoverability of the
carrying value of the facilities. During October 2002, the Company obtained a
waiver to the financial covenants of its post-petition credit agreement to
exclude the impact of up to $230.0 of possible charges that could result from a
change in its assessment regarding the recoverability of the Washington smelters
(including the $60.0 to $65.0 of possible early retirement charges discussed
above). See Note 5 for additional information concerning the post-petition
credit agreement.
Power Sales. In response to the unprecedented high market prices for power in
the Pacific Northwest, the Company (first partially and then fully) curtailed
the primary aluminum production at the Tacoma and Mead, Washington smelters
during the last half of 2000, all of 2001 and the first nine months of 2002. As
a result of the curtailments, as permitted under the prior BPA contract, the
Company, in a series of transactions, sold the power that it had under contract
through September 30, 2001 (the end of the prior contract period). In connection
with such power sales during the first nine months of 2001, the Company recorded
a net pre-tax gain of approximately $6.5 during the quarter ended September 30,
2001 and net pre-tax gains of approximately $229.2 during the nine months ended
September 30, 2001. Gross proceeds from the power sales were offset by
employee-related expenses and other fixed commitments. The net results from the
sales were reflected as Non-recurring operating charges (benefits), net (see
Note 12).
5. DEBT
Debt consists of the following:
September 30, December 31,
2002 2001
- -------------------------------------------------------------------------------- --------------- ----------------
Secured:
Post-Petition Credit Agreement $ - N/A
Credit Agreement N/A $ -
Alpart CARIFA Loans - (fixed and variable rates) due 2007, 2008 22.0 22.0
7.6% Solid Waste Disposal Revenue Bonds due 2027 19.0 19.0
Other non-Debtor borrowings (fixed rate) 2.7 2.7
Unsecured (reflected as Liabilities Subject to Compromise):
9 7/8% Senior Notes due 2002 172.8 172.8
10 7/8% Senior Notes due 2006 225.0 225.4
12 3/4% Senior Subordinated Notes due 2003 400.0 400.0
Other borrowings (fixed and variable rates) 32.4 32.4
--------------- ----------------
Total 873.9 874.3
Less - Current portion .9 173.5
Pre-Filing Date claims included in liabilities subject to
compromise (Note 1) 830.2 -
--------------- ----------------
Long-term debt $ 42.8 $ 700.8
=============== ================
DIP Facility. On February 12, 2002, the Company and Kaiser entered into a
post-petition credit agreement with a group of lenders for debtor-in-possession
financing (the "DIP Facility"). The Court signed a final order approving the DIP
Facility in March 2002. The DIP Facility provides for a secured, revolving line
of credit through the earlier of February 12, 2004, the effective date of a plan
of reorganization or voluntary termination by the Company. Under the DIP
Facility, the Company is able to borrow amounts by means of revolving credit
advances and to have issued for its benefit letters of credit (up to $125.0) in
an aggregate amount equal to the lesser of $300.0 or a borrowing base relating
to eligible accounts receivable, eligible inventory and eligible fixed assets
reduced by certain reserves, as defined in the DIP Facility agreement. The DIP
Facility is guaranteed by the Company, the Debtor subsidiaries and two wholly
owned non-Debtor subsidiaries, Kaiser Jamaica Corporation and Alpart Jamaica
Inc. Interest on any outstanding balances will bear a spread over either a base
rate or LIBOR, at the Company's option. The DIP Facility requires the Company to
comply with certain financial covenants and places restrictions on the Company's
ability to, among other things, incur debt and liens, make investments, pay
dividends, undertake transactions with affiliates, make capital expenditures,
and enter into unrelated lines of business. As of September 30, 2002, $176.6 was
available to the Company under the DIP Facility (of which $87.7 could be used
for additional letters of credit) and no borrowings were outstanding under the
revolving credit facility.
During October 2002, the Company obtained a waiver to the financial covenants of
the DIP Facility that excludes up to $230.0 of possible charges that could
result from a change in its assessment of recoverability regarding the
Washington smelters (see Note 4). The waiver covers all reporting periods
through December 31, 2002. The Company and the lenders to the DIP Facility have
agreed to the terms of an amendment that will permanently exclude the $230.0 of
charges from the financial covenant computations. The amendment will also (a)
allow for the sale of certain non-core and non-operating properties, subject to
certain possible reductions in the fixed asset component of the borrowing base,
(b) clarify the Company's ability to make investments in or to provide certain
guarantees in respect of certain debt obligations of Queensland Alumina Limited
("QAL"), in which the Company owns a 20% interest (see Note 8), (c) adjust a
financial compliance test under the DIP Facility to reflect more recent market
trends, (d) exclude certain non-cash, restructuring and benefit-related charges
reflected in year-to-date results and certain possible additional charges (see
Note 4) from the calculation of one of the financial covenants and (e) to
clarify that the adverse ruling received in respect of certain unfair labor
practices ("ULPs" - see Note 8) does not represent a material adverse effect on
the DIP Facility as long as such ruling is subject to appeal and no amounts are
paid during the term of the DIP Facility. The amendment is expected to be filed
with the Court during November 2002 and, while no assurances can be given, is
expected to be approved at the regularly scheduled December 19, 2002 Court
hearing.
Credit Agreement. Prior to the February 12, 2002 Filing Date, the Company and
Kaiser had a credit agreement, as amended (the "Credit Agreement"), which
provided a secured, revolving line of credit. The Credit Agreement terminated on
the Filing Date and was replaced by the DIP Facility discussed above. As of the
Filing Date, outstanding letters of credit were approximately $43.3 (which were
replaced by letters of credit under the DIP Facility) and there were no
borrowings outstanding under the Credit Agreement.
