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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended December 31, 2002
Commission file number 1-3605
KAISER ALUMINUM & CHEMICAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-0928288
(State of Incorporation) (I.R.S. Employer Identification No.)
5847 SAN FELIPE, SUITE 2500, HOUSTON, TEXAS 77057-3268
(Address of principal executive office (Zip Code)
Registrant's telephone number, including area code: (713) 267-3777
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Cumulative Convertible Preference Stock
(par value $100)
4 1/8% Series None
4 3/4% (1957 Series) None
4 3/4% (1959 Series) None
4 3/4% (1966 Series) None
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, and (2) has been subject to such filing requirements
for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes / / No /X/
As of February 28, 2003, there were 46,171,365 shares of the common stock of the
registrant outstanding, all of which were owned by Kaiser Aluminum Corporation,
the parent corporation of the registrant.
Documents Incorporated By Reference
None
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NOTE
Kaiser Aluminum & Chemical Corporation's Report on Form 10-K filed with the
Securities and Exchange Commission includes all exhibits required to be filed
with the Report. Copies of this Report on Form 10-K, including only Exhibit 21
of the exhibits listed on pages 93 - 98 of this Report, are available without
charge upon written request. The registrant will furnish copies of the other
exhibits to this Report on Form 10-K upon payment of a fee of 25 cents per page.
Please contact the office set forth below to request copies of this Report on
Form 10-K and for information as to the number of pages contained in each of the
exhibits and to request copies of such exhibits:
Corporate Secretary
Kaiser Aluminum & Chemical Corporation
5847 San Felipe, Suite 2500
Houston, Texas 77057-3268
(713) 267-3777
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14. CONTROLS AND PROCEDURES
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
SCHEDULE I
SIGNATURES
INDEX OF EXHIBITS
EXHIBIT 21 SUBSIDIARIES
PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K (the "Report") contains statements which
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Report (including, but not limited to, Item 1. "Business -
Business Operations," " - Competition," " - Environmental Matters," and " -
Factors Affecting Future Performance," Item 3. "Legal Proceedings," and Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations"). Such statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "estimates," "will," "should,"
"plans" or "anticipates" or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy. Readers are cautioned
that any such forward-looking statements are not guarantees of future
performance and involve significant risks and uncertainties, and that actual
results may vary materially from those in the forward-looking statements as a
result of various factors. These factors include the effectiveness of
management's strategies and decisions, general economic and business conditions,
developments in technology, new or modified statutory or regulatory
requirements, and changing prices and market conditions. Certain sections of
this Report identify other factors that could cause differences between such
forward-looking statements and actual results (for example, see Item 1.
"Business - Factors Affecting Future Performance"). No assurance can be given
that these are all of the factors that could cause actual results to vary
materially from the forward-looking statements.
GENERAL
Kaiser Aluminum & Chemical Corporation (the "Company"), a Delaware corporation
organized in 1940, is a direct subsidiary of Kaiser Aluminum Corporation
("Kaiser") and an indirect subsidiary of MAXXAM Inc. ("MAXXAM"). Kaiser owns all
of the Company's Common Stock, and 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 Company operates in all principal
aspects of the aluminum industry - the mining of bauxite, the refining of
bauxite into alumina, the production of primary aluminum from alumina, and the
manufacture of fabricated (including semi-fabricated) aluminum products.
REORGANIZATION PROCEEDINGS
The Company, Kaiser and 24 of the Company's subsidiaries have 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"); the Company, Kaiser and 15 of the Company's
subsidiaries (the "Original Debtors") filed in the first quarter of 2002 and
nine additional Company subsidiaries (the "Additional Debtors") filed in the
first quarter of 2003. The Original Debtors and Additional Debtors 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 this Report, the term "Filing Date" shall mean, with respect to any
particular Debtor, the date on which such Debtor filed its Case. None of the
Company's non-U.S. joint ventures are included in the Cases. The Cases are being
jointly administered. The Debtors are managing their businesses in the ordinary
course as debtors-in-possession subject to the control and administration of the
Court.
Original Debtors. During the first quarter of 2002, the Original Debtors filed
separate voluntary petitions for reorganization. The wholly owned subsidiaries
of the Company included in such filings were: 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.
The necessity for filing the Cases by the Original Debtors was attributable to
the liquidity and cash flow problems of the Company and its subsidiaries 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 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 debt of the Original
Debtors became immediately due and payable upon 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 Original Debtors' Cases, the Court, upon
motion by the Original Debtors, authorized the Original 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 Original 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 Original Debtors agree to perform their obligations and cure
certain existing defaults under an executory contract and "rejection" means that
the Original 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 Original 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 and liabilities may be
asserted, some of which may be significant.
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 by means of revolving credit advances and to issue letters of
credit (up to $125.0 million) in an aggregate amount equal to the lesser of
$300.0 million 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 and certain significant subsidiaries of the Company. Interest on any
outstanding borrowings will bear a spread over either a base rate or LIBOR, at
the Company's option.
In October 2002, the Court set January 31, 2003 as the last date by which
holders of pre-Filing Date claims against the Original Debtors (other than
asbestos-related personal injury claims and certain hearing loss claims) could
file their claims. Any holder of a claim that was required to file a claim by
such date and did not do so may be barred from asserting such claim against any
of the Original Debtors and, accordingly, may not be able to participate in any
distribution in any of the Cases on account of such claim. Because the Company
has not had sufficient time to analyze the proofs of claim to determine their
validity, no provision has been included in the accompanying financial
statements for claims that have been filed. The January 31, 2003 bar date does
not apply to asbestos-related personal injury claims, for which the Original
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.
Additional Debtors. On January 14, 2003, the Additional Debtors filed separate
voluntary petitions for reorganization. The wholly owned subsidiaries included
in such filings were: Kaiser Bauxite Company, Kaiser Jamaica Corporation, Alpart
Jamaica Inc., Kaiser Aluminum & Chemical of Canada Limited and five other
entities with limited balances or activities.
The Cases filed by the Additional Debtors were commenced, among other reasons,
to protect the assets held by these Debtors against possible statutory liens
that might arise and be enforced by the Pension Benefit Guaranty Corporation
("PBGC") primarily as a result of the Company's failure to meet a $17.0 million
accelerated funding requirement to its salaried employee retirement plan in
January 2003. From an operating perspective, the filing of the Cases by the
Additional Debtors had no impact on the Company's day-to-day operations.
In connection with the Additional Debtors' filings, the Court authorized the
Additional Debtors to continue to make payments in the normal course of business
(including payments of pre-Filing Date amounts), including payments of wages and
benefits, payments for items such as materials, supplies and freight and
payments of taxes. The Court also approved the continuation of the Company's
existing cash management systems and routine intercompany transactions
involving, among other transactions, the transfer of materials and supplies
among affiliates.
In March 2003, the Additional Debtors were added as co-guarantors and the DIP
Facility lenders received super priority status with respect to certain of the
Additional Debtors' assets.
In March 2003, the Court set May 15, 2003 as the last date by which holders of
pre-Filing Date claims against the Additional Debtors (other than
asbestos-related personal injury claims and certain hearing loss claims) must
file their claims.
All Debtors. The following table sets forth certain financial information for
the Debtors and non-Debtors as of and for the year ended December 31, 2002.
Consolidation/
Original Additional Elimination
Debtors Debtors Non-Debtors Entries Consolidated
---------------- --------------- ------------- -------------- --------------
Net sales $ 1,323.6 $ 47.6 $ 209.7 $ (111.3) $ 1,469.6
Operating income (420.7) 33.1 (18.3) - (405.9)
Net income (loss) (468.4) 22.6 (12.8) (9.8) (468.4)
Total assets $ 1,952.3 $ 1,219.4 $ 608.6 $ (1,549.9) $ 2,230.4
Liabilities not subject to compromise 304.6 28.6 130.4 (2.0) 461.6
Liabilities subject to compromise 2,726.0 - - - 2,726.0
Minority interests - - 102.3 18.8 121.1
Total stockholders' equity (deficit) (1,078.3) 1,190.8 375.9 (1,566.7) (1,078.3)
The Debtors' objective is to achieve the highest possible recoveries for all
creditors and stockholders, consistent with the Debtors' abilities to pay, and
the continuation of their businesses. However, there can be no assurance that
the Debtors will be able to attain these objectives or achieve a successful
reorganization. While valuation of the Debtors' assets and pre-Filing Date
claims at this stage of the Cases is subject to inherent uncertainties, the
Debtors currently believe that it is likely that their liabilities will be found
in the Cases to exceed the fair value of their assets. Therefore, the Debtors
currently believe that it is likely that pre-Filing Date claims will be paid at
less than 100% of their face value and the equity of the Company's stockholders
will be diluted or cancelled.
Under the Code, the rights 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.
Two creditors' committees, one representing the unsecured creditors and the
other representing the asbestos claimants, have been appointed as official
committees 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 the legal
representative for potential future asbestos claimants that has been appointed
in the Cases, 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 costs and expenses for the committees and the legal representative for
potential future asbestos claimants, 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 Original Debtors had the exclusive right to propose
a plan of reorganization for 120 days following the initial Filing Date. The
Court has subsequently approved extensions of the exclusivity period for all
Debtors through April 30, 2003. Additional extensions are likely to be sought.
However, no assurance can be given that such 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
number 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.
The Company expects that, when the Debtors ultimately file a plan of
reorganization, it will reflect the Company's strategic vision for emergence
from Chapter 11: (a) a standalone going concern with manageable leverage,
improved cost structure and competitive strength; (b) a company positioned to
execute its long-standing vision of market leadership and growth in fabricated
products specifically with a financial structure that provides financial
flexibility, including access to capital markets, for accretive acquisitions;
(c) a company that delivers a broad product offering and leadership in service
and quality for its customers and distributors; and (d) a company with continued
presence in those commodities markets that have the potential to generate
significant cash at steady-state metal prices. The Company's advisors have
developed a preliminary timeline that, assuming the current pace of the Cases
continues, could allow the Company to emerge from Chapter 11 in 2004. While no
assurances can be given in this regard, the Company's management continues to
push for an aggressive pace in advancing the Cases. Continued sales of non-core
assets and facilities that are ultimately determined not to be an important part
of the reorganized entity are likely. The Company's strategic vision, which is
subject to continuing review in consultation with the Company's stakeholders,
may also be modified from time to time as the Cases proceed due to changes in
such items as changes in the global markets, changes in the economics of the
Company's facilities or changing financial circumstances.
