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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, 2000 Commission file number 1-9447
KAISER ALUMINUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State of Incorporation)
94-3030279
(I.R.S. Employer Identification No.)
5847 SAN FELIPE, SUITE 2600, HOUSTON, TEXAS 77057-3010
(Address of principal executive offices) (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
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Common Stock, $.01 par value New York Stock Exchange
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. ___
As of February 28, 2001, there were 79,622,495 shares of the Common Stock of the
registrant outstanding. Based upon the New York Stock Exchange closing price on
February 28, 2001, the aggregate market value of the registrant's Common Stock
held by non-affiliates was $103.2 million.
Certain portions of the registrant's definitive proxy statement to be filed not
later than 120 days after the close of the registrant's fiscal year are
incorporated by reference into Part III of this Report on Form 10-K.
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NOTE
Kaiser Aluminum 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 71 -79 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 Corporation
5847 San Felipe, Suite 2600
Houston, Texas 77057-3010
(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. 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 (see, for example, 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. 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 Corporation (the "Company"), a Delaware corporation organized in
1987, is a subsidiary of MAXXAM Inc. ("MAXXAM"). MAXXAM and one of its
wholly-owned subsidiaries together own approximately 63% of the Company's Common
Stock, with the remaining approximately 37% publicly held. The Company, through
its wholly- owned subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"),
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. See Note 14 of Notes to Consolidated
Financial Statements for segment and geographical financial information. In
addition to the production utilized by KACC in its operations, KACC sells
significant amounts of alumina and primary aluminum in domestic and
international markets. The Company's operations are conducted through KACC's
business units. 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, 2000, 1999 and 1998:
Sources(2) Uses(2)
--------------------------------- ----------------------------------
Third Party Third Party Intersegment
Production Purchases Shipments Transfers
---------------- ------------- ----------------- --------------
(in thousands of tons*)
Bauxite -
2000 4,305.0 - 2,007.0 2,342.0
1999 5,261.0 - 1,497.0 3,515.0
1998 6,656.0 - 1,659.0 4,639.0
Alumina -
2000 2,042.9 322.0 1,927.1 751.9
1999 2,524.0 395.0 2,093.9 757.3
1998 2,964.0 - 2,250.0 750.7
Primary Aluminum -
2000 411.4 206.5 672.4(1) -
1999 426.4 260.1 684.6(1) -
1998 387.0 251.3 668.2(1) -
(1) Includes both primary aluminum shipments and pounds of aluminum contained
in fabricated aluminum product shipments. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Selected
Operational and Financial Information" for an allocation of shipments
between primary aluminum and pounds of aluminum in fabricated aluminum
products.
(2) Sources and uses will not equal due to the impact of inventory changes and
alumina and metal swaps.
- ---------------------------
* All references to tons in this Report refer to metric tons of 2,204.6 pounds.
SIGNIFICANT CURRENT ITEMS
This section briefly summarizes the major issues the Company dealt with during
2000 and/or is dealing with currently and provides a cross-reference to the
applicable section for a more complete discussion of the issue.
Liquidity and Capital Resources - KACC's $300.0 million credit agreement, as
amended (the "Credit Agreement") expires in August 2001. It is the Company's and
KACC's intention to extend or replace the Credit Agreement prior to its
expiration. However, in order for the Credit Agreement to be extended, on a
short-term basis, beyond August 2001, KACC will have to have a plan to mitigate
the $225.0 million of 97/8% Senior Notes, due February 2002 (the "97/8% Senior
Notes"). For the Credit Agreement to be extended past February 2003, both the
97/8% Senior Notes and the $400.0 million of 12 3/4% Senior Subordinated Notes,
due February 2003 (the "Senior Subordinated Notes"), will have to be retired
and/or refinanced. As of February 28, 2001, KACC had received approval from the
Credit Agreement lenders to purchase up to $50.0 million of the 97/8% Senior
Notes. As of February 28, 2001, KACC has purchased approximately $1.0 million of
97/8% Senior Notes. As of February 28, 2001, there were $94.0 million of
borrowings outstanding under the Credit Agreement and remaining availability of
approximately $120.0 million. However, proceeds of approximately $130.0 million
related to 2001 power sales are expected to be received at or near March 30,
2001, and an additional $130.0 million of power proceeds will be received
periodically through October 2001 with respect to other power sales made during
the first quarter of 2001.
Consistent with its previously disclosed strategy, KACC is considering the
possible sale of part or all of its interests in certain operating assets. The
contemplated transactions are in various stages of development. KACC expects
that at least one operating asset will be sold. KACC has multiple transactions
under way. It is unlikely, however, that KACC would consummate all of the
transactions under consideration. Further, there can be no assurance as to the
likelihood, timing, or terms of such sales. The Company would expect to use the
proceeds from any such sales for debt reduction, capital spending or some
combination thereof. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview, Strategic Initiatives" for
additional discussion.
Incident at Gramercy Facility - In July 1999, KACC's Gramercy, Louisiana alumina
refinery was extensively damaged by an explosion. A number of employees were
injured in the incident, several of them severely. As a result of the incident,
alumina production at the facility was completely curtailed until the middle of
December 2000 when partial production commenced. The plant is expected to
increase production progressively to approximately 75% of its newly rated
estimated annual capacity of 1,250,000 tons by the end of March 2001. At
February 28, 2001, the plant was operating at 70% of capacity. Based on current
estimates, construction at the facility is expected to be completed during the
third quarter of 2001. Through February 28, 2001, KACC had recorded $289.3
million of estimated insurance recoveries related to the Gramercy incident and
had collected $262.6 million of such amounts. An additional $7.0 million is
expected in March 2001. The remaining balance of approximately $20.0 million and
any additional amounts possibly due to KACC will likely not be recovered until
KACC and the insurers resolve certain outstanding issues. The insurers have
asserted that no additional business interruption amounts are due after November
30, 2000. KACC and the insurers are currently negotiating an arbitration
agreement as a means of resolving their differences. The Company anticipates
that the remaining issues will not be resolved until late 2001 or early 2002.
KACC and the Company continue to believe that a minimum of at least $290.0
million of insurance recoveries are probable, that additional amounts are owed
to KACC by the insurers, and that the likelihood of any refund by KACC of
amounts previously received from the insurers is remote. See Note 2 of Notes to
Consolidated Financial Statements for more detailed information regarding the
impact of the Gramercy incident.
Labor Matters - Prior to September 2000, when the labor dispute was settled,
KACC was operating five of its U.S. facilities with salaried employees and other
employees as a result of the September 1998 strike by the United Steelworkers of
America ("USWA") and the subsequent "lock-out" by KACC in January 1999. Under
the terms of the settlement, USWA members generally returned to the affected
plants during October 2000. The new labor contract, which expires in September
2005, provides for a 2.6% average annual increase in the overall wage and
benefit package and results in the reduction of at least 540 hourly jobs at the
five facilities (from approximately 2,800 in September 1998). See Note 5 of
Notes to Consolidated Financial Statements for a discussion of the labor dispute
and settlement. Although the USWA dispute has been settled and the workers have
returned to the facilities, two allegations of unfair labor practices ("ULPs")
remain in connection with the USWA strike and subsequent lock-out by KACC. The
Company believes that the remaining charges made against KACC by the USWA are
without merit. See Note 12 of Notes to Consolidated Financial Statements, "-
Labor Matters" for a discussion of the ULP charges.