6. INCOME TAXES
The income tax provisions for the quarter and nine-month periods ended September
30, 2002 of $7.0 and $21.4, respectively, relate primarily to foreign income
taxes. For the quarter and nine-month periods ended September 30, 2002, as a
result of the Cases, the Company did not recognize income tax benefits for the
losses incurred from its domestic operations or any U.S. tax benefits for
foreign income taxes. Instead, the increases in federal and state deferred tax
assets as a result of the losses were offset by equal increases in the valuation
allowances. See Note 9 of Notes to Consolidated Financial Statements in the
Company's Form 10-K for the year ended December 31, 2001 for additional
information regarding the Deferred Tax Assets and Valuation Allowances.
7. INCIDENT AT GRAMERCY FACILITY
General. In July 1999, the Company'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 commenced during the middle of December
2000. However, construction was not substantially completed until the third
quarter of 2001. During the first nine months of 2001, the plant operated at
approximately 68% of its newly-rated estimated annual capacity of 1,250,000
tons. During the fourth quarter of 2001, the plant operated at approximately 90%
of its newly-rated capacity. Since the end of February 2002, the plant has,
except for normal operating variations, generally operated at approximately 100%
of its newly-rated capacity. The facility is now focusing its efforts on
achieving its full operating efficiency. During the quarter and nine-month
periods ended September 30, 2001, abnormal Gramercy-related start-up costs
totaled approximately $13.9 and $54.9, respectively. These incremental costs for
the nine month period ended September 30, 2001 were offset by approximately
$15.2 of additional insurance benefit (recorded as a reduction of Bauxite and
alumina business unit's cost of products sold) during the second quarter of
2001. The abnormal costs in 2001 resulted from operating the plant in an interim
mode pending completion of construction at well less than the expected
production rate or full efficiency. During 2002, because the plant was operating
at near full capacity, the amount of start-up costs was substantially reduced as
compared to prior periods. Such costs were approximately $3.0 during the first
quarter of 2002 and were substantially eliminated during the second and third
quarters of 2002.
Contingencies. The Gramercy incident resulted in a significant number of
individual and class action lawsuits being filed against the Company and others
alleging, among other things, property damage, business interruption losses by
other businesses and personal injury. After these matters were consolidated, the
individual claims against the Company were settled for amounts which, after the
application of insurance, were not material to the Company. Further, an
agreement has been reached with the class plaintiffs for an amount which, after
the application of insurance, is not material to the Company. While the class
settlement remains subject to court approval and while certain plaintiffs may
opt out of the settlement, the Company does not currently believe that this
presents any material risk to the Company. Finally, the Company faces new claims
from certain parties to the litigation regarding the interpretation of and
alleged claims concerning certain settlement and other agreements made during
the course of the litigation. The aggregate amount of damages threatened in
these claims could, in certain circumstances, be substantial. However, the
Company does not currently believe these claims will result in any material
liability to the Company.
The Company currently believes that any amount from unsettled workers'
compensation claims from the Gramercy incident in excess of the coverage
limitations will not have a material effect on the Company's consolidated
financial position or liquidity. However, while unlikely, 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.
See Note 3 of Notes to Consolidated Financial Statements in the Company's Form
10-K for the year ended December 31, 2001 for additional information regarding
the Gramercy incident.
8. COMMITMENTS AND CONTINGENCIES
Impact of Reorganization Proceedings. During the pendency of the Cases,
substantially all pending litigation, except certain environmental claims and
litigation, against the Debtors is stayed. Generally, and as explained more
fully in Note 1, claims arising from actions or omissions prior to the Filing
Date will be settled in connection with the plan of reorganization.
Commitments. The Company has a variety of financial commitments, including
purchase agreements, tolling arrangements, forward foreign exchange and forward
sales contracts (see Note 9), letters of credit, and guarantees. Such purchase
agreements and tolling arrangements include long-term agreements for the
purchase and tolling of bauxite into alumina in Australia by QAL. These
obligations are scheduled to expire in 2008, subject to certain extension
rights. Under the agreements, the Company is unconditionally obligated to pay
its proportionate share of debt service, operating costs, and certain other
costs of QAL. The Company's share of the aggregate minimum amount of required
future principal payments in respect of QAL's debt at December 31, 2001, was
$79.4 which matures as follows: $30.4 in 2002, $32.0 in 2003 and $17.0 in 2006.
During July 2002, the Company made payments of approximately $29.5 to QAL to
fund the Company's share of QAL's scheduled debt maturities. The Company's share
of payments, including operating costs and certain other expenses under the
agreements, has ranged between $92.0 - $103.0 per year over the past three
years. The Company also has agreements to supply alumina to and to purchase
aluminum from the Company's 49%-owned affiliate Anglesey Aluminium Limited.
Minimum rental commitments under operating leases at December 31, 2001, are as
follows: years ending December 31, 2002 - $35.9; 2003 - $32.0; 2004 - $29.2;
2005 - $28.2; 2006 - $27.9; thereafter - $44.6. Pursuant to the Code, the
Debtors may elect to reject or assume unexpired pre-petition leases. At this
time, no decisions have been made as to which significant leases will be
accepted or rejected (see Note 1). Rental expenses were $41.0, $42.5 and $41.4,
for the years ended December 31, 2001, 2000 and 1999, respectively.