SUMMARY OF OPERATIONS
The Company sells significant amounts of alumina and primary aluminum in
domestic and international markets. The following table sets forth production
and third party purchases of bauxite, alumina and primary aluminum and third
party shipments and intersegment transfers of bauxite, alumina, primary aluminum
and fabricated products for the years ended December 31, 2002, 2001 and 2000:
Sources(1) Uses(1)
------------------------------------ ----------------------------------
Third Party Third Party Intersegment
Production(2) Purchases Shipments(2) Transfers
------------------ ---------------- ----------------- ---------------
(in thousands of tons*)
Bauxite -
2002 6,289.7 1,582.5 1,568.1 4,493.5
2001 5,628.3 1,916.3 1,512.2 4,355.4
2000 4,305.0 2,290.0 2,007.0 2,342.0
Alumina -
2002 2,848.5 258.9 2,626.6 343.9
2001 2,813.9(3) 115.0 2,582.7 422.8
2000 2,042.9 322.0 1,927.1 751.9
Primary Aluminum -
2002 187.4 6.1 194.8 1.7
2001 214.3 27.3 244.7 2.3
2000 411.4 56.1 345.5 148.9
Fabricated Aluminum Products(4) -
2002 - 164.7 170.7 -
2001 - 187.1 192.5 -
2000 - 155.4 326.9 -
(1) Sources and uses will not equal due to the impact of intrasegment
consumption, inventory changes and alumina and primary aluminum swaps.
(2) Production and third party shipments include the Company's share of
consolidated joint venture activities.
(3) During September 2001, the Company sold an 8.3% interest in Queensland
Alumina Limited ("QAL"). See "Business Operations--Bauxite and Alumina
Business Unit--QAL" below for a discussion of effects of the sale on
alumina production.
(4) Fabricated aluminum products activity is reported in equivalent tons of
primary aluminum. Third party purchases represent purchases of primary
aluminum, including scrap.
- ---------------------------
* All references to tons in this Report refer to metric tons of 2,204.6
pounds.
BUSINESS OPERATIONS
The Company conducts its business through its five main business units (Bauxite
and alumina, Primary aluminum, Commodities marketing, Flat-rolled products and
Engineered products), each of which is discussed below.
- - Bauxite and Alumina Business Unit
The following table lists the Company's bauxite mining and alumina refining
facilities as of December 31, 2002:
Annual
Production Total
Capacity Annual
Company Available to Production
Activity Facility Location Ownership the Company Capacity
- ------------------ ------------ -------------- ---------------- ----------------- ----------------
(tons) (tons)
Bauxite Mining KJBC Jamaica 49.0% 4,500,000 4,500,000
Alpart(1) Jamaica 65.0% 2,275,000 3,500,000
----------------- ----------------
6,775,000 8,000,000
================= ================
Alumina Refining Gramercy Louisiana 100.0% 1,250,000 1,250,000
Alpart Jamaica 65.0% 942,500 1,450,000
QAL Australia 20.0% 730,000 3,650,000
----------------- ----------------
2,922,500 6,350,000
================= ================
- ------------
(1) Alumina Partners of Jamaica ("Alpart") bauxite is refined into alumina at
the Alpart refinery.
The Company is a major producer of alumina and sells significant amounts of its
alumina production in domestic and international markets. The Company's strategy
is to sell a substantial portion of the alumina available to it in excess of its
internal smelting requirements under multi-year sales contracts with prices
linked to the price of primary aluminum. See "- Competition" and "- Commodity
Marketing" in this Report. During 2002, the Company sold alumina to
approximately 14 customers, the largest and top five of which accounted for
approximately 20% and 73%, respectively, of the business unit's third-party net
sales. All of the Company's third-party sales of bauxite in 2002 were made to
one customer, which sales represent approximately 6% of the business unit's
third-party net sales. The Company's principal customers for bauxite and alumina
consist of other aluminum producers, trading intermediaries, and users of
chemical grade alumina. Marketing and sales efforts are conducted by personnel
located in Baton Rouge, Louisiana.
KJBC. The Government of Jamaica has granted the Company a mining lease for the
mining of bauxite which will, at a minimum, satisfy the bauxite requirements of
the Company's Gramercy, Louisiana, alumina refinery so that it will be able to
produce at its current rated capacity until 2020. Kaiser Jamaica Bauxite Company
("KJBC") mines bauxite from land which is subject to the mining lease as an
agent for the Company. The Company holds its interest in KJBC through a wholly
owned subsidiary (Kaiser Bauxite Company) which was one of the Company's
subsidiaries that filed a petition for reorganization under the Code in January
2003. KJBC did not file a petition for reorganization. The Company and Kaiser
Bauxite Company have the authority from the Court to fund KJBC's cash
requirements in the ordinary course of business. Although the Company (through
Kaiser Bauxite Company) owns 49% of KJBC, it is entitled to, and generally
takes, all of its bauxite output. A substantial majority of the bauxite mined by
KJBC is refined into alumina at the Gramercy facility and the remainder is sold.
KJBC's operations were impacted by the Gramercy incident (see Gramercy below).
The Government of Jamaica, which owns 51% of KJBC, has agreed to grant the
Company an additional bauxite mining lease. The new mining lease will be
effective upon the expiration of the current lease in 2020 and will enable the
Gramercy facility to produce at its rated capacity for an additional ten year
period.
Gramercy. Alumina produced by the Gramercy refinery is primarily sold to third
parties. The Gramercy refinery produces two products: smelter grade alumina and
chemical grade alumina (e.g. hydrate). Smelter grade alumina is sold under
long-term contracts typically linked to London Metal Exchange prices ("LME
prices") for primary aluminum. Chemical grade alumina is sold at a premium price
over smelter grade alumina. Production at the plant was curtailed from July 1999
until December 2000 (at which time partial production commenced) as a result of
an explosion in the digestion area of the plant. Construction at the facility
was substantially completed in 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. During
2001, abnormal Gramercy-related start-up costs and litigation costs totaled
approximately $64.9 million and $6.5 million, respectively. These incremental
costs for 2001 were offset by approximately $36.6 million of additional
insurance benefit (recorded as a reduction of Bauxite and alumina business
unit's cost of products sold). The abnormal start-up 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 million during the first quarter of 2002 and were
substantially eliminated during the balance of 2002. The facility is now
focusing its efforts on achieving its full operating efficiency. While
production was curtailed, the Company purchased alumina from third parties, in
excess of the amounts of alumina available from other Company-owned facilities,
to supply major customers' needs as well as to meet intersegment requirements.
Alpart. The Company owns a 65% interest in Alpart, and Hydro Aluminium a.s
("Hydro") owns the remaining 35% interest. The Company holds its interests in
Alpart through two wholly owned subsidiaries (Kaiser Jamaica Corporation and
Alpart Jamaica Inc.), which were two of the Company's subsidiaries that filed
petitions for reorganization under the Code in January 2003. Alpart did not file
a petition for reorganization. The Debtors have the authority from the Court to
fund Alpart's cash requirements in the ordinary course of business. Alpart holds
bauxite reserves and owns a 1,450,000 ton per year alumina plant located in
Jamaica. The Company has management responsibility for the facility on a fee
basis. The Company and Hydro are responsible for their proportionate shares of
Alpart's costs and expenses. The Government of Jamaica has granted Alpart a
mining lease and has entered into other agreements with Alpart designed to
assure that sufficient reserves of bauxite will be available to Alpart to
operate its refinery, as it may be expanded up to a capacity of 2,000,000 tons
per year, through the year 2024. Alpart and JAMALCO, a joint venture between
affiliates of Alcoa Inc. and the Government of Jamaica, have been operating a
bauxite mining operation joint venture that consolidated their bauxite mining
operations in Jamaica since the first half of 2000. The joint venture agreement
also grants Alpart certain rights to acquire bauxite mined from JAMALCO's
reserves with the objective to optimize mining operations and capital costs. As
part of the Company's initiatives launched in 2001, Alpart's annual production
capacity is expected to increase to 1,650,000 tons per year during 2003, which
would equate to an increase in the Company's share of annual production by over
100,000 tons per year.
QAL. The Company owns a 20% interest in QAL, after selling an approximate 8.3%
interest in September 2001. The Company holds its interest in QAL through a
wholly owned subsidiary (Kaiser Alumina Australia Corporation ("KAAC")) which is
one of the Company's subsidiaries that filed a petition for reorganization under
the Code in 2002. The Debtors have the authority from the Court to fund QAL's
cash requirements in the ordinary course of business. QAL, which is located in
Queensland, Australia, owns one of the largest and most competitive alumina
refineries in the world. QAL refines bauxite into alumina, essentially on a cost
basis, for the account of its shareholders under long-term tolling contracts.
The shareholders, including KAAC, purchase bauxite from another QAL shareholder
under long-term supply contracts. KAAC has contracted with QAL to take
approximately 600,000 tons per year of alumina or pay standby charges. KAAC is
unconditionally obligated to pay amounts calculated to service its share ($49.0
million at December 31, 2002) of certain debt of QAL, as well as other QAL costs
and expenses, including bauxite shipping costs. Historically, the Company has
sold about half of its share of QAL's production to third parties and has used
the remainder to supply its Mead and Tacoma smelters, which have been curtailed
since the last half of 2000. The reduction in the Company's alumina supply
associated with its sale of a portion of its QAL interest has been substantially
offset by the return of its Gramercy alumina refinery to full operations during
the first quarter of 2002 at a higher capacity, by reduced internal requirements
due to production curtailments of primary aluminum facilities and by the
previously noted planned increase in capacity in 2003 at its Alpart alumina
refinery in Jamaica. Accordingly, the sale of a portion of the Company's QAL
interest did not have an adverse impact on the Company's ability to satisfy
existing third-party customer contracts.