Asbestos-Related Liability and Expected Recoveries - KACC is a defendant in a
number of lawsuits that generally relate to products KACC has not sold for more
than 20 years. The Company believes that KACC has insurance coverage available
to recover a substantial portion of its asbestos-related costs. For the year
ended December 31, 2000, a total of approximately $99.5 million of
asbestos-related settlements and defense costs were paid and partial insurance
reimbursements for asbestos-related matters totaling approximately $62.8 million
were received. See Note 12 of Notes to Consolidated Financial Statements for
additional information.
Pacific Northwest Power Sales and Operating Level - In response to the
unprecedented high market prices for power in the Pacific Northwest, KACC
temporarily curtailed primary aluminum production at the Tacoma and Mead,
Washington, smelters during the second half of 2000 and sold a portion of the
power that it had under contract through September 30, 2001. As a result of the
curtailments, KACC avoided the need to purchase power on a variable market price
basis and will receive cash proceeds sufficient to more than offset the cash
impact of the potline curtailments over the period for which the power was sold.
KACC has made additional power sales in 2001. Also, during October 2000, KACC
signed a new power contract with the Bonneville Power Administration ("BPA")
under which the BPA will provide KACC's operations in the State of Washington
with sufficient power to operate KACC's Trentwood facility as well as
approximately 40% of the combined capacity of KACC's Mead and Tacoma aluminum
smelting operations during the period from October 2001 through September 2006.
Power costs under the new contract are expected to exceed the cost of power
under KACC's current BPA contract by between 20% to 60% and, perhaps, by as much
as 100% in certain periods, and other contract terms are less favorable than
KACC's current BPA contract. KACC does not have any remarketing rights under the
new BPA contract. See Note 7 of Notes to Consolidated Financial Statements for
additional information on these matters.
BUSINESS OPERATIONS
KACC 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 KACC's bauxite mining and alumina refining facilities
as of December 31, 2000:
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(2) Louisiana 100.0% 1,250,000 1,250,000
Alpart Jamaica 65.0% 942,500 1,450,000
QAL Australia 28.3% 1,032,950 3,650,000
---------- ----------
3,225,450 6,350,000
========== ==========
- ------------
(1) Alumina Partners of Jamaica ("Alpart") bauxite is refined into alumina at
the Alpart refinery.
(2) Production was completely curtailed from July 1999 until the middle of
December 2000. See discussion below.
KACC is a major producer of alumina and sells significant amounts of its alumina
production in domestic and international markets. KACC'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 2000, KACC sold alumina to approximately 14 customers, the
largest and top five of which accounted for approximately 27% and 80%,
respectively, of the business unit's third-party net sales. All of KACC's
third-party sales of bauxite in 2000 were made to two customers, which sales
represent approximately 9% of the business unit's third-party net sales. KACC's
principal customers for bauxite and alumina consist of other aluminum producers,
trading intermediaries who resell raw materials to end-users, and users of
chemical grade alumina.
KJBC. The Government of Jamaica has granted KACC a mining lease for the mining
of bauxite which will, at a minimum, satisfy the bauxite requirements of KACC'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 the land which is subject to the mining lease as an agent for KACC.
Although KACC 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 to two
third-party customers. KJBC's operations have been impacted by the Gramercy
incident. The Government of Jamaica has agreed to grant KACC 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. See Note 2 of Notes to
Consolidated Financial Statements for a detailed discussion of the Gramercy
incident.
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"). Chemical grade alumina is sold at a premium price over smelter grade
alumina. Production at the Gramercy refinery was completely curtailed in July
1999 when it was extensively damaged by an explosion in the digestion area of
the plant. Production at the plant remained curtailed until the middle of
December 2000 at which time partial production commenced. The plant is expected
to increase production progressively to approximately 75% of its newly rated
estimated annual capacity of 1,250,000 tons by the end of March 2001. At
February 28, 2001, the plant was operating at 70% of capacity. Based on current
estimates, construction at the facility is expected to be completed during the
third quarter of 2001. While production was curtailed, KACC purchased alumina
from third parties, in excess of the amounts of alumina available from other
KACC-owned facilities, to supply major customers' needs as well as to meet
intersegment requirements. See Note 2 of Notes to Consolidated Financial
Statements for additional information regarding the impact of the Gramercy
incident.
Alpart. Alpart holds bauxite reserves and owns a 1,450,000 ton per year alumina
plant located in Jamaica. KACC owns a 65% interest in Alpart, and Hydro
Aluminium a.s ("Hydro") owns the remaining 35% interest. KACC has management
responsibility for the facility on a fee basis. KACC and Hydro have agreed to be
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.
Beginning in the first half of 2000, Alpart and JAMALCO, a joint venture between
affiliates of Alcoa Inc. and the Government of Jamaica, began operating a
bauxite mining operation joint venture that consolidates their bauxite mining
operations in Jamaica, the objective of which is to optimize mining operating
and capital costs. The joint venture agreement also grants Alpart certain rights
to acquire bauxite mined from JAMALCO's reserves.
QAL. KACC owns a 28.3% interest in Queensland Alumina Limited ("QAL"), which
owns one of the largest and most competitive alumina refineries in the world,
located in Queensland, Australia. QAL refines bauxite into alumina, essentially
on a cost basis, for the account of its shareholders under long-term tolling
contracts. The shareholders, including KACC, purchase bauxite from another QAL
shareholder under long-term supply contracts. KACC has contracted with QAL to
take approximately 868,000 tons per year of alumina or pay standby charges. KACC
is unconditionally obligated to pay amounts calculated to service its share
($101.5 million at December 31, 2000) of certain debt of QAL, as well as other
QAL costs and expenses, including bauxite shipping costs.
- - Primary Aluminum Business Unit
The following table lists KACC's primary aluminum smelting facilities as of
December 31, 2000:
Annual Rated Total 2000
Capacity Annual Average
Company Available to Rated Operating
Location Facility Ownership the Company Capacity Rate
- ---------------- -------------- ------------ ------------- --------- -----------
(tons) (tons)
United States
Washington Mead 100% 200,000 200,000 85%(1)
Washington Tacoma 100% 73,000 73,000 41%(1)
------------- ---------
Subtotal 273,000 273,000
------------- ---------
International
Ghana Valco 90% 180,000 200,000 78%
Wales, United Kingdom Anglesey 49% 66,150 135,000 106%
------------- ---------
Subtotal 246,150 335,000
------------- ---------
Total 519,150 608,000
============= =========
- --------
(1) 2000 operating rates were affected by the high market prices for electric
power in the Pacific Northwest. Both smelters were curtailed as of December
31, 2000. For a discussion of these matters see "Availability of Affordable
Electric Power" below.
KACC 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 KACC's ability to compete more effectively with the industry's newer
smelters.
KACC's principal primary aluminum customers consist of large trading
intermediaries and metal brokers. In 2000, KACC sold its primary aluminum
production not utilized for internal purposes to approximately 46 customers, the
largest and top five of which accounted for approximately 52% and 73%,
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 Houston, Texas; and Tacoma and Spokane, Washington.
Operations in the United States. The Mead facility uses pre-bake technology.