The Company has a long-term liability, net of estimated subleases income
(included in Long-term liabilities), with respect to an office building in which
the Company 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
sale-and-leaseback agreement. The future minimum rentals receivable under
subleases was $104.5 at December 31, 2001.
Environmental Contingencies. The Company is subject to a number of environmental
laws, to fines or penalties assessed for alleged breaches of the environmental
laws, and to claims and litigation based upon such laws. The Company 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. During the
quarter and nine-month periods ended September 30, 2001, the Company's ongoing
assessment process resulted in the Company recording charges of $1.0 and $9.0,
respectively, to increase its environmental accrual (included in Other income
(expense) - see Note 12). Additionally, the Company's environmental accruals
were increased during the nine-month period ended September 30, 2001 by
approximately $6.0 in connection with the purchase of certain property. At
September 30, 2002, the balance of such accruals was $59.7 (of which $21.7 were
included in Liabilities subject to compromise - see Note 1). As of December 31,
2001, the accruals were primarily included in Long-term liabilities. 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 action 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 $1.3 to $12.2 for the years 2002 through 2006 and an aggregate of
approximately $24.8 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 $28.0. 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 it has insurance coverage available to recover certain
incurred and future environmental costs and is pursuing claims in this regard.
However, no amounts have been accrued in the financial statements with respect
to such potential recoveries.
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. The Company has been one of many defendants 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 the Company or exposure to products containing asbestos
produced or sold by the Company. The lawsuits generally relate to products the
Company has not sold for more than 20 years.
The following table presents the changes in the number of such claims pending
for the nine months ended September 30, 2002 (through the Filing Date) and the
year ended December 31, 2001.
January 1, 2002 Year Ended
through December 31,
February 12, 2002 2001
- ------------------------------------------------------------------------ ------------------- -----------------
Number of claims at beginning of period 112,800 110,800
Claims received 5,300 34,000
Claims settled or dismissed (6,100) (32,000)
------------------- -----------------
Number of claims at end of period 112,000 112,800
=================== =================
Due to the Cases, holders of asbestos claims are stayed from continuing to
prosecute pending litigation and from commencing new lawsuits against the
Debtors. However, during the pendency of the Cases, the Company expects
additional asbestos claims will be filed as part of the claims process. A
separate creditors' committee representing the interests of the asbestos
claimants has been appointed. The Debtors' obligations with respect to present
and future asbestos claims will be resolved pursuant to a plan of
reorganization.
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 2012). At September 30, 2002, the balance of such accrual was
$610.1, all of which was included in Liabilities subject to compromise (see Note
1). As of December 31, 2001, this accrual of $621.3 was included in Other
accrued liabilities ($130.0) and Long-term liabilities ($491.3). The Company's
estimate is based on the Company's view, at each balance sheet date, of the
current and anticipated number of asbestos-related claims, the timing and
amounts of asbestos-related payments, the status of ongoing litigation and
settlement initiatives, and the advice of Wharton Levin Ehrmantraut & Klein,
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 2012 and,
accordingly, no accrual has been recorded for any costs which may be incurred
beyond 2012, the Company expects that the plan of reorganization process may
require an estimation of the Company's entire asbestos-related liability, which
may go beyond 2012, and that such costs could be substantial.
The Company believes that it 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 and disputes with
certain carriers exist. The timing and amount of future recoveries from these
and other insurance carriers will depend on the pendency of the Cases and on the
resolution of any disputes regarding coverage under the applicable insurance
policies. The Company believes that substantial recoveries from the insurance
carriers are probable and additional amounts may be recoverable in the future if
additional claims are added. 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. During 2000, the
Company filed suit against a group of its insurers, after negotiations with
certain of the insurers regarding an agreement covering both reimbursement
amounts and the timing of reimbursement payments were unsuccessful. During
October 2001, the court ruled favorably on a number of issues, and during
February 2002, an intermediate appellate court also ruled favorably on an issue
involving coverage. The rulings did not result in any changes to the Company's
estimates of its current or future asbestos-related insurance recoveries. Other
courts may hear additional issues from time to time. Moreover, the Company
amended its lawsuit during the second quarter of 2002 to add additional insurers
who have responsibility to respond for asbestos-related costs. Given the
expected significance of probable future asbestos-related payments, the receipt
of timely and appropriate payments from such insurers is critical to a
successful plan of reorganization and the Company's long-term liquidity.
The following tables present historical information regarding the Company's
asbestos-related balances and cash flows:
September 30, December 31,
2002 2001
- ---------------------------------------------------------------------------- ---------------- -----------------
Liability (current portion of $130.0 in 2001) $ 610.1 $ 621.3
Receivable (included in Other assets)(1) 489.7 501.2
---------------- -----------------
$ 120.4 $ 120.1
================ =================
(1) The asbestos-related receivable was determined on the same basis as the
asbestos-related cost accrual. However, no assurances can be given that
the Company will be able to project similar recovery percentages for
future asbestos-related claims in excess of those accrued or that the
amounts related to future asbestos-related claims will not exceed the
Company's aggregate insurance coverage. As of September 30, 2002 and
December 31, 2001, $30.4 and $33.0, respectively, of the receivable
amounts relate to costs paid. The remaining receivable amounts relate to
costs that are expected to be paid by the Company in the future.