- - Primary Aluminum Business Unit
The following table lists the Company's primary aluminum smelting facilities as
of December 31, 2002:
Annual Rated Total 2002
Capacity Annual Average
Company Available to Rated Operating
Location Facility Ownership the Company Capacity Rate
- ----------------- ---------- ------------ ---------------- ----------- ------------
(tons) (tons)
Ghana Valco 90% 180,000 200,000 66%
Wales, United Kingdom Anglesey 49% 66,150 135,000 103%
Washington, United States Mead 100% 200,000 200,000 -(1)
---------------- -----------
Total 446,150 535,000
================ ===========
- ------------
(1) Production was completely curtailed during 2002. In January 2003, the
Company announced the indefinite curtailment of the Mead facility - see
below.
The Company uses proprietary retrofit and control technology in all of its
smelters. This technology - which includes the redesign of the cathodes, anodes
and bus that conduct electricity through reduction cells, improved feed systems
that add alumina to the cells, computerized process control and energy
management systems, and furnace technology for baking of anode carbon - has
significantly contributed to increased and more efficient production of primary
aluminum and enhanced the Company's ability to compete more effectively with the
industry's newer smelters.
The Company's principal primary aluminum customers consist of large trading
intermediaries and metal brokers. In 2002, the Company sold its primary aluminum
production to approximately 37 customers, the largest and top five of which
accounted for approximately 52% and 99%, respectively, of the business unit's
third-party net sales. See "-Competition" in this Report. Marketing and sales
efforts are conducted by personnel located in Baton Rouge, Louisiana.
Electric power represents an important production input for the Company at its
aluminum smelters and its cost can significantly affect the Business Unit's
profitability.
Valco. The Company manages, and directly owns a 90% interest in, the Volta
Aluminium Company Limited ("Valco") aluminum smelter in Ghana. The Valco smelter
uses pre-bake technology and processes alumina supplied by the Company and the
other participant into primary aluminum under tolling contracts which provide
for proportionate payments by the participants. The Company's share of the
primary aluminum is sold to third parties.
Valco's operating level has been subject to fluctuations resulting from the
amount of power it is allocated by the Volta River Authority ("VRA"). The
operating level over the last five years has ranged from one to four out of a
total of five potlines. During 2002 and 2001, Valco operated an average of three
and four potlines, respectively. The amount of power made available to Valco by
the VRA depends in large part on the level of the lake that is the primary
source for generating the hydroelectric power used to supply the smelter. The
level of the lake is primarily a function of the level of annual rainfall and
the alternative (non-Valco) uses of the power generated, as directed by the VRA.
As of February 28, 2003, the lake level was at a ten-year low. During late 2000,
Valco, the Government of Ghana ("GoG") and the VRA reached an agreement, subject
to Parliamentary approval, that would provide sufficient power for Valco to
operate at least three and one-half of its five potlines through 2017. However,
Parliamentary approval was not received and, in March 2002, the GoG reduced
Valco's power allocation forcing Valco to curtail one of its four operating
potlines. Valco's power allocation was further reduced in January 2003 resulting
in the curtailment of two additional operating potlines. As of February 28,
2003, Valco was operating one of its five potlines. However, no assurances can
be given that Valco will continue to receive sufficient power to operate the one
remaining operating potline. Valco has met with the GoG and the VRA and
anticipates such discussions will continue in respect of the current and future
power situations. Valco has objected to the power curtailments and expects to
seek appropriate compensation from the GoG. In addition, Valco and the Company
have filed for arbitration with the International Chamber of Commerce in Paris
against both the GoG and the VRA. However, no assurances can be given as to the
ultimate success of any such actions or to the likelihood of Valco receiving any
compensation from the VRA or GoG.
Valco did not file a petition for reorganization. The Company does not expect
Valco's operations to be adversely affected as a result of the Cases as the
Debtors have received the authority from the Court to fund Valco's cash
requirements in the ordinary course of business. The Company and the PBGC have
entered into a stipulation, which was approved by the Court, that extends the
automatic stay in bankruptcy to Valco to prevent statutory liens from arising
against Valco in respect of certain pension obligations related to the Company's
U.S. pension plans (see Note 10 of Notes to Consolidated Financial Statements).
The stipulation currently expires on December 31, 2003. It can be extended
beyond that date either through agreement of the parties or involuntarily by
order of the Court. The Company is unable to assess at this time whether an
extension of the stipulation might be necessary or whether, if sought, an
extension might be obtained. If the stipulation were not extended, a PBGC lien
could arise against Valco that could have material consequences. The Company is
unable to state at this time whether a lien, if one arose, would be enforceable
in Ghana against Valco.
Anglesey. The Company also owns a 49% interest in the Anglesey Aluminium Limited
("Anglesey") aluminum smelter at Holyhead, Wales. The Anglesey smelter uses
pre-bake technology. The Company supplies 49% of Anglesey's alumina requirements
and purchases 49% of Anglesey's aluminum output. The Company sells its share of
Anglesey's output to third parties. Anglesey operates under a power agreement
that provides sufficient power to sustain its operations at full capacity
through September 2009.
Anglesey did not file a petition for reorganization. The Company does not expect
Anglesey's operations to be adversely affected as a result of the Cases as the
Debtors have received the authority from the Court to fund Anglesey's cash
requirements in the ordinary course of business.
Mead and Tacoma. The Mead facility uses pre-bake technology. Through 2000, the
Bonneville Power Administration ("BPA") was supplying approximately half of the
electric power for the Mead and Tacoma smelters, with the balance coming from
other suppliers. In response to the unprecedented high market prices for power
in the Pacific Northwest, the Company curtailed primary aluminum production at
the Mead and Tacoma, Washington, smelters during the last half of 2000 and all
of 2001 and 2002. During this same period, as permitted under the BPA contract,
the Company remarketed to the BPA the available power that it had under contract
through September 30, 2001. As a result of the curtailments, the Company avoided
the need to purchase power on a variable market price basis and received cash
proceeds sufficient to more than offset the cash impact of the potline
curtailments over the period for which the power was sold. Both smelters
remained completely curtailed during 2001 and 2002.
During October 2000, the Company signed a new power contract with the 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. However, the October
2000 contract was less favorable than the prior contract and contained several
clauses that had adverse consequences for the Company. 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. See Note 3 of Notes to
Consolidated Financial Statements for a discussion of the Company's rejection of
the BPA contract.
In January 2003, the Company announced the indefinite curtailment of the Mead
facility. The curtailment of the Mead facility was due to the continuing
unfavorable market dynamics, specifically unattractive long-term power prices
and weak primary aluminum prices - both of which are significant impediments for
an older smelter with higher-than-average operating costs. The Mead facility is
expected to remain completely curtailed unless and until an appropriate
combination of reduced power prices, higher primary aluminum prices and other
factors occurs. If the Company were to restart all or a portion of its Mead
facility, 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 Mead
facility would result in production and cost inefficiencies such that operating
results would, at best, be breakeven to modestly negative at long-term primary
aluminum prices.
In January 2003, the Court approved the sale of the Tacoma smelter to the Port
of Tacoma. The sale closed in February 2003. See Note 17 of Notes to
Consolidated Financial Statements for additional discussion on the sale of the
Tacoma smelter.
- - Commodities Marketing Business Unit
The Company's operating results are sensitive to changes in the prices of
alumina, primary aluminum, and fabricated aluminum products, and also depend to
a significant degree upon the volume and mix of all products sold. Primary
aluminum prices have historically been subject to significant cyclical
fluctuations. Alumina prices, as well as fabricated aluminum product prices
(which vary considerably among products), are significantly influenced by
changes in the price of primary aluminum and generally lag behind primary
aluminum prices by up to three months. From time to time in the ordinary course
of business, the Company enters into hedging transactions to provide risk
management in respect of its net exposure of earnings and cash flow related to
primary aluminum price changes. Given the significance of primary aluminum
hedging activities to the Company, the Company reports its primary
aluminum-related hedging activities as a separate segment. Primary
aluminum-related hedging activities are managed centrally on behalf of all of
the Company's business segments to minimize transaction costs, to monitor
consolidated net exposures and to allow for increased responsiveness to changes
in market factors.
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 those positions in advance of the initial Filing Date. The net gain
associated with those liquidated positions was deferred and is being recognized
as income through December 31, 2003 (the period during which the underlying
transactions are expected to occur). During December 2002 and the first quarter
of 2003, the Company, with Court approval, reinstituted its hedging program when
it entered into hedging transactions with respect to a portion of its 2003 fuel
oil requirements consumed in its production process. The Company anticipates
that, subject to the prevailing economic conditions, it may enter into
additional hedging transactions with respect to primary aluminum prices, natural
gas and fuel oil prices and foreign currency values to protect the interests of
its constituents. However, no assurance can be given as to when or if the
Company will enter into such additional hedging activities.
Hedging activities conducted in respect of the Company's cost exposure to energy
prices and foreign exchange rates are not considered a part of the Commodity
marketing segment. Rather, such activities are included in the results of the
business unit to which they relate.
- - Flat-Rolled Products Business Unit
The Flat-rolled products business unit operates the Trentwood, Washington,
rolling mill. During recent years, the business unit has sold to the aerospace,
transportation and industrial ("ATI") markets (producing heat-treat sheet and
plate products), both directly and through distributors.
During 2000, the Company shifted the product mix of its Trentwood rolling mill
toward higher value-added product lines, exited beverage can body stock, wheel
and common alloy products in 2001 and exited the can lid and tab stock and
brazing sheet products in 2002 in an effort to enhance its profitability.
In 2002, the business unit sold to approximately 82 customers in the ATI
markets, most of which represented heat-treat product shipments to distributors
who sell to a variety of industrial end-users. The largest and top five
customers in the ATI markets for flat-rolled products accounted for
approximately 16% and 41%, respectively, of the business unit's third-party net
sales. See "- Competition" in this Report. Sales are made directly to end-use
customers and distributors by the Company's sales representatives located in the
United States and Europe, and by independent sales agents in Asia.
- - Engineered Products Business Unit
The Engineered products business unit operates soft-alloy and hard-alloy
extrusion facilities and engineered component (forgings) facilities in the
United States and Canada. Major markets for extruded products are in the ground
transportation industry, to which the business unit sells extrusions for
automobiles, light-duty vehicles, heavy duty trucks and trailers, and shipping
containers, and in the distribution, durable goods, defense, ordnance and
electrical markets.