Approximately 68% of Mead's 2000 production was used at KACC's Trentwood,
Washington, rolling mill and other KACC-owned facilities, with the balance being
sold to third parties. The Tacoma facility uses Soderberg technology and
produces primary aluminum and high-grade, continuous-cast, redraw rod, which
currently commands a premium price in excess of the price of primary aluminum.
The business unit maintains specialized laboratories and a miniature carbon
plant in the state of Washington which concentrate on the development of
cost-effective technical innovations such as equipment and process improvements.
As of December 31, 2000, both the Mead and Tacoma smelters were completely
curtailed and are expected to remain curtailed at least through September 30,
2001. However, KACC has continued to operate the Tacoma rod-mill. See additional
discussion below regarding electric power.
International Operations. KACC manages, and 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 KACC and the other
participant into primary aluminum under tolling contracts which provide for
proportionate payments by the participants. KACC'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 2000 and 1999, Valco
operated an average of four and three potlines, respectively.
KACC owns a 49% interest in the Anglesey Aluminium Limited ("Anglesey") aluminum
smelter at Holyhead, Wales. The Anglesey smelter uses pre-bake technology. KACC
supplies 49% of Anglesey's alumina requirements and purchases 49% of Anglesey's
aluminum output. KACC sells its share of Anglesey's output to third parties.
Availability of Affordable Electric Power - Electric power represents an
important production input for KACC at its aluminum smelters and its cost can
significantly affect KACC's profitability.
United States. KACC purchases electric power for the Mead and Tacoma,
Washington, smelters from the BPA, which has supplied approximately half of the
electric power for the two plants over recent years, and from other suppliers.
The power contract with the BPA expires in September 2001, and the power
contracts with other suppliers have either expired or the underlying power has
been sold. As a result of unprecedented high market prices for electric power in
the Pacific Northwest, KACC temporarily curtailed all of the primary aluminum
production at the Tacoma and Mead, Washington, smelters and commenced selling
power that it had under contract through September 30, 2001. As a result of the
curtailment, KACC will avoid the need to purchase power on a variable market
basis and will receive cash proceeds sufficient to more than offset the cash
impact of the potline curtailments over the period for which the power was sold.
Both the Mead and Tacoma smelters are expected to remain curtailed through at
least September 30, 2001. Under a new contract with the BPA, which will run from
October 2001 through September 2006, the BPA will provide KACC with sufficient
power to operate its Trentwood facility as well as approximately 40% of the
combined capacity of its Mead and Tacoma aluminum smelting operations. Power
costs under the new contract are expected to exceed the cost of power under
KACC's current BPA contract by between 20% to 60% and, perhaps, as much as 100%
in certain periods, and other contract terms are less favorable than KACC's
current BPA contract. KACC does not have any remarketing rights under the new
BPA contract.
International. Valco and the VRA have reached an agreement, which is subject to
Parliamentary approval in 2001, that provides for sufficient power to operate at
least four of Valco's five potlines in 2001 and at least three and one-half
potlines thereafter. During early 2000, Anglesey entered into a new power
agreement that provides sufficient power to sustain its operations at full
capacity through September 2009.
- - 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, KACC 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 and KACC, the Company has begun (starting with the
year ended December 31, 2000) reporting its primary aluminum-related hedging
activities as a separate segment. Primary aluminum-related hedging activities
are managed centrally on behalf of all of KACC's business segments to minimize
transaction costs, to monitor consolidated net exposures and to allow for
increased responsiveness to changes in market factors. See Note 1 of Notes to
Consolidated Financial Statements, " - Derivative Financial Instruments," Note
13 of Notes to Consolidated Financial Statements and "Quantitative and
Qualitative Disclosures About Market Risk" for additional information regarding
primary aluminum-related 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. The business unit sells to the aerospace, transportation and
industrial ("ATI") markets (producing heat-treat sheet and plate products and
automotive brazing sheet) and the beverage container market (producing lid and
tab stock), both directly and through distributors.
During 2000, KACC shifted the product mix of its Trentwood rolling mill toward
higher value-added product lines, such as heat-treat sheet and plate, automotive
brazing sheet and beverage can lid and tab stock, and away from beverage can
body stock, wheel and common alloy tread products in an effort to enhance its
profitability. See "Management's Discussion and Analysis of Financial Condition
and Results of Operation--2000 as Compared to 1999--Flat-Rolled Products" for a
discussion of the financial impact of this product mix shift. In 2000, the
business unit sold to approximately 124 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 8% and 23%,
respectively, of the business unit's third-party net sales.
KACC's flat-rolled products are also sold to beverage container manufacturing
locations primarily in the western United States and Asian Pacific Rim
countries. The largest and top five of such customers accounted for
approximately 12% and 26%, 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 KACC sales representatives located across the
United States and England, and by independent sales agents in Asia. However, in
addition to exiting can body stock production, beverage can lid and tab
manufacturing is also being de-emphasized to further increase the business
unit's focus on higher value- added heat-treat product lines described above.
- - 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 extruded shapes for
automobiles, light-duty vehicles, heavy duty trucks and trailers, and shipping
containers, and in the distribution, durable goods, defense, building and
construction, 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. During 2000 and 2001, the Tulsa facility is being reconfigured as a
focused production facility for standard soft- alloy extrusion products, having
transferred its cathodic protection business to the Sherman facility. 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 a facility in Chandler, Arizona, that it purchased in May 2000.
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. Forging facilities are located in
Oxnard, California, and Greenwood, South Carolina. 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.
In 2000, the Engineered products business unit had approximately 400 customers,
the largest and top five of which accounted for approximately 8% and 23%,
respectively, of the business unit's third-party net sales. See "- Competition"
below. Sales are made directly to end-use customers and distributors by KACC
sales representatives located across the United States.
COMPETITION
KACC competes globally with producers of bauxite, alumina, primary aluminum, and
fabricated aluminum products. Many of KACC's competitors have greater financial
resources than KACC. 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. KACC competes with numerous domestic and international fabricators in
the sale of fabricated aluminum products. KACC manufactures and markets
fabricated aluminum products for the transportation, packaging, construction,
and consumer durables markets in the United States and abroad. Sales in these
markets 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. KACC
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 KACC'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 $5.6 million in
2000, $11.0 million in 1999, and $13.7 million in 1998. KACC estimates that
research and development net expenditures will be in the range of $3.0 million
to $5.0 million in 2001.
EMPLOYEES
During 2000, KACC employed an average of approximately 7,800 persons, compared
with an average of approximately 8,600 persons in 1999 and approximately 9,200
persons in 1998. At December 31, 2000, KACC employed approximately 7,300
persons. The foregoing employee counts for 2000, 1999 and 1998 include the USWA
workers who were subject to the lockout imposed by KACC as a result of the labor
dispute that was settled in September 2000. During the labor dispute, KACC
operated the five affected facilities with temporary workers who were not
included in the employee counts for 2000, 1999 and 1998.
The labor agreements with employees at the Valco smelter in Ghana, the Alpart
refinery in Jamaica and the Engineered products business unit's plants at Los
Angeles, California, and Richmond, Virginia, are scheduled to expire in 2001.
ENVIRONMENTAL MATTERS
The Company and KACC are 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 - KACC's current or past
operations subject it to environmental compliance, clean-up and damage claims
that may be costly" below.
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.
- - 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. Two key variables in this regard are prices for primary
aluminum 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 Midwest
United States transaction price (the "AMT price") has ranged from approximately
$.50 to $1.00 per pound.
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 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.