Nine Months Ended Inception
September 30, 2002 To Date
-------------------- -------------------
Payments made, including related legal costs $ 17.1 $ 355.7
Insurance recoveries 17.6 239.2
-------------------- -------------------
$ (.5) $ 116.5
==================== ===================
During the pendency of the Cases, all asbestos litigation is stayed. As a
result, the Company does not expect to make any asbestos payments in the near
term. Despite the Cases, the Company continues to pursue insurance collections
in respect of asbestos-related amounts paid prior to the Filing Date.
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. This process resulted in the Company recording
charges of $53.3 (included in Other income (expense) - see Note 12) in the
nine-month period ended September 30, 2001, for asbestos claims, net of expected
insurance recoveries, based on recent cost and other trends experienced by the
Company and other companies. Additional asbestos-related claims are likely to be
filed against the Company as a part of the Chapter 11 process. Management cannot
reasonably predict the ultimate number of such claims or the amount of the
associated liability. However, it is likely that such amounts could exceed,
perhaps significantly, the liability amounts reflected in the Company's
consolidated financial statements, which (as previously stated) is only
reflective of an estimate of claims over a ten-year period. The Company's
obligations in respect of the currently pending and future asbestos-related
claims will ultimately be determined (and resolved) as a part of the overall
Chapter 11 proceedings. It is anticipated that resolution of these matters will
be a lengthy process. Management will continue to periodically reassess its
asbestos-related liabilities and estimated insurance recoveries as the Cases
proceed. However, absent unanticipated developments such as asbestos-related
legislation, material developments in other asbestos-related proceedings or in
the Company's Chapter 11 proceedings, it is not anticipated that the Company
will have sufficient information to reevaluate its asbestos-related obligations
and estimated insurance recoveries until much later in the Cases. Any
adjustments ultimately deemed to be required as a result of the reevaluation of
the Company's asbestos-related liabilities or estimated insurance recoveries
could have a material impact on the Company's future financial statements.
Labor Matters. In connection with the USWA strike and subsequent lock-out by the
Company, which was settled in September 2000, certain ULP allegations were filed
with the NLRB by the USWA. As previously disclosed, the Company responded to all
such allegations and believes that the allegations are without merit. Twenty-two
of twenty-four allegations of ULPs previously brought against the Company by the
USWA were dismissed. A trial before an administrative law judge for the two
remaining allegations concluded in September 2001. In May 2002, the
administrative law judge ruled against the Company in respect of the two
remaining ULP allegations and recommended that the NLRB award back wages, plus
interest, less any earnings of the workers during the period of the lockout. The
administrative law judge's ruling did not contain any specific amount of
proposed award and is not self-executing. The USWA has publicly stated that any
such amount could be in the $200.0 range. The NLRB had previously notified the
Court that, if the USWA ultimately were to prevail, the value of the claim could
be in excess of $100.0. Depending on the ultimate amount of any interest due and
amount of offsetting employee earnings and other factors, if the USWA ultimately
were to prevail it is possible that the amount of the award could exceed $100.0.
It is also possible that the Company may ultimately prevail on appeal and that
no loss will occur.
The Company continues to believe that the allegations are without merit and will
vigorously defend its position. The Company has appealed the ruling of the
administrative law judge to the full NLRB. Any outcome from the NLRB appeal
would be subject to additional appeals in a United States Circuit Court of
Appeals by the general counsel of the NLRB, the USWA or the Company. This
process could take several years. Because the Company believes that it may
prevail in the appeals process, the Company has not recognized a charge in
response to the adverse ruling. However, it is possible that, if the Company's
appeal(s) are not ultimately successful, a charge in respect of this matter may
be required in one or more future periods and the amount of such charge(s) could
be significant.
This matter is not currently stayed by the Cases. However, as previously stated,
seeing this matter to its ultimate outcome could take several years. Further,
any amounts ultimately determined by a court to be payable in this matter will
be dealt with in the overall context of the Debtors' plan of reorganization and
will be subject to compromise. Accordingly, any payments that may ultimately be
required in respect of this matter would only be paid upon or after the
Company's emergence from the Cases.
Dispute with MAXXAM. In March 2002, MAXXAM filed a declaratory action with the
Court asking the Court to find that it has no further obligations to the Debtors
under certain tax allocation agreements. See Note 9 of Notes to Consolidated
Financial Statements in the Company's Form 10-K for the year ended December 31,
2001 for additional information regarding the tax allocation agreements. MAXXAM
asserts that the agreements are personal contracts and financial accommodations
which cannot be assumed under the Code. At September 30, 2002, the Company had a
receivable from MAXXAM of $35.0 (included in Other assets) outstanding under the
tax allocation agreement in respect of various tax contingencies in an equal
amount (reflected in Long-term liabilities). The Company believes that MAXXAM's
position is without merit and that MAXXAM will be required to satisfy its
obligations under the tax allocation agreements.
Other Contingencies. The Company is involved in various other claims, lawsuits,
and other proceedings relating to a wide variety of matters related to past or
present operations. 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.
9. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS
In conducting its business, the Company uses various instruments, including
forward contracts and options, to manage the risks arising from fluctuations in
aluminum prices, energy prices and exchange rates. The Company enters into
hedging transactions from time to time to limit its exposure resulting from (1)
its anticipated sales of alumina, primary aluminum, and fabricated aluminum
products, net of expected purchase costs for items that fluctuate with aluminum
prices, (2) the energy price risk from fluctuating prices for natural gas, fuel
oil and diesel oil used in its production process, and (3) foreign currency
requirements with respect to its cash commitments with foreign subsidiaries and
affiliates.