Soft-alloy extrusion facilities are located in Los Angeles, California; Sherman,
Texas; Tulsa, Oklahoma; Richmond, Virginia; and London, Ontario, Canada.
Products manufactured at these facilities include rod, bar, tube, shapes and
billet. Hard-alloy extrusion facilities are located in Newark, Ohio, and
Jackson, Tennessee, and produce rod, bar, screw machine stock, redraw rod,
forging stock and billet. The business unit also extrudes seamless tubing in
both hard- and soft-alloys at a facility in Richland, Washington and produces
drawn tube in both hard- and soft-alloys at its operations in Chandler, Arizona,
that it purchased in May 2000. Soft-alloy extruded seamless and drawn tubing is
also produced at the Richmond, Virginia facility.
The business unit sells forged parts to customers in the automotive, heavy-duty
truck, general aviation, rail, machinery and equipment, and ordnance markets.
The high strength-to-weight properties of forged aluminum make it particularly
well-suited for automotive applications. The Company's remaining forging
facility is located in Greenwood, South Carolina. Another forging facility
located in Oxnard, California was sold in December 2002. Through its sales and
engineering office in Southfield, Michigan, the business unit staff works with
automobile makers and other customers and plant personnel to create new
automotive component designs and to improve existing products.
The Company's London, Ontario facility is owned by a wholly owned subsidiary
(Kaiser Aluminum & Chemical of Canada Limited ("KACCL")) which was one of the
Company's subsidiaries that filed a petition for reorganization under the Code
in January 2003. The Company does not believe KACCL's operations will be
adversely affected by the Cases.
In 2002, the Engineered products business unit had approximately 600 customers,
the largest and top five of which accounted for approximately 10% and 25%,
respectively, of the business unit's third-party net sales. See "- Competition"
below. Sales are made directly to end-use customers and distributors by the
Company sales representatives located across the United States.
COMPETITION
The Company competes globally with producers of bauxite, alumina, primary
aluminum, and fabricated aluminum products. Many of the Company's competitors
have greater financial resources than the Company. Primary aluminum and, to some
degree, alumina are commodities with generally standard qualities, and
competition in the sale of these commodities is based primarily upon price,
quality and availability. Aluminum competes in many markets with steel, copper,
glass, plastic, and other materials. The Company competes with numerous domestic
and international fabricators in the sale of fabricated aluminum products. The
Company markets fabricated aluminum products it manufactures in the United
States and abroad. Sales are made directly and through distributors to a large
number of customers. Competition in the sale of fabricated products is based
upon quality, availability, price and service, including delivery performance.
The Company concentrates its fabricating operations on selected products in
which it believes it has production expertise, high-quality capability, and
geographic and other competitive advantages. The Company believes that, assuming
the current relationship between worldwide supply and demand for alumina and
primary aluminum does not change materially, the loss of any one of the
Company's customers, including intermediaries, would not have a material adverse
effect on the Company's financial condition or results of operations.
RESEARCH AND DEVELOPMENT
Net expenditures for research and development activities were $1.8 million in
2002, $4.0 million in 2001, and $5.6 million in 2000. The Company estimates that
research and development net expenditures will be in the range of $2.0 million
to $3.0 million in 2003.
EMPLOYEES
At December 31, 2002, the Company employed approximately 5,200 persons, of which
approximately 3,400 were employed by the Debtors and 1,800 were employed by
non-Debtors. At December 31, 2001, the Company employed approximately 5,800
persons.
The labor agreements with the employees at the Valco smelter in Ghana and the
employees at the Alpart refinery in Jamaica were renewed in 2002 and with the
employees at the London, Ontario facility in February 2003.
ENVIRONMENTAL MATTERS
The Company is subject to a wide variety of international, federal, state and
local environmental laws and regulations. For a discussion of this subject, see
"Factors Affecting Future Performance - the Company's current or past operations
subject it to environmental compliance, clean-up and damage claims that may be
costly" below. During the pendency of the Cases, substantially all pending
litigation, except certain environmental claims and litigation, against the
Debtors is stayed.
FACTORS AFFECTING FUTURE PERFORMANCE
This section discusses certain factors that could cause actual results to vary,
perhaps materially, from the results described in forward-looking statements
made in this Report. Forward-looking statements in this Report are not
guarantees of future performance and involve significant risks and
uncertainties. In addition to the factors identified below, actual results may
vary materially from those in such forward-looking statements as a result of a
variety of other factors including the effectiveness of management's strategies
and decisions, general economic and business conditions, developments in
technology, new or modified statutory or regulatory requirements, and changing
prices and market conditions. This Report also identifies other factors that
could cause such differences. No assurance can be given that these factors are
all of the factors that could cause actual results to vary materially from the
forward-looking statements.
- - The Cases and any plan of reorganization may have adverse consequences on the
Company and its stakeholders and/or our reorganization from the Cases may not
be successful
Our objective is to achieve the highest possible recoveries for all creditors
and stockholders, consistent with our ability to pay and the continuation of our
businesses. However, there can be no assurance that we will be able to attain
these objectives or achieve a successful reorganization and remain a going
concern. The consolidated financial statements included elsewhere in this Report
do not include any adjustments relating to the recoverability and classification
of recorded asset amounts or the amount and classification of liabilities or the
effect on existing stockholders' equity that may result from any plans,
arrangements or other actions arising from the Cases, or the possible inability
of the Debtors to continue in existence. Adjustments necessitated by such plans,
arrangements or other actions could materially change the consolidated financial
statements included elsewhere in this Report. For example,
1. If the Debtors were to decide to sell certain assets not deemed a
critical part of the reorganized entity, such asset sales could
result in gains or losses (depending on the asset sold) and such
gains or losses could be significant.
2. Additional pre-Filing Date claims may be identified through the
proof of claim reconciliation process and may arise in connection
with actions taken by the Debtors in the Cases. For example, while
the Debtors consider rejection of the BPA contract to be in the
Company's best long-term interests, such rejection may increase
the amount of pre-Filing Date claims by approximately $75.0
million based on the BPA's proof of claim filed in connection with
the Cases in respect of the contract rejection.
3. As more fully discussed below, the amount of pre-Filing Date
claims ultimately allowed by the Court in respect of contingent
claims and benefit obligations may be materially different from
the amounts reflected in the consolidated financial statements.
While valuation of the Debtors' assets and pre-Filing Date claims at this stage
of the Cases is subject to inherent uncertainties, the Debtors currently believe
that it is likely that their liabilities will be found in the Cases to exceed
the fair value of their assets. Therefore, the Debtors currently believe that it
is likely that pre-Filing Date claims will be paid at less than 100% of their
face value and the equity of the Company's stockholders will be diluted or
cancelled. Because of such possibility, the value of the Common Stock is
speculative and any investment in the Common Stock would pose a high degree of
risk.
Additionally, while the Debtors operate their businesses as
debtors-in-possession pursuant to the Code during the pendency of the Cases, the
Debtors will be required to obtain the approval of the Court prior to engaging
in any transaction outside the ordinary course of business. In connection with
any such approval, creditors and other parties in interest may raise objections
to such approval and may appear and be heard at any hearing with respect to any
such approval. Accordingly, the Debtors may be prevented from engaging in
transactions that might otherwise be considered beneficial to the Company. The
Court also has the authority to oversee and exert control over the Debtors'
ordinary course operations.
- - We may not operate profitably in the future
We reported a net loss of $468.4 million for the year ended December 31, 2002,
which included a number of significant special items and non-cash charges. Even
if such items were excluded from the results for 2002, results for the year
ended December 31, 2002 would have been a net loss. There can be no assurance
that we will generate a profit from recurring operations or that we will operate
profitably in future periods. During 2002, the Company experienced a net
decrease in cash and cash equivalents of $74.6 million; $49.6 million of which
was used in operating activities and $25.0 million of which was used in
investing and financing activities. The $49.6 million of cash and cash
equivalents used in operations included several items not typically considered
part of our normal recurring operations including: (a) asbestos-related
insurance recoveries of $23.3 million; (b) approximately $30.0 million of
funding to QAL in respect of QAL's scheduled debt maturities; and (c) foreign
income tax payments related to prior year activities of $8.0 million. The
balance of the cash and cash equivalents used in operations ($34.9 million)
resulted from a combination of adverse market factors in the business segments
in which the Company operates including (a) primary aluminum prices below
long-term averages, (b) a weak demand for fabricated metal products,
particularly aerospace products, and (c) higher than average power, fuel oil and
natural gas prices.
To date, despite the foregoing adverse consequences, the Company's liquidity
(cash and cash equivalents plus unused availability under the DIP Facility) has
remained strong, averaging between $200.0 million and $250.0 million during the
fourth quarter of 2002. The completed sales of the Tacoma facility and the
Company's interests in an office building during the first quarter of 2003 are
expected to further bolster the Company's liquidity. However, no assurances can
be given that the Company's liquidity will not erode if the adverse market
factors continue for an extended period or for other reasons.
- - Our earnings are sensitive to a number of variables
Our operating earnings are sensitive to a number of variables over which we have
no direct control. Key variables in this regard include prices for primary
aluminum and energy and general economic conditions.
The price of primary aluminum significantly affects our financial results.
Primary aluminum prices historically have been subject to significant cyclical
price fluctuations. The Company believes the timing of changes in the market
price of aluminum are largely unpredictable. Since 1993, the average LME
transaction price has ranged from approximately $.50 to $1.00 per pound.
Electric power represents an important production input for us at our aluminum
smelters and its cost can significantly affect our profitability. Power
contracts for our smelters have varying contractual terms. See
"Business--Primary Aluminum Business Unit." Our earnings, particularly in our
Bauxite and Alumina business unit, are also sensitive to changes in the prices
for natural gas, fuel oil and diesel oil which are used in our production
processes, and to foreign exchange rates in respect of our cash commitments to
our foreign subsidiaries and affiliates.