- - KACC's near-term significant debt maturities could adversely affect us
KACC has significant near-term debt maturities. KACC's Credit Agreement expires
in August 2001. It is the Company's and KACC's intention to extend or replace
the Credit Agreement prior to its expiration. However, in order for the Credit
Agreement to be extended, on a short-term basis, beyond August 2001, KACC will
have to have a plan to mitigate the $225.0 million of 97/8% Senior Notes. For
the Credit Agreement to be extended past February 2003, both the 97/8% Senior
Notes and the $400.0 million of Senior Subordinated Notes will have to be
retired and/or refinanced. As of February 28, 2001, KACC had received approval
from the Credit Agreement lenders to purchase up to $50.0 million of the 97/8%
Senior Notes. As of February 28, 2001, KACC had purchased approximately $1.0
million of 97/8% Senior Notes. As of February 28, 2001, there were $94.0 million
of borrowings outstanding under the Credit Agreement and remaining availability
of approximately $120.0 million. However, proceeds of approximately $130.0
million related to 2001 power sales are expected to be received at or near March
30, 2001, and an additional $130.0 million of power proceeds will be received
periodically through October 2001 with respect to other power sales made during
the first quarter of 2001. KACC is also considering the possible sale of part or
all of its interests in certain assets. The contemplated transactions are in
various stages of development. KACC expects that at least one operating asset
will be sold. KACC has multiple transactions under way. It is unlikely, however,
that it would consummate all of the transactions under consideration. Further,
there can be no assurance as to the likelihood, timing or terms of such sales.
The Company expects to use the proceeds from any such sales for debt reduction,
capital spending or some combination thereof.
KACC's ability to refinance its debt depends primarily on its ability to
generate cash in the future. This, to a certain extent, is subject to general
economic, financial, competitive, legislative and other factors beyond KACC's
control.
- - KACC's high leverage and debt service requirements could adversely affect us
KACC is highly leveraged and has significant debt service requirements. As of
December 31, 2000, KACC's total debt was approximately $989.4 million. KACC's
high level of debt affects our operations in several important ways:
- - a large portion of the cash KACC generates is used to pay interest.
Accordingly, our financial results are more vulnerable in the event of a
downturn in our business, the aluminum industry or general economic
conditions;
- - the agreements governing such debt limit KACC's and our flexibility in
planning for and reacting to changes in our business conditions. For
example, some or all of the agreements governing such debt limit KACC's
and/or our ability to make capital expenditures, to borrow additional money
and to consolidate or merge with other companies;
- - KACC may experience a competitive disadvantage because it is more highly
leveraged than some of its competitors; and
- - the agreements governing such debt permit KACC's and our creditors to
accelerate payments if KACC or we default or experience a change in the
control of our ownership as set forth in such agreements.
KACC's ability to make payments on its debt depends on its ability to generate
cash in the future. This, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors beyond KACC's
control.
- - The asbestos-related lawsuits against KACC could continue to increase and
could adversely impact our financial position
KACC is a defendant 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 KACC, or exposure to products containing
asbestos produced or sold by KACC. The lawsuits generally relate to products
KACC sold more than 20 years ago.
Our December 31, 2000, balance sheet includes a liability for estimated
asbestos-related costs of $492.4 million. We cannot assure you that this
liability will not increase in the future. In determining the amount of the
liability, we have only included estimates for the cost of claims for a ten year
period through 2010 because we do not have a reasonable basis for estimating
costs beyond that period. However, we expect that these costs may continue
beyond 2010 and that they could be substantial.
We believe KACC has insurance coverage for a substantial portion of such
asbestos-related costs. Accordingly, our December 31, 2000, balance sheet
includes a long-term receivable for estimated insurance recoveries of $406.3
million. We believe that KACC will recover a substantial portion of these
payments from insurance, but cannot assure you that KACC will receive
substantial insurance payments or that the timing of such payments will occur in
the year KACC is required to make the payments. Delays in receiving future
insurance repayments would have an adverse impact on KACC's liquidity.
Prior to insurance recoveries, we estimate that KACC's annual cash payments for
asbestos-related costs will be approximately $110.0 - $135.0 million in the
years 2001 and 2002, approximately $45.0 - $50.0 million in the years 2003 and
2004, approximately $25.0 million in the year 2005 and a total of $125.0 million
beyond 2005.
See Note 12 of Notes to Consolidated Financial Statements for additional
discussion of this matter.
- - Power availability for smelting operations
Electric power represents an important production input for KACC at its aluminum
smelters and its cost can significantly affect KACC's profitability. Power
contracts for KACC's smelters have varying contractual terms. See "Business -
Primary Aluminum Business Unit - Availability of Affordable Electric Power" in
this Report. We cannot provide assurance that electric power will be available
in the future, at affordable prices, for KACC's smelters. Under the new contract
with the BPA, KACC's Pacific Northwest operations will not receive sufficient
power to run its smelting operations at full capacity and may have to pay as
much as 100% more than the power rate under the current contract. Depending on
the ultimate price for such power or the availability of an alternate power
supply at an acceptable price, KACC may be unable to operate the smelters in the
near or long-term. Under KACC's contract with the USWA, KACC is liable for
certain severance and supplemental unemployment benefits for laid-off workers.
Such costs related to the period from January 1, 2001 to September 30, 2001 have
been accrued to the extent that the costs are fixed and determinable. However,
the Company may become liable for additional costs. In particular, KACC would
become liable for certain early retirement benefits for USWA workers at the Mead
and Tacoma, Washington, facilities if such facilities are not restarted prior to
late 2002 or early 2003. Such costs could be significant and would adversely
impact KACC's and our operating results and liquidity.
- - The Gramercy incident could result in adverse consequences to us
In July 1999, KACC's Gramercy, Louisiana, alumina refinery was extensively
damaged by an explosion in the digestion area of the plant. A number of
employees were injured in the incident, several of them severely. KACC may be
liable for claims relating to the injured employees. The incident has also
resulted in more than ninety lawsuits being filed against KACC alleging, among
other things, property damage, business interruption loss by other businesses
and personal injury. The aggregate amount of damages sought in the lawsuits and
other claims cannot be determined at this time. We currently believe KACC's
insurance will cover the majority of the costs of these lawsuits and claims
relating to the injured employees.
Through February 28, 2001, KACC had recorded $289.3 million of estimated
insurance recoveries related to the Gramercy incident and had collected $262.6
million of such amounts. An additional $7.0 million is expected in March 2001.
The remaining balance of approximately $20.0 million and any additional amounts
possibly due to KACC will likely not be recovered until KACC and the insurers
resolve certain outstanding issues. The insurers have asserted that no
additional business interruption amounts are due after November 30, 2000. KACC
and the insurers are currently negotiating an arbitration agreement as a means
of resolving their differences. We anticipate that the remaining issues will not
be resolved until late 2001 or early 2002. We continue to believe that a minimum
of approximately $290.0 million of insurance recoveries are probable, that
additional amounts are owed to KACC by the insurers, and that the likelihood of
any refund by KACC of amounts previously received from the insurers is remote.
However, because this matter is subject to significant uncertainties, no
assurances can be given as to the ultimate outcome of this matter or its impact
on KACC's and our near-term liquidity and results of operations.