Because the agreements underlying the Company's hedging positions provided that
the counterparties to the hedging contracts could liquidate the Company's
hedging positions if the Company filed for reorganization, the Company chose to
liquidate these positions in advance of the Filing Date. Proceeds from the
liquidation totaled approximately $42.2. A net gain of $23.3 associated with
these liquidated positions was deferred and is being recognized as income
through December 31, 2003 (the period during which the underlying transactions
to which the hedges related are expected to occur). The net gain consisted of:
gains of $30.2 for aluminum contracts, losses of $5.0 for Australian dollars and
losses of $1.9 for energy contracts. As of September 30, 2002, the unamortized
net gain was approximately $4.9.
During the first quarter of 2001, the Company recorded a mark-to-market benefit
of $6.8 related to the application of Statement of Financial Accounting
Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities. However, starting in the second quarter of 2001, the income
statement impact of mark-to-market changes was essentially eliminated as
unrealized gains or losses resulting from changes in the value of these hedges
began being recorded in other comprehensive income based on changes in SFAS No.
133 enacted in April 2001. Also during the first quarter of 2001, the Company
recorded the cumulative impact of adopting SFAS No. 133 of $1.8 in comprehensive
income.
During late 1999 and early 2000, the Company entered into certain aluminum
contracts with a counterparty. While the Company believed that the transactions
were consistent with its stated hedging objectives, these positions did not
qualify for treatment as a "hedge" under accounting guidelines. Accordingly, the
positions were marked-to-market each period. Mark-to-market pre-tax gains of
$13.9 and $25.5 associated with these positions during the quarter and
nine-month periods ended September 30, 2001, respectively, together with the
$6.8 discussed in the paragraph above, were recorded in Other income (expense)
(see Note 12). During the fourth quarter of 2001, the Company liquidated all of
the remaining positions.
As of September 30, 2002, the Company had sold forward substantially all of the
alumina available to it in excess of its projected internal smelting
requirements for 2002 and 2003, respectively, at prices indexed to future prices
of primary aluminum.
No hedging activities were conducted between the Filing Date and October 31,
2002. The Company anticipates that, subject to prevailing economic conditions,
it may reinstitute an active hedging program to protect the interests of its
constituents. Court approval for such activities was received in July 2002.
However, no assurance can be given as to when or if such hedging activities will
restart.
10. TRUST FUNDS
In the first quarter of 2002, the Company paid an aggregate of $10.0 into two
separate trusts funds in respect of (a) potential directors and officers
liability obligations and (b) certain obligations attributable to certain
management compensation agreements. These payments resulted in an approximate
$5.0 increase in Other assets and an approximate $5.0 charge to Corporate
selling, administrative, research and development, and general expenses in the
nine-month period ended September 30, 2002.
11. PENSION PLAN MATTERS
Possible Year-End Financial Statement Item. The assets of the Company sponsored
pension plans, like numerous other companies' plans, are, to a substantial
degree, invested in the capital markets and managed by a third party. Given the
year-to-date performance of the capital markets, it is likely that, barring a
material improvement in the capital markets during the fourth quarter of 2002,
the Company will be required to reflect a significant additional minimum pension
liability in its year-end financial statements as a result of a decline in the
value of the assets held by the Company's pension plans. Minimum pension
liability adjustments are non-cash adjustments that are reflected as an increase
in pension liability and an offsetting charge to stockholders' equity through
comprehensive income (rather than net income). The ultimate amount of such
additional adjustment cannot be determined until year-end 2002. However, based
on the year-to-date stock market performance and an estimated range of year-end
2002 asset values based, in part, upon year-to-date stock market performance,
the Company estimates that the minimum pension liability adjustment at December
31, 2002, could be in the $75.0 to $125.0 range. The Company also anticipates
that the decline in the value of the pension plans' assets will unfavorably
impact pension costs reflected in its 2003 operating results. Further, the
Company estimates that the impact of the adverse capital market performance
during the 2001 and 2002 year-to-date period, together with restructuring
efforts and the possible incurrence of substantial additional full early
retirement obligations in respect of the Company's Washington smelters in early
2003 or sooner (see Note 4), will cause expected minimum pension funding
requirements for the year ending December 31, 2003 to increase to approximately
$59.0. As reported in October 2002, the Company has disclosed that it intends to
meet with the PBGC and its labor unions to explore alternatives to the minimum
funding requirements. Such alternatives may include extended amortization
periods for payment of unfunded liabilities and the potential termination of the
pension plans. However, no assurances can be given as to the outcome of such
discussions.
Settlement Charge. During the quarter and nine-month periods ended September 30,
2002, the Company recorded non-cash charges of $1.1 and $10.4, respectively
(included in Corporate selling, administrative, research and development, and
general expense), for additional pension expense. The non-cash charges were
recorded because the lump sum payments from the assets of the Company's salaried
employee pension plan exceeded a stipulated level prescribed by GAAP.
Accordingly, a partial "settlement," as defined by GAAP, was deemed to have
occurred. Under GAAP, if a partial "settlement" occurs, a charge must be
recorded for a portion of any unrecognized net actuarial losses not reflected in
the consolidated balance sheet. The portion of the total unrecognized actuarial
losses of the plan ($75.0 at December 31, 2001) that must be recorded as a
charge is the relative percentage of the total projected benefit obligation of
the plan ($300.0 at December 31, 2001) settled by the lump sum payments ($4.0
and $40.0 for the quarter and nine-month periods ended September 30, 2002,
respectively). The Company had approximately 90 salaried employees announce
their retirement during October 2002. These additional retirements are expected
to result in additional settlement charges in the fourth quarter of 2002 of
between $7.0 and $8.0. To the extent that additional retirements occur over the
balance of 2002 and the salaried retirees exercise their lump sum payment option
under the salaried employees pension plan, additional charges to earnings will
occur. The amount of such charges could be significant.