Changes in global, regional, or country-specific economic conditions can have a
significant impact on overall demand for aluminum-intensive fabricated products
in the transportation, distribution, and aerospace markets. Such changes in
demand can directly affect our earnings by impacting the overall volume and mix
of such products sold. To the extent that these end-use markets weaken, demand
can also diminish for alumina and primary aluminum.
- - The indefinite curtailment of the Mead facility may have adverse impacts on
the Company
The Mead facility is expected to remain curtailed indefinitely unless/until an
appropriate combination of reduced power prices, higher primary aluminum prices
and other factors occurs. Until then, the Company will incur certain costs to
safely maintain the property. While other costs are being reduced to a minimum,
these costs may range from $3.0 million to $5.0 million per year and will reduce
the Company's otherwise available liquidity. However, at some point in the
future, the Company may decide, due to economic conditions and foreign
competition and other factors, to sell the facility. If, in connection with such
a hypothetical disposition, the Company were required to dismantle, demolish or
otherwise permanently close the Mead facility, the demolition and environmental
remediation costs could be significant. While the proceeds of such a disposition
might offset such costs, no assurances can be provided that such amounts would
fully or substantially offset the environmental remediation costs.
- - We may not have electric power in sufficient amounts and/or at affordable
costs available for our smelting operations
Electric power represents an important production input at our aluminum smelters
and its cost can significantly affect our profitability. Power contracts for our
smelters have varying contractual terms. In March 2002, the GoG reduced the
power allocation for our 90% owned Valco smelter forcing Valco to curtail one of
its four operating potlines. In January 2003, Valco's power allocation was
further reduced forcing the curtailment of two additional operating potlines. As
of February 28, 2003, Valco was operating only one of its five potlines. See
"Business--Primary Aluminum Business Unit--Valco." We cannot provide assurance
that electric power will be available in the future, at affordable prices, for
our smelters.
- - The Company's current or past operations subject it to environmental
compliance, clean-up and damage claims that have been and continue to be
costly
The operations of the Company's facilities are regulated by a wide variety of
international, federal, state and local environmental laws. These environmental
laws regulate, among other things, air and water emissions and discharges; the
generation, storage, treatment, transportation and disposal of solid and
hazardous waste; and the release of hazardous or toxic substances, pollutants
and contaminants into the environment. Compliance with these environmental laws
is costly. While legislative, regulatory and economic uncertainties make it
difficult for us to project future spending for these purposes, we currently
anticipate that in the 2003 - 2004 period, the Company's environmental capital
spending will be approximately $1.3 million per year and that the Company's
operating costs will include pollution control costs totaling approximately
$14.8 million per year. However, subsequent changes in environmental laws may
change the way the Company must operate and may force the Company to spend more
than we currently project.
Additionally, the Company's current and former operations can subject it to
fines or penalties for alleged breaches of environmental laws and to other
actions seeking clean-up or other remedies under these environmental laws. The
Company also may be subject to damages related to alleged injuries to health or
to the environment, including claims with respect to certain waste disposal
sites and the clean-up of sites currently or formerly used by the Company.
Currently, the Company is subject to certain lawsuits under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended by
the Superfund Amendments and Reauthorization Act of 1986 ("CERCLA"). The
Company, along with certain other companies, has been named as a Potentially
Responsible Party for clean-up costs at certain third-party sites listed on the
National Priorities List under CERCLA. As a result, the Company may be exposed
not only to its assessed share of clean-up but also to the costs of others if
they are unable to pay. Additionally, the Company's Mead, Washington, facility
has been listed on the National Priorities List under CERCLA. The Company and
the regulatory authorities agreed to a plan of remediation in respect of the
Mead facility in January 2000.
In response to environmental concerns, we have established environmental
accruals representing our estimate of the costs we reasonably expect the Company
to incur in connection with these matters. At December 31, 2002, the balance of
our accruals, which are primarily included in our long-term liabilities, was
$59.1 million. We estimate that the annual costs charged to these environmental
accruals will be approximately $.6 million to $12.3 million per year for the
years 2003 through 2007 and an aggregate of approximately $33.3 million
thereafter. However, we cannot assure you that the Company's actual costs will
not exceed our current estimates. We believe 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 $30.0 million.
See Note 14 of Notes to Consolidated Financial Statements for additional
information.
- - The settlement of the asbestos-related matters may have a major impact on our
plan of reorganization
The Company has been one of many defendants in numerous lawsuits in which the
plaintiffs allege that they have injuries caused by 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 sold more than 20 years ago.
Due to the Cases, existing lawsuits are stayed and new lawsuits cannot be
commenced against us.
Our December 31, 2002, balance sheet includes a liability for estimated
asbestos-related costs of $610.1 million. In determining the amount of the
liability, we have included estimates only for the costs of claims through 2011
because we do not have a reasonable basis for estimating costs beyond that
period. However, the plan of reorganization process will require an estimation
of the Company's entire asbestos-related liability, which may go beyond 2011.
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 through
2011. 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 periodically continue
to 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.
We believe the Company has insurance coverage for a substantial portion of such
asbestos-related costs. Accordingly, our December 31, 2002 balance sheet
includes a long-term receivable for estimated insurance recoveries of $484.0
million. We believe that recovery of this amount is probable and additional
amounts may be recoverable in the future if additional claims are received.
However, we cannot assure you that all such amounts will be collected. The
timing and amount of future recoveries from the Company's insurance carriers
will depend on the pendency of the Cases and on the resolution of disputes
regarding coverage under the applicable insurance policies. During October 2001,
the court ruled favorably on a number of policy interpretation issues, one of
which was affirmed in February 2002 by an intermediate appellate court in
response to a petition from the insurers. The rulings did not result in any
changes to our estimates of current and future asbestos-related insurance
recoveries. The trial court is scheduled to decide certain policy interpretation
issues in Sprin 2003 and may hear additional issues from time to time. Given the
expected significance of probable future asbestos-related payments, the receipt
of timely and appropriate payments from the Company's insurers is critical to a
successful plan of reorganization and our long-term liquidity.
- - The outcome of the unfair labor practices ("ULPs") action filed by the United
Steelworkers of America ("USWA") could adversely affect us
In connection with the strike by the USWA and the subsequent lock-out by the
Company, the USWA filed twenty-four allegations of ULPs. Twenty-two of the
allegations were dismissed. A trial before an administrative law judge on 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 National Labor Relations
Board ("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 the proposed award and is not self-executing. The
USWA has filed a proof of claim of approximately $240.0 million in the Cases in
respect of this matter. The NLRB also filed a proof of claim in respect of this
matter. The NLRB claim was for $117.0 million, including interest of $18.0
million. 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. The NLRB general counsel and USWA
have cross-appealed. 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. 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 likely only be paid upon or after the
Company's emergence from the Cases.
- - Our profits and cash flows may be adversely impacted by the results of the
Company's hedging programs
From time to time in the ordinary course of business, the Company enters into
hedging transactions 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 primary aluminum prices,
(2) 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.
To the extent that the prices for primary aluminum exceed the fixed or ceiling
prices established by the Company's hedging transactions or that energy costs or
foreign exchange rates are below the fixed prices, our profits and cash flow
would be lower than they otherwise would have been.
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 those positions in advance of the Filing Date. During December 2002
and the first quarter of 2003, the Company, with Court approval, reinstituted
its hedging program when it entered into hedging transactions with respect to a
portion of its 2003 fuel oil requirements. The Company anticipates that, subject
to prevailing economic conditions, it may enter into additional hedging
transactions with respect to primary aluminum prices, natural gas and fuel oil
prices and foreign currency values to protect the interests of its constituents.
However, no assurance can be given as to when or if the Company will enter into
such additional hedging activities.
- - We operate in a highly competitive industry
The production of alumina, primary aluminum and fabricated aluminum products is
highly competitive. There are numerous companies who operate in the aluminum
industry. Certain of our competitors are substantially larger, have greater
financial resources than we do and may have other strategic advantages.
- - The Company is subject to political and regulatory risks in a number of
countries
The Company operates facilities in the United States and in a number of other
countries, including Australia, Canada, Ghana, Jamaica, and the United Kingdom.
While we believe the Company's relationships in the countries in which it
operates are generally satisfactory, we cannot assure you that future
developments or governmental actions in these countries will not adversely
affect the Company's operations particularly or the aluminum industry generally.
Among the risks inherent in the Company's operations are unexpected changes in
regulatory requirements, unfavorable legal rulings, new or increased taxes and
levies, and new or increased import or export restrictions. The Company's
operations outside of the United States are subject to a number of additional
risks, including but not limited to currency exchange rate fluctuations,
currency restrictions, and nationalization of assets.
ITEM 2. PROPERTIES
The locations and general character of the principal plants, mines, and other
materially important physical properties relating to the Company's operations
are described in Item 1 "- Business Operations" and those descriptions are
incorporated herein by reference. The Company owns in fee or leases all the real
estate and facilities used in connection with its business. Plants and equipment
and other facilities are generally in good condition and suitable for their
intended uses. However, the Mead facility is expected to remain completely
curtailed unless and until an appropriate combination of reduced power prices,
higher primary aluminum prices and other factors occurs.
The Company's obligations under the DIP Facility are secured by, among other
things, mortgages on the Company's major domestic plants. See Note 7 of Notes to
Consolidated Financial Statements for further discussion.
ITEM 3. LEGAL PROCEEDINGS
This section contains statements which constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. See
Item 1 of this Report for cautionary information with respect to such
forward-looking statements.
REORGANIZATION PROCEEDINGS
During the pendency of the Cases, substantially all pending litigation, except
certain environmental claims and litigation, against the Debtors is stayed.
Generally, claims against a Debtor arising from actions or omissions prior to
its Filing Date will be settled in connection with the plan of reorganization.
See Item 1. "Business - Reorganization Proceedings" for a discussion of the
reorganization proceedings. Such discussion is incorporated herein by reference.
ASBESTOS-RELATED LITIGATION
The Company is a defendant in a number of lawsuits, some of which involve claims
of multiple persons, in which the plaintiffs allege that certain of their
injuries were caused by, among other things, exposure to asbestos during, and as
a result of, their employment or association with the Company or exposure to
products containing asbestos produced or sold by the Company. The lawsuits
generally relate to products the Company has not manufactured for more than 20
years. The lawsuits are currently stayed by the Cases. The portion of Note 14 of
Notes to Consolidated Financial Statements under the heading "Asbestos
Contingencies" is incorporated herein by reference.