- - Our profits and cash flows may be adversely impacted by the results of KACC's hedging programs
KACC 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 KACC's hedging transactions or that energy
costs or foreign exchange rates are below the fixed or floor prices, our profits
and cash flow would be lower than they otherwise would have been.
Hedging activities can also have a temporary impact on our and KACC's liquidity.
KACC has established credit limits with certain counterparties related to open
forward sales and option contracts. When unrealized gains or losses on open
positions are in excess of such credit lines, KACC is entitled to receive margin
advances from the counterparties or is required to make margin advances to
counterparties, as the case may be. At December 31, 2000, the impact of margin
arrangements on KACC's and our liquidity was insignificant. However, future
increases in primary aluminum prices or decreases in foreign exchange rates
could result in KACC having to make margin advances or post additional letters
of credit and such amounts could be significant and could adversely impact
KACC's and our liquidity.
Information regarding KACC's sensitivity to certain price amounts from both an
earnings and liquidity perspective is provided in "Quantitative and Qualitative
Disclosures About Market Risk."
- - KACC's current or past operations subject it to environmental compliance,
clean-up and damage claims that may be costly
The operations of KACC'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 2001 - 2002 period, KACC's environmental capital spending
will be approximately $6.0 million per year and that KACC's operating costs will
include pollution control costs totaling approximately $27.0 million per year.
However, subsequent changes in environmental laws may change the way KACC must
operate and may force KACC to spend more then we currently project.
Additionally, KACC'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. KACC 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 KACC.
Currently, KACC 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"). KACC, 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, KACC 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, KACC's Mead, Washington, facility has been listed on the
National Priorities List under CERCLA. KACC and the regulatory authorities
agreed to a plan of remediation in January 2000.
In response to environmental concerns, we have established environmental
accruals representing our estimate of the costs we reasonably expect KACC to
incur in connection with these matters. At December 31, 2000, the balance of our
accruals, which are primarily included in our long-term liabilities, was $46.1
million. We estimate that the annual costs charged to these environmental
accruals will be approximately $3.0 million to $12.0 million per year for the
years 2001 through 2005 and an aggregate of approximately $21.0 million
thereafter. However, we cannot assure you that KACC'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 $35.0 million.
See Note 12 of Notes to Consolidated Financial Statements for additional
information.
- - The remaining allegations of Unfair Labor Practices ("ULPs") filed by the USWA
could adversely affect us In connection with the USWA strike and subsequent
lock-out by KACC, the USWA filed twenty-four allegations of ULPs. Twenty-two of
the allegations were dismissed. A trial before an administrative law judge for
the two remaining allegations commenced in November 2000 and is continuing. If
the outcome of either of these two allegations eventually results in a final
ruling against KACC, it could be obligated to provide back pay to the USWA
members and such amount could be significant. However, any outcome from the
trial before the administrative law judge would be subject to additional appeals
by the general counsel of the National Labor Relations Board (the "NLRB"), the
USWA or KACC. This process could take months or years.
- - Ability to operate profitably in the future
We reported net income of $16.8 million for the year ended December 31, 2000
which included material non-recurring gains and losses. If such non-recurring
gains and losses were excluded from the 2000 results (see "Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Summary" for a summary of non-recurring gains and losses), net income for the
year ended December 31, 2000 would have been only slightly above break-even.
While we expect that 2001 will be profitable as a result of net gains from power
sales, there can be no assurance that we will generate a profit from recurring
operations or that we will operate profitably in future periods.
- - We operate in a highly competitive industry
The production of alumina, primary 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.
- - KACC is subject to political and regulatory risks in a number of countries
KACC 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 KACC's relationships in the countries in which it operates are
generally satisfactory, we cannot assure you that future country developments or
governmental actions will not adversely affect KACC's operations particularly or
the aluminum industry generally. Among the risks inherent in KACC'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. KACC'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 KACC's operations are
described in Item 1 "- Business Operations" and those descriptions are
incorporated herein by reference. KACC 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, subject to changing environmental requirements. Although KACC's domestic
aluminum smelters were initially designed early in KACC's history, they have
been modified frequently over the years to incorporate technological advances in
order to improve efficiency, increase capacity, and achieve energy savings. The
Company believes that KACC's plants are cost competitive on an international
basis. However, the long-term viability of KACC's Pacific Northwest smelters may
be adversely impacted if an adequate supply of power at reasonable prices is not
ultimately available.
KACC's obligations under the Credit Agreement are secured by, among other
things, mortgages on KACC's major domestic plants (other than the Gramercy
alumina refinery). See Note 8 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.
GRAMERCY LITIGATION
On July 5, 1999, KACC's Gramercy, Louisiana, alumina refinery was extensively
damaged by an explosion in the digestion area of the plant. A number of
employees were injured in the incident, several of them severely. KACC may be
liable for claims relating to the injured employees. The incident has resulted
in more than ninety lawsuits, many of which were styled as class action suits,
being filed against KACC and others since July 1999 on behalf of more than
16,000 claimants. Such lawsuits allege, among other things, property damage,
business interruption loss by other businesses and personal injury. All such
lawsuits previously pending in state court are now consolidated into one action
pending in the Twenty-Third Judicial District Court for the Parish of St. James,
State of Louisiana. One lawsuit remains pending in the United States District
Court, Eastern District of Louisiana. Discovery has begun in the cases. The
aggregate amount of damages sought in the lawsuits cannot be determined at this
time. See Note 2 of Notes to Consolidated Financial Statements.
In connection with the settlement of the U.S. Mine Safety and Health
Administration's ("MSHA") investigation of the incident, KACC is paying a fine
of $.5 million but denied the alleged violations.
ASBESTOS-RELATED LITIGATION
KACC is a defendant in a number of lawsuits, some of which involve claims of
multiple persons, in which the plaintiffs allege that certain of their injuries
were caused by, among other things, exposure to asbestos during, and as a result
of, their employment or association with KACC or exposure to products containing
asbestos produced or sold by KACC. The lawsuits generally relate to products
KACC has not manufactured for more than 20 years. The portion of Note 12 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 KACC, certain
allegations of ULPs were filed by the USWA with the NLRB. Twenty-two of the
twenty-four allegations of ULPs brought against KACC by the USWA have been
dismissed. A trial on the remaining two allegations before an administrative law
judge commenced in November 2000 and is continuing. The Company is unable to
estimate when the trial will be completed. If the outcome of either of these two
allegations eventually results in a final ruling against KACC, it could be
obligated to provide back pay to the USWA members and such amount could be
significant. Any outcome from the trial would be subject to additional appeals
by the general counsel of the NLRB, the USWA or KACC. This process could take
months or years. The portion of Note 12 of Notes to Consolidated Financial
Statements under the heading "Labor Matters" is incorporated herein by
reference.
OTHER MATTERS
Various other lawsuits and claims are pending against KACC. 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 12 of Notes to
Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of the Company during the
fourth quarter of 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the New York Stock Exchange under the
symbol "KLU." The number of record holders of the Company's Common Stock at
February 28, 2001, was 347. The Company has not paid any dividends on its Common
Stock during the two most recent fiscal years. The high and low sales prices for
the Company's Common Stock for each quarterly period of 2000, 1999 and 1998, as
reported on the New York Stock Exchange is set forth in the Quarterly Financial
Data on page 60 in this Report and is incorporated herein by reference.