12. OTHER NON-RECURRING ITEMS
Non-Recurring Operating Charges (Benefits), Net. The income (loss) impact
associated with non-recurring operating (charges) benefits, net for the quarter
and nine-month periods ended September 30, 2002 and 2001, was as follows (the
business segment to which the items is applicable is indicated):
Quarter Ended Nine Months Ended
September 30, September 30,
----------------------------- ---------------------------
2002 2001 2002 2001
-------------- ------------- ---------------------------
Net gains from power sales (Primary Aluminum)
(Note 4) $ - $ 6.5 $ - $ 229.2
Restructuring charges -
Bauxite & Alumina - (2.9) (1.9) (4.9)
Primary Aluminum (1.0) (4.8) (2.7) (4.8)
Flat-Rolled Products (1.5) (10.7) (5.4) (10.7)
Engineered Products (1.3) - (1.3) -
Corporate - (.5) - (1.0)
Impairment charges -
Bauxite & Alumina - (5.0) - (5.0)
Primary Aluminum (3.4) (.6) (3.4) (.6)
Eliminations - intersegment profit elimination on
Primary Aluminum impairment charges 1.9 - 1.9 -
Flat-Rolled Products - product line exit (Note 3) - - (1.6) -
Corporate - non-operating properties (20.0) - (20.0) -
Contractual labor costs related to smelter curtailment
(Primary aluminum) (Note 4) - (3.3) - (3.3)
-------------- ------------- ------------- ------------
$ (25.3) $ (21.3) $ (34.4) $ 198.9
============== ============= ============= ============
Restructuring charges result from the Company's initiatives to increase cash
flow, generate cash, and improve the Company's financial flexibility.
Restructuring charges in the third quarter of 2002, consist entirely of employee
benefit and related costs associated with 140 job eliminations, 74 of which had
occurred as of October 31, 2002, and the balance of which will occur during the
fourth quarter of 2002. Restructuring charges for the 2002 year-to-date period,
consist of $9.4 of employee benefit and related costs associated with 200 job
eliminations (119 of which have occurred and 81 of which will occur prior to
December 31, 2002) and $1.9 of third party costs associated with cost reduction
initiatives. Restructuring costs during the nine months ended September 30, 2001
resulted from the elimination of 125 positions at the Flat-rolled products and
Primary aluminum business segments ($14.1), all of which positions have been
eliminated, and $7.3 of third party costs associated with cost reduction
initiatives.
Impairment charges at the Primary aluminum business segment in 2002 includes a
third quarter charge of $3.4 to write-down certain alumina inventories at the
Company's Northwest smelters to their net realizable values (see Note 3). The
charge at Primary Aluminum was partially offset by a $1.9 benefit in the
Eliminations segment representing the elimination of deferred intersegment
profit included in the Primary aluminum inventory charge. Impairment charges at
the Bauxite & alumina and Primary aluminum business segments in 2001 of $5.6
related to the write-down of excess operating supplies and repairs and
maintenance parts that were sold to generate cash, rather than be used in
production.
The Company is continuing its efforts to sell non-core assets. Based on updated
reviews of the applicable markets and the status of its ongoing efforts, the
Company reflected a non-cash impairment charge of approximately $20.0 related to
its non-operating properties during the quarter ended September 30, 2002.
Other Income (Expense). Amounts included in other income (expense), other than
interest expense, for the quarter and nine-month periods ended September 30,
2002 and 2001, included the following pre-tax gains (losses):
Quarter Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ----------- ---------------------------
Gain on sale of real estate $ - $ 5.7 $ 4.0 $ 5.7
Mark-to-market gains (losses) (Note 9) - 13.9 (.4) 32.3
Asbestos-related charge (Note 8) - - - (53.3)
Adjustment to environmental liabilities (Note 8) - (1.0) - (9.0)
MetalSpectrum investment write-off - - - (2.8)
------------ ----------- ------------- ------------
Special items, net - 18.6 3.6 (27.1)
All other, net (1.4) (2.3) (2.5) (1.0)
------------ ----------- ------------- ------------
$ (1.4) $ 16.3 $ 1.1 $ (28.1)
============ =========== ============= ============
As previously disclosed, during the fourth quarter of 2001, the Company
reflected an impairment charge of $17.7 to adjust the carrying value of certain
equipment to its estimated fair value in connection with planned equipment sales
by the Flat-rolled products segment as a result of the Company's decision to
exit the lid and tab stock and brazing sheet product lines. In June 2002, with
Court approval, the Company sold certain of the equipment for total proceeds of
$15.8, which amount approximated its previously estimated fair value. As a
result, the sale did not have a material impact on the Company's operating
results for the nine-month period ended September 30, 2002.
During January 2002, the Company, in the ordinary course of business, sold
certain non-operating property for total proceeds of approximately $4.5,
resulting in a pre-tax gain of approximately $4.0.
As part of its ongoing initiatives to generate cash benefits, the Company sold
certain non-operating real estate during the third quarter of 2001 for net
proceeds totaling approximately $6.7, resulting in a gain of $5.7.
In June 2001, the Company wrote-off its investment of $2.8 in MetalSpectrum LLC,
a start-up, e-commerce entity in which the Company was a partner. During the
second quarter of 2001, MetalSpectrum ceased operations.