LABOR MATTERS
In connection with the USWA strike and subsequent lock-out by the Company,
certain allegations of ULPs were filed by the USWA with the NLRB. Twenty-two of
the twenty-four allegations of ULPs brought against the Company by the USWA were
dismissed. A trial on the remaining two allegations before an administrative law
judge 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 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. The NLRB general counsel and the USWA have cross-appealed. 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. This matter is not currently
stayed by the Cases. 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. The portion of Note 14 of
Notes to Consolidated Financial Statements under the heading "Labor Matters" is
incorporated herein by reference.
GRAMERCY LITIGATION
On July 5, 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. The
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. During 2002, all of these matters were settled for amounts
which, after the application of insurance, were not material to the Company.
OTHER MATTERS
Various other lawsuits and claims are pending against the Company. 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 believes that the resolution of such uncertainties and the
incurrence of such costs should not have a material adverse effect on the
Company's consolidated financial position, results of operations, or liquidity.
See Note 14 of Notes to Consolidated Financial Statements for discussion of
additional litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the security holder of the Company during
the fourth quarter of 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There is no established public market for the Company's Common Stock, which is
held solely by Kaiser. The Company has not paid any dividends on its Common
Stock during the two most recent fiscal years. In accordance with the Code and
the DIP Facility, the Company is not permitted to pay any dividends or purchase
any of its stock.
Kaiser's non-qualified stock option plans, which are Kaiser's only stock option
plans, have been approved by Kaiser's stockholders. The number of shares of
Common Stock to be issued upon exercise of outstanding options, the weighted
average price per share of the outstanding options and the number of shares of
Common Stock available for future issuance under Kaiser's non-qualified stock
option plans at December 31, 2002, included under the heading "Incentive Plans"
in Note 10 of Notes to Consolidated Financial Statements is incorporated herein
by reference.
See Note 7 of Notes to Consolidated Financial Statements under the heading "Debt
Covenants and Restrictions" for additional information, which information is
incorporated herein.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the Company is incorporated herein by reference to
the table at page 4 of this Report, to the table at page 17 of Management's
Discussion and Analysis of Financial Condition and Results of Operations, to
Note 2 of Notes to Consolidated Financial Statements, and to the Five-Year
Financial Data on pages 71 - 72 in this Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
REORGANIZATION PROCEEDINGS
The Company, Kaiser and 24 of the Company's subsidiaries have filed separate
voluntary petitions with the Court for reorganization under Chapter 11 of the
Code; the Company, Kaiser and 15 of the Company's subsidiaries (the "Original
Debtors") filed in the first quarter of 2002 and nine additional Company
subsidiaries (the "Additional Debtors") filed in the first quarter of 2003. The
Original Debtors and Additional Debtors are collectively referred to herein as
the "Debtors" and the Chapter 11 proceedings of these entitles are collectively
referred to herein as the "Cases." For purposes of this Report, the term "Filing
Date" shall mean, with respect to any particular Debtor, the date on which such
Debtor filed its Case. None of the Company's non-U.S. joint ventures are
included in the Cases. The Cases are being jointly administered. The Debtors are
managing their businesses in the ordinary course as debtors-in-possession
subject to the control and administration of the Court.
Original Debtors. The necessity for filing the Cases by the Original Debtors was
attributable to the liquidity and cash flow problems of the Company and its
subsidiaries 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
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. In connection with the filing of the Original
Debtors' Cases, the Original Debtors are prohibited from paying pre-Filing Date
obligations other than those related to certain joint ventures and in certain
other limited circumstances approved by the Court.
In October 2002, the Court set January 31, 2003 as the last date by which
holders of pre-Filing Date claims against the Original Debtors (other than
asbestos-related personal injury claims and certain hearing loss claims) could
file their claims. Any holder of a claim that was required to file a claim by
such date and did not do so may be barred from asserting such claim against any
of the Original Debtors and, accordingly, may not be able to participate in any
distribution in any of the Cases on account of such claim. Because the Company
has not had sufficient time to analyze the proofs of claim to determine their
validity, no provision has been included in the accompanying financial
statements for claims that have been filed. The bar date does not apply to
asbestos-related claims, for which the Original Debtors reserve the right to
establish a separate bar date at a later date. A separate bar date of June 30,
2003 has been set for certain hearing loss claims.
Additional Debtors. The Cases filed by the Additional Debtors were commenced,
among other reasons, to protect the assets held by these Debtors against
possible statutory liens that might arise and be enforced by the PBGC primarily
as a result of the Company's failure to meet a $17.0 million accelerated funding
requirement to its salaried employee retirement plan in January 2003. From an
operating perspective, the filing of the Cases by the Additional Debtors had no
impact on the Company's day-to-day operations. In contrast to the circumstances
of the Original Debtors, the Court authorized the Additional Debtors to continue
to make all payments in the normal course of business (including payments of
pre-Filing Date amounts) to creditors.
In March 2003, the Court set May 15, 2003 as the last date by which holders of
pre-Filing Date claims against the Additional Debtors (other than
asbestos-related personal injury claims and certain hearing loss claims) must
file their claims.
All Debtors. The Debtors' 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. While valuation of the Debtors' assets and pre-Filing Date
claims at this stage of the Cases is subject to inherent uncertainties, the
Debtors currently believe that it is likely that their liabilities will be found
in the Cases to exceed the fair value of their assets. Therefore, the Debtors
currently believe that it is likely that pre-Filing Date claims will be paid at
less than 100% of their face value and the equity of the Company's stockholders
will be diluted or cancelled. Because of such possibility, the value of the
Common Stock is speculative and any investment in the Common Stock would pose a
high degree of risk.
As provided by the Code, the Original Debtors had the exclusive right to propose
a plan of reorganization for 120 days following the initial Filing Date. The
Court has subsequently approved extensions of the exclusivity period for all
Debtors through April 30, 2003. Additional extensions are likely to be sought.
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 future 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.
The Company expects that, when the Debtors ultimately file a plan of
reorganization, it will reflect the Company's strategic vision for emergence
from Chapter 11: (a) a standalone going concern with manageable leverage,
improved cost structure and competitive strength; (b) a company positioned to
execute its long-standing vision of market leadership and growth in fabricated
products specifically with a financial structure that provides financial
flexibility, including access to capital markets, for accretive acquisitions;
(c) a company that delivers a broad product offering and leadership in service
and quality for its customers and distributors; and (d) a company with continued
presence in those commodities markets that have the potential to generate
significant cash at steady-state metal prices. The Company's advisors have
developed a preliminary timeline that, assuming the current pace of the Cases
continues, could allow the Company to emerge from Chapter 11 in 2004. While no
assurances can be given in this regard, the Company's management continues to
push for an aggressive pace in advancing the Cases. Continued sales of non-core
assets and facilities that are ultimately determined not to be an important part
of the reorganized entity are likely. The Company's strategic vision, which is
subject to continuing review in consultation with the Company's stakeholders,
may also be modified from time to time as the Cases proceed due to changes in
such items as changes in the global markets, changes in the economics of the
Company's facilities or changing financial circumstances.
Impact of the Cases on Financial Information. In light of the Cases, the
accompanying financial information of the Company and related discussions of
financial condition and results of operations are based on the assumption that
the Company will continue as a "going concern," 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 financial information for
the year ended December 31, 2002, contained herein does 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 that may be allowed in the Cases, or (c)
the effect of any changes that may occur in connection with the Debtors'
capitalizations or operations resulting from 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.
OVERVIEW
The Company operates in the following business segments: Bauxite and alumina,
Primary aluminum, Flat-rolled products, Engineered products and Commodities
marketing. The Company uses a portion of its bauxite, alumina, and primary
aluminum production for additional processing at certain of its downstream
facilities. The table below provides selected operational and financial
information on a consolidated basis with respect to the Company for the years
ended December 31, 2002, 2001 and 2000. The following data should be read in
conjunction with the Company's consolidated financial statements and the notes
thereto contained elsewhere herein. See Note 18 of Notes to Consolidated
Financial Statements for further information regarding segments. (All references
to tons refer to metric tons of 2,204.6 pounds.) Intersegment transfers are
valued at estimated market prices.
Year Ended December 31,
-----------------------------------------------
(In millions of dollars, except shipments and prices) 2002 2001 2000
- ------------------------------------------------------------------------- ------------- --------------- --------------
Shipments: (000 tons)
Alumina
Third Party 2,626.6 2,582.7 1,927.1
Intersegment 343.9 422.8 751.9
------------- --------------- --------------
Total Alumina 2,970.5 3,005.5 2,679.0
------------- --------------- --------------
Primary Aluminum(1)
Third Party 194.8 244.7 345.5
Intersegment 1.7 2.3 148.9
------------- --------------- --------------
Total Primary Aluminum 196.5 247.0 494.4
------------- --------------- --------------
Flat-Rolled Products 46.3 74.4 162.3
------------- --------------- --------------
Engineered Products 124.4 118.1 164.6
------------- --------------- --------------
Average Realized Third Party Sales Price:(2)
Alumina (per ton) $ 165 $ 186 $ 209
Primary Aluminum (per pound) $ .62 $ .67 $ .74
Net Sales:
Bauxite and Alumina
Third Party (includes net sales of bauxite) $ 458.1 $ 508.3 $ 442.2
Intersegment 58.6 77.9 148.3
------------- --------------- --------------
Total Bauxite & Alumina 516.7 586.2 590.5
------------- --------------- --------------
Primary Aluminum(1)
Third Party 265.3 358.9 563.7
Intersegment 2.5 3.8 242.3
------------- --------------- --------------
Total Primary Aluminum 267.8 362.7 806.0
------------- --------------- --------------
Flat-Rolled Products 183.6 308.0 521.0
Engineered Products 425.0 429.5 564.9
Commodities Marketing(3) 39.1 22.9 (25.4)
Minority Interests 98.5 105.1 103.4
Eliminations (61.1) (81.7) (390.6)
------------- --------------- --------------
Total Net Sales $ 1,469.6 $ 1,732.7 $ 2,169.8
============= =============== ==============
Operating Income (Loss):
Bauxite & Alumina (4) $ (48.5) $ (46.9) $ 57.2
Primary Aluminum(5) (23.1) 5.1 100.1
Flat-Rolled Products(5)(6) (30.7) .4 16.6
Engineered Products(5)(6) 8.5 4.6 34.1
Commodities Marketing 36.2 5.6 (48.7)
Eliminations 1.7 1.0 .1
Corporate and Other(7) (98.8) (68.2) (61.1)
Non-Recurring Operating (Charges) Benefits, Net(8) (251.2) 163.6 41.3
------------- --------------- --------------
Total Operating Income (Loss) $ (405.9) $ 65.2 $ 139.6
============= =============== ==============
Net Income (Loss) $ (468.4) $ (457.0) $ 17.5
============= =============== ==============
Capital Expenditures $ 47.6 $ 148.7 $ 296.5
============= =============== ==============
(1) Beginning in the first quarter of 2001, as a result of the continuing
curtailment of the Company's Northwest smelters, the Flat-rolled products
business unit began purchasing its own primary aluminum rather than
relying on the Primary aluminum business unit to supply its aluminum
requirements through production or third party purchases. The Engineered
products business unit was already responsible for purchasing the majority
of its primary aluminum requirements.