The Credit Agreement contains restrictions on the ability of the Company to pay
dividends on or make distributions on account of the Company's Common Stock, and
the Credit Agreement and the indentures governing KACC's public debt contain
restrictions on the ability of the Company's subsidiaries to transfer funds to
the Company in the form of cash dividends, loans or advances.
See Note 8 of Notes to Consolidated Financial Statements under the heading "Debt
Covenants and Restrictions" and the " Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources
- - Capital Structure" for additional information which are incorporated herein.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the Company is incorporated herein by reference to
the table at page 1 of this Report, to the table at pages 14 - 15 of
Management's Discussion and Analysis of Financial Condition and Results of
Operations, to Note 1 of Notes to Consolidated Financial Statements, and to the
Five-Year Financial Data on pages 61 - 62 in this Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Kaiser Aluminum Corporation ("Kaiser" or the "Company"), through its wholly
owned subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"), 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. Intersegment
transfers are valued at estimated market prices. The table below provides
selected operational and financial information on a consolidated basis with
respect to the Company for the years ended December 31, 2000, 1999 and 1998. The
following data should be read in conjunction with the Company's consolidated
financial statements and the notes thereto, contained elsewhere herein. See Note
14 of Notes to Consolidated Financial Statements for further information
regarding segments. (All references to tons refer to metric tons of 2,204.6
pounds.)
Year Ended December 31,
------------------------------------
(In millions of dollars, except shipments and prices) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
Shipments: (000 tons)
Alumina(1)
Third Party 1,927.1 2,093.9 2,250.0
Intersegment 751.9 757.3 750.7
--------- ---------- ----------
Total Alumina 2,679.0 2,851.2 3,000.7
--------- ---------- ----------
Primary Aluminum(2)
Third Party 345.5 295.6 263.2
Intersegment 148.9 171.2 162.8
--------- ---------- ----------
Total Primary Aluminum 494.4 466.8 426.0
--------- ---------- ----------
Flat-Rolled Products 162.3 217.9 235.6
--------- ---------- ----------
Engineered Products 164.6 171.1 169.4
--------- ---------- ----------
Average Realized Third Party Sales Price:(3)(4)
Alumina (per ton) $ 209 $ 176 $ 184
Primary Aluminum (per pound) $ .74 $ .66 $ .67
Net Sales:(3)
Bauxite and Alumina(1)(4)
Third Party (includes net sales of bauxite) $ 442.2 $ 395.8 $ 445.2
Intersegment 148.3 129.0 135.8
--------- ---------- ----------
Total Bauxite & Alumina 590.5 524.8 581.0
--------- ---------- ----------
Primary Aluminum(2)(4)
Third Party 563.7 432.9 390.7
Intersegment 242.3 240.6 233.5
--------- ---------- ----------
Total Primary Aluminum 806.0 673.5 624.2
--------- ---------- ----------
Flat-Rolled Products 521.0 591.3 732.7
Engineered Products 564.9 556.8 595.3
Commodities Marketing(4) (25.4) 18.3 60.5
Minority Interests 103.4 88.5 78.0
Eliminations (390.6) (369.6) (369.3)
--------- ---------- ----------
Total Net Sales $2,169.8 $ 2,083.6 $ 2,302.4
========= ========== ==========
Operating Income (Loss): (7)(8)
Bauxite & Alumina (4)(5) $ 57.2 $ (10.5) $ 5.5
Primary Aluminum (4)(6) 100.1 (4.8) 28.3
Flat-Rolled Products 16.6 17.1 86.8
Engineered Products 34.1 38.6 51.5
Commodities Marketing(4) (48.7) 21.3 98.1
Micromill (.6) (11.6) (18.4)
Eliminations .1 6.9 8.9
Corporate and Other (61.4) (61.8) (65.1)
Labor Settlement Charge (38.5) - -
Other Non-Recurring Operating Items, Net 80.4 (24.1) (105.0)
--------- ---------- ----------
Total Operating Income (Loss) $ 139.3 $ (28.9) $ 90.6
========= ========== ==========
Net Income (Loss) $ 16.8 $ (54.1) $ .6
========= ========== ==========
Capital Expenditures $ 296.5 $ 68.4 $ 77.6
========= ========== ==========
(1) Net sales for 2000 and 1999 included approximately 267,000 tons and
264,000 tons, respectively, of alumina purchased from third parties and
resold to certain unaffiliated customers and 55,000 tons and 131,000 tons,
respectively, of alumina purchased from third parties and transferred to
the Company's primary aluminum business unit.
(2) Net sales for 2000, 1999 and 1998 included approximately 206,500 tons,
260,100 tons and 251,300 tons, respectively, of primary aluminum purchased
from third parties to meet third-party and internal commitments.
(3) Net sales for 1999 and 1998 for all segments have been restated to conform
to a new accounting requirement which states that freight charges should
be included in cost of products sold rather than netted against net sales
as was the Company's prior policy. 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.
(4) Average realized third-party sales prices, net sales and operating income
(loss) for Bauxite and alumina and Primary aluminum segments for 1999 and
1998 have been restated to reflect a change in the Company's segment
reporting. The results of KACC's metal hedging activities are now set out
separately in the Commodities marketing segment rather than being
allocated between the two commodity business units.
(5) Operating income (loss) for 2000 and 1999 included estimated business
interruption insurance recoveries totaling $110.0 and $41.0, respectively
Additionally, depreciation was suspended for the Gramercy facility for the
period from July 1999 to December 2000 as a result of the July 1999
incident. Depreciation expense for the Gramercy facility for the six
months ended June 30, 1999, was approximately $6.0. See Note 2 of Notes to
Consolidated Financial Statements for additional information.
(6) Operating income (loss) for the year ended December 31, 1999, included
potline preparation and restart costs of $12.8.
(7) The allocation of the labor settlement charges to the Company's business
units for the year ended December 31, 2000 is as follows: Bauxite and
Alumina - $2.1, Primary aluminum - $15.9, Flat-rolled products - $18.2 and
Engineered products - $2.3.
(8) See Note 6 of Notes to Consolidated Financial Statements for a detailed
summary of the components of non-recurring operating items, net (other
than the labor settlement charges) and the business segment to which the
items relate.
This section contains statements which constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements appear in a number of places in this section (see "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. 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.
OVERVIEW
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 KACC's hedging strategies. Primary aluminum prices have historically
been subject to significant cyclical price fluctuations. See Notes 1 and 13 of
Notes to Consolidated Financial Statements for a discussion of KACC's hedging
activities.
Changes in global, regional, or country-specific economic conditions can have a
significant impact on overall demand for aluminum-intensive fabricated products
in the transportation, distribution, and packaging markets. Such changes in
demand can directly affect the Company's earnings by impacting the overall
volume and mix of such products sold. To the extent that these end-use markets
weaken, demand can also diminish for what the Company sometimes refers to as the
"upstream" products: alumina and primary aluminum.
During 2000, the Average Midwest United States transaction price ("AMT price")
per pound of primary aluminum was $.75 per pound. During 1999, the AMT price
declined to a low of approximately $.57 per pound in February 1999 and then
began a steady increase ending 1999 at $.79 per pound. During 1998, the AMT
price experienced a steady decline during the year, beginning the year in the
$.70 to $.75 range and ending the year in the low $.60 range. At January 31,
2001, the AMT price was approximately $.81 per pound.