13. KEY EMPLOYEE RETENTION PROGRAM
In June 2002, the Company adopted a key employee retention program (the "KERP"),
which was approved by the Court in September 2002. The KERP is a comprehensive
program that is designed to provide financial incentives sufficient to retain
certain key employees during the Cases. The KERP includes six key elements: a
retention plan, a severance plan, a change in control plan, a completion
incentive plan, the continuation for certain participants of an existing
supplemental employee retirement plan ("SERP") and a long-term incentive plan.
The retention plan is expected to have a total cost of approximately $7.3 per
year. Under the KERP, retention payments commenced in September 2002 and will be
paid every six months through March 31, 2004, except that 50% of the amounts
payable to certain senior officers will be withheld until the Debtors emerge
from the Cases or as otherwise agreed pursuant to the KERP. The severance and
change in control plans, which are similar to the provisions of previous
arrangements that existed for certain key employees, generally provide for
severance payments of between six months and three years of salary and certain
benefits, depending on the facts and circumstances and the level of employee
involved. The completion incentive plan generally provides for payments of up to
an aggregate of approximately $1.2 to certain senior officers provided that the
Debtors emerge from the Cases in 30 months or less from the Filing Date. If the
Debtors emerge from the Cases after 30 months from the Filing Date, the amount
of the payments will be reduced accordingly. The SERP generally provides
additional non-qualified pension benefits for certain active employees at the
time that the KERP was approved, who would suffer a loss of benefits based on
Internal Revenue Code limitations, so long as such employees are not
subsequently terminated for cause or voluntarily terminate prior to reaching
their retirement age. The long-term incentive plan generally provides for
incentive awards to key employees based on an annual cost reduction target.
Payment of such awards generally will be made: (a) 50% when the Debtors emerge
from the Cases and (b) 50% one year from the date the Debtors emerge from the
Cases. During the quarter and nine-month periods ended September 30, 2002, the
Company has recorded charges of $1.8 and $3.6, respectively, (included in
Selling, administrative, research and development, and general) related to the
KERP.
14. SALE OF 8.3% INTEREST IN QAL
In September 2001, the Company sold an approximate 8.3% interest in QAL and
recorded a pre-tax gain of approximately $163.6 (included in Other income
(expense) in the accompanying condensed consolidated statements of income
(loss)). The total value of the transaction was approximately $189.0, consisting
of a cash payment of approximately $159.0 plus the purchaser's assumption of
approximately $30.0 of off-balance sheet QAL indebtedness currently guaranteed
by the Company. See Note 4 of Notes to Consolidated Financial Statements in the
Company's Form 10-K for the year ended December 31, 2001 for additional
information regarding the sale of the interest in QAL.
15. 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 2 of Notes to
Consolidated Financial Statements in the Company's Form 10-K for the year ended
December 31, 2001. 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 16 of Notes to Consolidated Financial
Statements in the Company's Form 10-K for the year ended December 31, 2001.
Financial information by operating segment for the quarter and nine-month
periods ended September 30, 2002 and 2001 is as follows:
Quarter Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2002 2001 2002 2001
----------------------------- -----------------------------
Net Sales:
Bauxite and Alumina:
Net sales to unaffiliated customers $ 99.0 $ 132.0 $ 327.5 $ 402.3
Intersegment sales 9.2 9.1 41.4 55.0
------------- ------------- ------------- --------------
108.2 141.1 368.9 457.3
------------- ------------- ------------- --------------
Primary Aluminum:
Net sales to unaffiliated customers 64.7 83.0 200.0 282.1
Intersegment sales .1 .5 2.5 3.8
------------- ------------- ------------- --------------
64.8 83.5 202.5 285.9
------------- ------------- ------------- --------------
Flat-Rolled Products 39.9 75.5 145.6 248.3
Engineered Products 109.7 101.4 328.4 337.9
Commodities Marketing(a) 9.3 9.5 30.8 5.9
Minority Interests 25.4 28.9 72.6 80.9
Eliminations (9.3) (9.6) (43.9) (58.8)
------------- ------------- ------------- --------------
$ 348.0 $ 430.3 $ 1,104.9 $ 1,357.4
============= ============= ============= ==============
Operating income (loss):
Bauxite and Alumina(b) $ (15.3) $ .4 $ (30.5) $ (12.4)
Primary Aluminum (6.8) (.3) (16.8) 8.1
Flat-Rolled Products(c) (9.8) .2 (26.6) 6.5
Engineered Products(d) 4.6 - 15.5 5.1
Commodities Marketing 9.0 3.2 28.1 (5.8)
Eliminations (1.5) (.4) 1.4 5.1
Corporate and Other (Notes 10, 11 and 13) (20.5) (17.7) (75.7) (53.5)
Non-Recurring Operating (Charges) Benefits, Net
(Note 12) (25.3) (21.3) (34.4) 198.9
------------- ------------- ------------- --------------
$ (65.6) $ (35.9) $ (139.0) $ 152.0
============= ============= ============= ==============
Depreciation and amortization:
Bauxite and Alumina $ 9.8 $ 9.6 $ 29.4 $ 27.2
Primary Aluminum 5.4 5.3 16.1 16.3
Flat-Rolled Products 3.9 4.9 11.9 12.9
Engineered Products 3.0 3.0 9.1 9.3
Corporate and Other .5 .3 1.1 .9
------------- ------------- ------------- --------------
$ 22.6 $ 23.1 $ 67.6 $ 66.6
============= ============= ============= ==============
Capital expenditures:
Bauxite and Alumina(e) $ 17.2 $ 98.0
Primary Aluminum 6.7 5.2
Flat-Rolled Products 1.1 1.3
Engineered Products 3.9 15.3
Corporate and Other .3 .3
------------- --------------
$ 29.2 $ 120.1
============= ==============
(a) Net sales in 2002 primarily represent partial recognition of deferred
gains from hedges closed prior to the commencement of the Cases. Net sales
in 2001 represent net settlements with counterparties for maturing
derivative positions.