(2) Average realized prices for the Company's Flat-rolled products and
Engineered products segments are not presented as such prices are
subject to fluctuations due to changes in product mix.
(3) 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 and 2000 represent net settlements with counterparties for
maturing derivative positions.
(4) Operating results for 2002 include $4.4 of charges resulting from an
increase in the allowance for doubtful receivables and a LIFO inventory
charge of $.5. Operating results for 2001 include abnormal
Gramercy-related start-up costs and litigation costs, net of business
interruption-related insurance accruals, of $34.8 and a LIFO inventory
charge of $3.7.
(5) Operating results for 2002 include LIFO inventory charges of: Primary
aluminum - $2.1, Flat-Rolled Products - $2.0 and Engineered Products -
$1.5.
(6) Operating results for 2001 include LIFO inventory charges of: Flat-Rolled
Products - $3.0 and Engineered Products - $1.5.
(7) Operating results for 2002 include special pension charges of $24.1 and
key employee retention program charges of $5.1.
(8) See Note 6 of Notes to Consolidated Financial Statements for a detailed
summary of the components of non-recurring operating (charges) benefits,
net and the business segment to which the items relate.
This Report contains statements which constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements appear in a number of places in this section (see "Overview,"
"Results of Operations," "Liquidity and Capital Resources" and "Other Matters").
Such statements can be identified by the use of forward-looking terminology such
as "believes," "expects," "may," "estimates," "will," "should," "plans" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy. Readers are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
significant risks and uncertainties, and that actual results may vary materially
from those in the forward-looking statements as a result of various factors.
These factors include the effectiveness of management's strategies and
decisions, general economic and business conditions, developments in technology,
new or modified statutory or regulatory requirements and changing prices and
market conditions. See Item 1. "Business - Factors Affecting Future
Performance." No assurance can be given that these are all of the factors that
could cause actual results to vary materially from the forward-looking
statements.
SIGNIFICANT ITEMS
Market-related Factors. The Company's operating results are sensitive to changes
in the prices of alumina, primary aluminum, and fabricated aluminum products,
and also depend to a significant degree on the volume and mix of all products
sold and on the Company's hedging strategies. Primary aluminum prices have
historically been subject to significant cyclical price fluctuations. See Notes
2 and 15 of Notes to Consolidated Financial Statements for a discussion of the
Company's hedging activities.
Changes in global, regional, or country-specific economic conditions can have a
significant impact on overall demand for aluminum-intensive fabricated products
in the transportation, distribution, and packaging markets. Such changes in
demand can directly affect the Company's earnings by impacting the overall
volume and mix of such products sold. To the extent that these end-use markets
weaken, demand can also diminish for what the Company sometimes refers to as the
"upstream" products: alumina and primary aluminum.
During 2002, the average LME price per pound for primary aluminum was $.61.
During 2001, the LME price began the year at $.71 per pound and then began a
steady decrease ending 2001 at $.61 per pound. During 2000, the average LME
price was $.70 per pound. At February 28, 2003, the LME price was approximately
$.66 per pound.
Indefinite Curtailment of Mead Facility. In January 2003, the Company announced
the indefinite curtailment of the Mead facility. The curtailment of the facility
was due to the continuing unfavorable market dynamics, specifically unattractive
long-term power prices and weak primary aluminum prices, both of which are
significant impediments for an older smelter with higher-than-average operating
costs. The Mead facility is expected to remain completely curtailed unless and
until an appropriate combination of reduced power prices, higher primary
aluminum prices and other factors occurs. As a result of the indefinite
curtailment, in December 2002, the Company recorded non-cash non-recurring
charges of: (a) $138.5 million to write-down the Washington smelter assets to
their estimated fair value; (b) a net charge of $18.6 million to write-down
certain aluminum and alumina inventories at the Northwest smelters to their net
realizable values based on the Company's intent to sell (rather than use) such
inventories; and (c) a LIFO inventory charge of $.9 million which resulted from
the write-down of the aluminum and alumina inventories. Additionally, during
December 2002, the Company accrued approximately $58.8 million of pension,
postretirement benefit and related obligations for the hourly employees who had
been on a laid-off status and under the terms of their labor contract became
eligible to elect early retirement because of the indefinite curtailment. See
Note 5 of Notes to Consolidated Financial Statements for additional discussion
of the Mead curtailment.
Approximately $1.5 million of charges associated with salaried workforce
reductions at the Mead facility will be recorded in the first quarter of 2003
because the recognition requirements under generally accepted accounting
principles for such charges were not met at December 31, 2002.
Liquidity/Negative Cash Flow. During 2002, the Company experienced a net
decrease in cash and cash equivalents of $74.6 million; $49.6 million of which
was used in operating activities and $25.0 million of which was used in
investing and financing activities. The $49.6 million of cash and cash
equivalents used in operations included several items not typically considered
part of our normal recurring operations including: (a) asbestos-related
insurance recoveries of $23.3 million; (b) approximately $30.0 million of
funding to QAL in respect of QAL's scheduled debt maturities; and (c) foreign
income tax payments related to prior year activities of $8.0 million. The
balance of the cash and cash equivalent used in operations ($34.9 million)
resulted from a combination of adverse market factors in the business segments
in which the Company operates including (a) primary aluminum prices that were
below long-term averages, (b) a weak demand for fabricated metal products,
particularly aerospace products, and (c) higher than average power, fuel oil and
natural gas prices.
Despite the foregoing, the Company's liquidity (cash and cash equivalents plus
unused availability under the DIP Facility) has remained strong, averaging
between $200.0 million and $250.0 million during the fourth quarter of 2002.
Recent improvements in primary aluminum prices, fabricated product demand,
particularly aerospace products, and the sale of the Tacoma facility and the
Company's interests in an office building in the first quarter of 2003 are
expected to further bolster the Company's liquidity. However, no assurances can
be given that the recent primary aluminum price increase and fabricated product
market demand improvement will be sustained or that the Company's liquidity will
not erode for other reasons.
Pension Plan Matters. 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 performance of the stock
market during 2002, and the resulting decline in the value of the assets held by
the Company pension plans, the Company was required to reflect additional
minimum pension liabilities of $133.1 million in its 2002 financial statements.
Additionally, 2003 operating results are expected to be adversely impacted by
higher pension costs resulting from the decline in the value of the pension
plans' assets and increased liabilities due to lower interest rates,
restructuring activities and the incurrence of additional full early retirement
obligations in respect of the Company's Washington smelters. However, the
Company does not currently intend to fund the remaining required pension
contributions due in 2003 as it believes that virtually all of such amounts are
pre-Filing Date obligations. As previously announced, the Company has met on
several occasions with the PBGC to discuss alternative solutions to the pension
funding issue that would assist the Company in assessing its alternatives for a
plan of reorganization. These options include extended amortization periods for
payments of unfunded liabilities or the potential termination of the plans.
Also, during 2002, the Company recorded charges of $24.1 million for additional
pension expense. See Note 10 of Notes to Consolidated Financial Statements for
additional discussion of the additional pension expense.
Valco Operating Level. The amount of power made available to Valco by the VRA
depends in large part on the level of the lake that is the primary source for
generating the hydroelectric power used to supply the smelter. The level of the
lake is primarily a function of the level of annual rainfall and the alternative
(non-Valco) uses of the power generated, as directed by the VRA. As of February
28, 2003, the lake level was at a ten-year low.
During late 2000, Valco, the GoG and the VRA reached an agreement, subject to
Parliamentary approval, that would provide sufficient power for Valco to operate
at least three and one-half of its five potlines through 2017. However,
Parliamentary approval was not received and, in March 2002, the GoG reduced
Valco's power allocation forcing Valco to curtail one of its four operating
potlines. Valco's power allocation was further reduced resulting in the
curtailment of two additional operating potlines in January 2003. In connection
with such curtailments, $5.5 million of end-of-service benefits were paid
resulting in a $3.2 million charge to earnings in January 2003. Additional
curtailments and end-of-service payments/charges are possible. As of February
28, 2003, Valco was operating only one of its five potlines.
No assurance can be given that Valco will continue to receive sufficient power
to operate the one remaining operating potline. Valco has met with the GoG and
the VRA and anticipates such discussions will continue in respect of the current
and future power situations. Valco has objected to the power curtailments and
expects to seek appropriate compensation from the GoG. In addition, Valco and
the Company have filed for arbitration with the International Chamber of
Commerce in Paris against both the GoG and the VRA. However, no assurances can
be given as to the ultimate success of any such actions.
RESULTS OF OPERATIONS
Summary. The Company reported a net loss of $468.4 million for 2002, compared to
a net loss of $457.0 million for 2001 and net income of $17.5 million for 2000.
Net sales in 2002 totaled $1,469.6 million compared to $1,732.7 million in 2001
and $2,169.8 million in 2000.