Liquidity/Cash Resources. KACC has significant near-term debt maturities. KACC's
ability to make payments on and refinance its debt depends on its ability to
generate cash in the future. In addition to being impacted by power sales and
normal operating items, the Company's and KACC's near-term liquidity and cash
flows will also be affected by the Gramercy incident, net payments for
asbestos-related liabilities and possible proceeds from asset dispositions. See
"Liquidity and Capital Resources - Financing Activities and Liquidity" for a
discussion of these matters.
Incident at Gramercy Facility. In July 1999, KACC's Gramercy, Louisiana alumina
refinery was extensively damaged by an explosion in the digestion area of the
plant. Construction on the damaged part of the facility began during the first
quarter of 2000. Initial production at the plant commenced during the middle of
December 2000. The plant is expected to increase production progressively to
approximately 75% of its newly rated estimated annual capacity of 1,250,000 tons
by the end of March 2001. At February 28, 2001, the plant was operating at 70%
of capacity. Based on current estimates, construction at the facility is
expected to be completed during the third quarter of 2001.
Through February 28, 2001, KACC had recorded $289.3 million of estimated
insurance recoveries related to the Gramercy incident and had collected $262.6
million of such amounts. An additional $7.0 million is expected in March 2001.
The remaining balance of approximately $20.0 million and any additional amounts
possibly due to KACC will likely not be recovered until KACC and the insurers
resolve certain outstanding issues. KACC and the insurers are currently
negotiating an arbitration agreement as a means of resolving their differences.
The Company anticipates that the remaining issues will not be resolved until
late 2001 or early 2002. KACC and the Company continue to believe that a minimum
of approximately $290.0 million of insurance recoveries are probable, that
additional amounts are owed to KACC by the insurers, and that the likelihood of
any refund by KACC of amounts previously received from the insurers is remote.
See Note 2 of Notes to Consolidated Financial Statements for a full discussion
regarding the incident at the Gramercy facility.
Labor Matters. As previously reported, prior to the settlement of the labor
dispute, KACC was operating five of its U.S. facilities with salaried employees
and other employees as a result of the September 1998 strike by the United
Steelworkers of America ("USWA") and the subsequent "lockout" by KACC in January
1999. The labor dispute was settled in September 2000. In September 2000, the
Company recorded a one-time pre-tax labor settlement charge of $38.5 million to
reflect the incremental, non-recurring impacts of the labor settlement,
including severance and other contractual obligations for non-returning workers.
See Note 5 of Notes to Consolidated Financial Statements for additional
discussions on the labor settlement.
Although the USWA dispute has been settled and the workers have returned to the
facilities, two allegations of unfair labor practices ("ULPs") in connection
with the USWA strike and subsequent lock-out by KACC remain to be settled. The
Company believes that the remaining charges made against KACC by the USWA are
without merit. See Note 12 of Notes to Consolidated Financial Statements for
additional discussion on the ULP charges.
Strategic Initiatives. KACC's strategy is to improve its financial results by:
increasing the competitiveness of its existing plants; continuing its cost
reduction initiatives; adding assets to businesses it expects to grow; pursuing
divestitures of its non-core businesses; and strengthening its financial
position by divesting of part or all of its interests in certain operating
assets.
In addition to working to improve the performance of the Company's existing
assets, the Company has devoted significant efforts analyzing its existing asset
portfolio. The Company intends to focus its efforts and capital in sectors of
the industry that are considered most attractive, and in which the Company
believes it is well positioned to capture value. During 2000, KACC sold certain
non-operating properties, its Micromill assets and technology and its
Pleasanton, California, office complex and purchased the assets of a drawn tube
aluminum fabricating operation. The dispositions were part of the Company's
initiative to monetize non-strategic or underperforming assets. The acquisition
was part of the Company's continued focus on growing its Engineered products
operations.
KACC is considering the possible sale of part or all of its interests in certain
operating assets. The contemplated transactions are in various stages of
development. KACC expects that at least one operating asset will be sold. KACC
has multiple transactions under way. It is unlikely, however, that it would
consummate all of the transactions under consideration. Further, there can be no
assurance as to the likelihood, timing, or terms of such sales. The consummation
of any such sales would be dependent upon a number of factors, such as
negotiation of definitive documentation, due- diligence investigations, certain
lender approvals and/or anti-trust clearances. The Company would expect to use
the proceeds from any such sales for debt reduction, capital spending or some
combination thereof.
Another area of emphasis has been a continuing focus on managing the Company's
legacy liabilities. The Company believes that KACC has insurance coverage
available to recover a substantial portion of its asbestos-related costs and is
actively pursuing recoveries in this regard. For the period from inception
through December 31, 2000, the Company has paid approximately $220.5 million for
asbestos-related settlements and associated defense costs and has received
partial insurance reimbursements during this same period totaling $131.3
million. The timing and amount of future recoveries of asbestos-related claims
from insurance carriers remain a major priority of the Company, but will depend
on the pace of claims review and processing by such carriers and the resolution
of any disputes regarding coverage under the insurance policies.
Additional portfolio analysis and initiatives are continuing.
Pacific Northwest Power Sales and Operating Level. In response to the
unprecedented high market prices for power in the Pacific Northwest, the Company
temporarily curtailed the primary aluminum production at the Tacoma and Mead,
Washington, smelters during the second half of 2000 and sold a portion of the
power that it had under contract through September 30, 2001. As a result of the
curtailments, KACC avoided the need to purchase power on a variable market price
basis and will receive cash proceeds sufficient to more than offset the cash
impact of the potline curtailments over the period for which the power was sold.
KACC has made additional power sales in 2001.
During October 2000, KACC signed a new power contract with the Bonneville Power
Administration ("BPA") under which the BPA will provide KACC's operations in the
State of Washington with power during the period October 2001 through September
2006. The contract will provide sufficient power to operate KACC's Trentwood
facility as well as approximately 40% of the combined capacity of KACC's Mead
and Tacoma aluminum smelting operations. Power costs under the new contract are
expected to exceed the cost of power under KACC's current BPA contract by
between 20% to 60% and, perhaps, by as much as 100% in certain periods. There
are other terms of the new BPA contract which are also less favorable than the
current BPA contract. KACC does not have any remarketing rights under the new
BPA contract.
See Note 7 of Notes to Consolidated Financial Statements for additional
information on the power sales and the new BPA contract.
RESULTS OF OPERATIONS
Summary. The Company reported net income of $16.8 million, or $.21 of basic
income per common share, for 2000 compared to a net loss of $54.1 million, or
$.68 of basic loss per common share, for 1999 and net income of $.6 million, or
$.01 of basic income per common share, for 1998. However, results for 2000, 1999
and 1998 included material non- recurring gains and losses as summarized below:
Year Ended December 31,
------------------------------------------
2000 1999 1998
---------- ---------- ----------
As reported, income (loss) per common share $ .21 $ (.68) $ .01
Less material non-recurring (gains) losses:
Labor settlement charge in 2000; strike-related costs in 1998 .30 - .50
Asbestos-related charges .33 .44 .11
Impairment loss - U.S. smelters in 2000; Micromill in 1999 and 1998 .25 .16 .38
Net gains from power sales (1.22) - -
Operating profit foregone as a result of power sales .20 - -
Gains - real estate transactions in 2000; AKW L.P. interests in 1999 (.30) (.42) -
Other non-recurring operating charges .21 - -
Gramercy-related items:
Gain on involuntary conversion - (.71) -
Incremental maintenance spending .09 - -
Charge for insurance deductibles - .04 -
LIFO inventory charge .05 - -
Mark-to-market (gains) losses (.08) .27 -
---------- ---------- ----------
$ .04 $ (.90) $ 1.00
========== ========== ==========
Net sales in 2000 totaled $2,169.8 million compared to $2,083.6 million in 1999
and $2,302.4 million in 1998.