(b) Results for the quarter and nine-month periods ended September 30, 2002,
include $4.4 of charges resulting from an increase in the allowance for
doubtful receivables; a LIFO inventory charge of $1.5; and estimated
weather-related excess costs and inefficiencies of between $2.0 and $3.0
resulting from hurricane conditions in the Caribbean and Gulf of Mexico in
late September 2002. Operating results for the quarter and nine-month
periods ended September 30, 2001 included: (1) abnormal Gramercy-related
start-up costs of $13.9 and $54.9 offset by business interruption-related
insurance accruals of $21.4 and $36.6; and (2) a LIFO inventory charge of
$2.0.
(c) Results for the quarter and nine-month periods ended September 30, 2002
include a $1.5 LIFO inventory charge.
(d) Results for the quarter and nine-month periods ended September 30, 2001
include a $1.0 LIFO inventory charge.
(e) Capital spending for the Bauxite and Alumina segment for the nine-month
period ended September 30, 2001 includes $70.6 of Gramercy-related
spending. See Note 7 of Notes to Interim Consolidated Financial
Statements.
16. SUPPLEMENTAL GUARANTOR INFORMATION
Certain domestic, wholly-owned (direct or indirect) subsidiaries of the Company
(hereinafter collectively referred to as the Subsidiary Guarantors) have
provided, joint and several, guarantees of the 9 7/8% Senior Notes, the 10 7/8%
Senior Notes, due 2006 and the 12 3/4% Senior Subordinated Notes (the "Notes").
Such guarantees are full and unconditional. See Note 17 of Notes to Consolidated
Financial Statements in the Company's Form 10-K for the year ended December 31,
2001 for a more complete discussion regarding the Subsidiary Guarantors and
their operations.
The accompanying financial information presents consolidating balance sheets,
statements of income (loss) and statements of cash flows showing separately the
Company, Subsidiary Guarantors, other subsidiaries and eliminating entries.
Certain reclassifications have been made to the December 31, 2001 consolidating
balance sheets to conform to the current presentation.
CONDENSED CONSOLIDATING BALANCE SHEETS
SEPTEMBER 30, 2002
SUBSIDIARY OTHER ELIMINATING
COMPANY GUARANTORS SUBSIDIARIES ENTRIES CONSOLIDATED
-------------- --------------- -------------- ------------- --------------
ASSETS
Current assets $ 351.7 $ 95.0 $ 154.2 $ - $ 600.9
Investments in subsidiaries 2,705.4 164.4 - (2,869.8) -
Intercompany advances receivable
(payable) (2,277.2) 594.8 1,682.4 - -
Investments in and advances to
unconsolidated affiliates 17.2 27.5 24.0 - 68.7
Property and equipment, net 734.4 22.9 403.4 - 1,160.7
Deferred income taxes (25.7) (2.7) 28.4 - -
Other assets 655.6 .2 22.1 - 677.9
-------------- --------------- -------------- ------------- --------------
$ 2,161.4 $ 902.1 $ 2,314.5 $ (2,869.8) $ 2,508.2
============== =============== ============== ============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 177.5 $ 26.7 $ 119.2 $ - $ 323.4
Other long-term liabilities 56.9 17.2 20.9 - 95.0
Long-term debt 20.8 - 22.0 - 42.8
Liabilities subject to compromise 2,570.7 12.8 8.8 - 2,592.3
Minority interests - - 18.8 100.4 119.2
Stockholders' equity (664.5) 845.4 2,124.8 (2,970.2) (664.5)
-------------- --------------- -------------- ------------- --------------
$ 2,161.4 $ 902.1 $ 2,314.5 $ (2,869.8) $ 2,508.2
============== =============== ============== ============= ==============
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2001
SUBSIDIARY OTHER ELIMINATING
COMPANY GUARANTORS SUBSIDIARIES ENTRIES CONSOLIDATED
---------------- --------------- --------------- -------------- --------------
ASSETS
Current assets $ 510.2 $ 76.0 $ 179.5 $ - $ 765.7
Investments in subsidiaries 2,697.3 161.4 - (2,858.7) -
Intercompany advances receivable
(payable) (2,296.3) 657.8 1,638.5 - -
Investments in and advances to
unconsolidated affiliates 19.0 20.0 24.0 - 63.0
Property and equipment, net 793.4 23.4 398.6 - 1,215.4
Deferred income taxes (26.9) (2.7) 29.6 - -
Other assets 682.4 .2 23.5 - 706.1
---------------- --------------- --------------- -------------- --------------
$ 2,379.1 $ 936.1 $ 2,293.7 $ (2,858.7) $ 2,750.2
================ =============== =============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 638.0 $ 50.2 $ 115.2 $ - $ 803.4
Other long-term liabilities 1,496.3 25.7 40.2 - 1,562.2
Long-term debt 678.8 - 22.0 - 700.8
Minority interests - - 19.0 98.8 117.8
Stockholders' equity (434.0) 860.2 2,097.3 (2,957.5) (434.0)
---------------- --------------- --------------- -------------- --------------