2002 AS COMPARED TO 2001
Bauxite and Alumina. Third party net sales of alumina for 2002 decreased 10% as
compared to 2001, primarily due to an 11% decrease in third party average
realized prices. The decrease in average realized prices was due to a decrease
in primary aluminum market prices to which the Company's third party alumina
sales contracts are linked. Third party shipments were up modestly primarily due
to the curtailment of one of Valco's operating potlines in March 2002 discussed
below.
Intersegment net sales for 2002 decreased 25% as compared to 2001 as the result
of a 19% decrease in the intersegment shipments and a 7% decrease in
intersegment average realized prices. The decrease in shipments was due to
reduced shipments to the Primary alumina business unit primarily due to the
curtailment of one of Valco's operating potlines in March 2002. The decrease in
intersegment average realized prices is the result of a decrease in primary
aluminum prices from period to period as intersegment transfers are made on the
basis of primary aluminum market prices on a lagged basis of one month.
Segment operating results (excluding non-recurring items) for 2002 were modestly
worse than 2001. The decrease was primarily due to the decrease in the average
realized price discussed above and the reduction in alumina shipments associated
with the sale of a portion of our interest in QAL offset by the decrease in
abnormal Gramercy related net start-up costs, favorable caustic prices at QAL
and the return to a more normal cost performance at KJBC resulting in part from
increased production volume (due to the Gramercy restart). Results for 2002 also
included an increase of $4.4 million in the allowance for doubtful accounts and
a LIFO charge of $.5 million. Operating results for 2001 included: (1) abnormal
Gramercy-related start-up costs and litigation costs of $64.9 million and $6.5
million, respectively, offset by business interruption-related insurance
accruals of $36.6 million; and (2) a LIFO inventory charge of $3.7 million.
Segment operating results for 2002, discussed above, exclude non-recurring costs
of $2.0 million incurred in connection with cost reduction initiatives. Segment
operating results for 2001 exclude non-recurring costs of $15.8 million also
incurred in connection with cost reduction initiatives.
Because of the January 2003 curtailment of two additional potlines at Valco (see
"Valco Operating Level" above), it is anticipated that 2003 intersegment
shipments will decline but will be substantially offset by an increase in
third-party sales of alumina.
Primary Aluminum. Third party net sales of primary aluminum decreased 26% for
2002 as compared to 2001 as a result of a 20% decrease in third party shipments
and a 7% decrease in third party average realized prices. The decrease in
shipments was primarily due to the curtailment of one of Valco's operating
potlines in March 2002 and the curtailment of the rod operations at the Tacoma
facility in the second quarter of 2001. The decrease in the average realized
prices was primarily due to the decrease in primary aluminum market prices.
Since the beginning of 2001, the Northwest smelters have been completely
curtailed. The Mead facility is expected to remain curtailed indefinitely unless
and until an appropriate combination of reduced power prices and higher primary
aluminum prices occurs. The Tacoma facility was sold in February 2003. As a
result, intersegment net sales of primary aluminum for 2002 and 2001 have been
minimal. Beginning in the first quarter of 2001, the Flat-rolled products
business unit began purchasing its own primary aluminum rather than relying on
the Primary aluminum business unit to supply its aluminum requirements through
production or third party purchases. The Engineered products business unit was
already responsible for purchasing the majority of its primary aluminum
requirements.
Segment operating results (before non-recurring items) for 2002 were
substantially worse than 2001. The primary reasons for the decrease were the
decreases in the average realized prices and net shipments discussed above and
Valco potline shutdown and pension costs, offset by lower alumina metal prices
and reductions in overhead costs. Results for 2002 also included a LIFO
inventory charge of $2.1 million.
Segment operating results for 2002, discussed above, exclude a non-cash charge
of approximately $138.5 million related to the write-down of the Washington
smelter assets to their estimated fair value, a non-cash charge of approximately
$21.4 million related to a write-down of certain aluminum and alumina
inventories, an $.8 million LIFO inventory charge which resulted in connection
with the write-down of the aluminum and alumina inventories and non-recurring
costs of $2.7 million incurred in connection with cost reduction initiatives.
Segment operating results for 2002 also exclude approximately $58.8 million of
pension and postretirement benefits and related obligations for the hourly
employees who had been on a laid-off status and under the terms of their labor
contract are eligible for early retirement because of the indefinite curtailment
of the Mead facility. Segment operating results for 2001 excluded non-recurring
net power sales gains of $229.2 million. These gains were offset by costs of
$7.5 million also incurred in connection with cost reduction initiatives and
contractual labor costs related to the Washington smelter impairment of $12.7
million.
Because of the January 2003 curtailment of two additional potlines at Valco (see
"Valco Operating Level" above), it is anticipated that 2003 primary aluminum
shipments will decline substantially.
Flat-Rolled Products. Net sales of flat-rolled products decreased 40% in 2002 as
compared to 2001 primarily due to a 38% decrease in product shipments and a 4%
decrease in realized prices. Shipments in 2002 were lower than 2001 primarily
due to a continuation of soft aerospace products demand and by the second
quarter of 2002 exit of the can lid and tab stock and brazing sheet products
offset modestly by an increase in general engineering plate demand. The decrease
in average realized prices was due to the impact of weaker demand.
Segment operating results (before non-recurring items) for 2002 were worse than
2001 primarily due to the decrease in shipments and product prices discussed
above. Operating results for 2002 were also adversely impacted by a LIFO
inventory charge of $2.0 million. Partially offsetting these adverse impacts
were reductions in overhead and other costs as a result of cost cutting
initiatives. Operating results for 2001 included a LIFO inventory charge of $3.0
million.
Segment operating results for 2002 exclude non-recurring costs of $7.9 million
incurred in connection with cost reduction initiatives and product line exit.
Segment operating results for 2002 also exclude a $1.6 million non-cash LIFO
inventory charge associated with the product line exits. Segment operating
results for 2001 excludes a non-cash impairment charge of $17.7 million
associated with certain equipment that the Company planned to sell or idle as a
result of the planned 2002 exit from the brazing heat-treat and tab stock
product lines and non-recurring costs of $10.7 million also incurred in
connection with cost reduction initiatives.
Engineered Products. Net sales of engineered products decreased modestly during
2002 as compared to 2001, as a 6% decrease in average realized prices was
substantially offset by a 5% increase in product shipments. The decrease in
average realized prices was due to lower metal prices as well as some erosion in
overall product prices resulting from continuing weak overall market conditions.
The increase in product shipments was the result of increased ground
transportation markets offset in part by reduced general aviation market
shipments.
Segment operating results (before non-recurring items) for 2002 improved as
compared to 2001. Such increase was primarily attributable to improved cost
performance, higher shipment volumes and reductions in energy and overhead
costs, offset in part by the net effect of the lower product prices factor
described above and a LIFO inventory charge of $1.5 million. Operating results
for 2001 included a LIFO inventory charge of $1.5 million.
Commodities Marketing. In 2002, net sales for this segment primarily represents
recognition of deferred gains from hedges closed prior to the commencement of
the Cases. See Note 15 of Notes to Consolidated Financial Statements. Gains or
losses associated with these liquidated positions are initially deferred in
Other comprehensive income and are subsequently recognized over the original
hedging periods as the underlying purchases/sales occur. In 2001, net sales for
this segment represented net settlements with third party brokers for maturing
derivative positions.
Segment operating results for 2002 increased compared to the comparable periods
in 2001 due to the higher prices implicit in the liquidation of the positions in
January 2002 versus the prevailing market prices during 2001.
Eliminations. Eliminations of intersegment profit vary from period to period
depending on fluctuations in market prices as well as the amount and timing of
the affected segments' production and sales. Eliminations for 2002 include a
benefit of $2.8 million of deferred intersegment profit offsetting the $21.4
million inventory write-down in the Primary aluminum business segment discussed
above.
Corporate and Other. Corporate operating expenses represent corporate general
and administrative expenses which are not allocated to the Company's business
segments. The increase in corporate operating expenses (excluding non-recurring
items) in 2002 as compared to 2001 was due largely to higher medical and pension
cost accruals for active and retired employees and non-cash pension charges of
$19.9 million (see Note 10 of Notes to Consolidated Financial Statements),
charges of $5.1 million related to the Company's key employee retention program
(see Note 16 of Notes to Consolidated Financial Statements) and payments in
January 2002 of approximately $4.2 million to a trust in respect of certain
management compensation agreements (see Note 10 of Notes to Consolidated
Financial Statements) offset in part primarily by reduced salary and litigation
expenses.
Corporate operating results for 2002, discussed above, exclude a non-cash
impairment charge of approximately $20.0 million related to the Kaiser Center
office complex, one of the Company's non-operating properties. Corporate
operating results for 2001, discussed above, exclude non-recurring costs of $1.2
million incurred in connection with the Company's cost reduction initiatives.
2001 AS COMPARED TO 2000
Bauxite and Alumina. Third-party net sales of alumina in 2001 were 15% higher
than in 2000 as a 34% increase in third-party shipments was only partially
offset by an 11% decrease in third-party average realized prices. The increase
in period-over-period shipments resulted primarily from (1) higher third-party
sales due to reduced internal alumina requirements as a result of the
curtailment of the Washington smelters, (2) the restart of production at the
Gramercy refinery in December 2000 and (3) the timing of shipments. The decrease
in average realized prices was due to a decrease in primary aluminum market
prices to which our third-party alumina sales contracts are linked, typically on
a lagged basis of three months.
Intersegment net sales for 2001, decreased 47% as compared to 2000. The decrease
was due to a 44% decrease in the intersegment shipments and a 7% decrease in
intersegment average realized prices. The decrease in shipments was primarily
due to the curtailments of the Company's Washington smelters. The decrease in
the intersegment average realized prices was the result of the decrease in
primary aluminum prices from period to period as intersegment transfers are made
on the basis of primary aluminum market prices on a lagged basis of one month.
Segment operating results (excluding non-recurring items) for 2001 were down
significantly from 2000. Increased net shipments only partially offset the
decrease in the average realized sales prices. Additionally, operating income
for 2001 was adversely affected by abnormal Gramercy related start-up costs and
litiga