2000 AS COMPARED TO 1999
Bauxite and Alumina. Third party net sales of alumina were up 12% in 2000 as
compared to 1999 as a 19% increase in third party average realized price was
partially offset by an 8% decrease in third party shipments. The increase in
average realized price was because the sales prices for alumina under the
Company's third-party alumina sales contracts are linked to primary aluminum
prices and primary aluminum prices increased year over year. The decrease in
year-over- year shipments resulted primarily from differences in the timing of
shipments and, to a lesser extent, the net effect of the Gramercy incident,
after considering the 267,000 tons of alumina purchased by KACC in 2000 from
third parties to fulfill third party sales contracts.
Intersegment net sales for 2000 increased 15% as compared to 1999. The increase
was primarily due to a 16% increase in the intersegment average realized price
resulting from increases in primary aluminum prices from period to period as
intersegment transfers are made on the basis of primary aluminum market prices
on a lagged basis of one month. Intersegment shipments were essentially flat.
The favorable impact on intersegment alumina shipments of operating more
potlines at the Company's smelters during the first half of 2000 as compared to
the same period in 1999 was offset by the unfavorable impact of the potline
curtailments at the Company's Washington smelters in the last half of 2000.
Intersegment shipments for 2000 included approximately 55,000 tons of alumina
purchased by KACC from third-parties and transferred to the Primary aluminum
business unit.
Segment operating income (before non-recurring items) for 2000 was up
significantly as compared to 1999 primarily as a result of the factors discussed
above. Segment operating income for 2000 excludes non-recurring labor settlement
charges of $2.1 million and three Gramercy-related items; a $7.0 million
non-cash LIFO inventory charge, incremental maintenance spending of $11.5
million and an $.8 million non-cash restructuring charge. Segment operating
income for 1999 excludes the segment's allocated share of the expense of
insurance deductibles related to the Gramercy incident of $4.0 million.
See Note 2 of Notes to Consolidated Financial Statements for additional
discussion of the effect of the Gramercy incident on the Bauxite and Alumina
business unit's operations.
Primary Aluminum. Third party net sales of primary aluminum were up 30% for 2000
as compared to 1999 as a result of a 17% increase in third party shipments and a
12% increase in third party averaged realized prices. The increase in shipments
was primarily due to the favorable impact of the increased operating rate at the
Company's 90%-owned Volta Aluminium Company Limited ("Valco") throughout 2000
and the Washington smelters (during the first six months of 2000). These
shipment increases were offset, in part, by curtailments of the potlines at the
Washington smelters during the second half of 2000, net of approximately 206,500
tons of primary aluminum purchased from third-parties to meet third-party and
internal commitments. The increase in the average realized prices reflects the
14% increase in primary aluminum market prices. Intersegment net sales for 2000
were up modestly when compared to 1999. A 16% increase in intersegment average
realized prices was offset by a 13% decrease in intersegment shipments. The
increase in the intersegment average realized price was due to higher market
prices for primary aluminum as intersegment transfers are made on the basis of
market prices. The decrease in shipments was primarily due to the potline
curtailments at the Washington smelters, the reduced requirements of the
Flat-rolled products segment due to the can body stock exit and the reduced
requirements of the Engineered products segment due to the softening of the
ground transportation and distribution markets.
Segment operating income (before non-recurring items) for 2000 was up
significantly from 1999. The primary reason for the increase was the
improvements in average realized prices and net shipments discussed above.
However, segment operating income for 2000 was adversely affected by increased
alumina prices, higher electric power costs and reduced profitability resulting
from metal purchased and resold to the Flat-rolled products and Engineered
products business units. The increase in alumina costs is the result of higher
primary aluminum prices in 2000 because transfers of alumina from KACC's alumina
business unit are made on a metal-linked basis. Power costs have generally
increased, even after excluding the higher than normal power costs experienced
by the Company in the Pacific Northwest. As previously reported, new agreements
entered into in both Ghana and Wales provide for increased power stability but
at increased costs. The reduced profitability on sales to the Flat-rolled
products and Engineered products segments is due to the lack of a profit margin
on metal that was purchased and resold at cost to the segments versus the profit
margin that would have existed had the metal been produced.
Segment operating income for 2000, discussed above, excludes non-recurring net
power sales gains of $159.5 million. Segment operating income for 2000 also
excludes a non-cash smelter impairment charge of $33.0 million, the segment's
share of the non-recurring labor settlement charge of $15.9 million and costs
related to staff reduction initiatives of $3.1 million. Operating income in 1999
included costs of approximately $12.8 million associated with preparing and
restarting potlines at Valco and the Washington smelters.
Flat-Rolled Products. Net sales of flat-rolled products decreased by 12% in 2000
as compared to 1999 as a 26% decrease in shipments was only partially offset by
a 14% increase in average realized prices. The decrease in shipments was
primarily due to reduced shipments of can body stock as a part of the Company's
planned exit from this product line. Offsetting the reduced can body stock
shipments was a modest year over year improvement in shipments of heat-treat
products. The increase in average realized prices primarily reflects the change
in product mix (resulting from the can body stock exit) as well as the pass
through to customers of increased market prices for primary aluminum.
Segment operating income (before non-recurring items) for 2000 was essentially
flat when compared to 1999 as the increase in price and volume for heat-treat
products offset the impacts of the can body stock exit. Segment operating income
for 2000, discussed above, excludes the segment's share of the non-recurring
labor settlement charge of $18.2 million. Segment operating income also excludes
a $7.5 million non-cash LIFO inventory charge and $5.1 million of non-cash
impairment charges associated with KACC's exit from the can body stock product
line.
Results for 2000 for the Flat-rolled products segment were also adversely
affected late in the year by the Washington smelter curtailments as the business
unit no longer had a supply of hot metal. While the impact of this change was
modest in 2000, the business unit will be adversely affected by this situation
in 2001. The amount of the impact will depend on the cost of acquiring the
necessary metal units and the energy costs incurred to melt the purchased metal.
Engineered Products. Net sales of engineered products for 2000 were essentially
flat as compared to 1999 as a 5% increase in average realized prices was offset
by a 4% decrease in product shipments. The increase in average realized prices
reflects increased prices for soft alloy extrusions, offset, in part, by a shift
in product mix. The decrease in product shipments in 2000 over 1999 reflects a
substantial weakening in ground transportation and distribution markets in the
last half of 2000.
The changes in segment operating income (before non-recurring items) for 2000 as
compared to 1999 were primarily attributable to increased energy costs. Segment
operating income for 2000 excludes a non-recurring non-cash impairment charge
associated with product line exit of $5.6 million and labor settlement charges
of $2.3 million. Segment operating income for 1999 included equity in earnings
of $2.5 million from the Company's 50% interest in AKW L.P., which was sold in
April 1999.
Commodities Marketing. Commodities marketing includes the results of KACC's
aluminum hedging activities. Its hedging activities include: (1) metal hedging
on behalf of the Bauxite and alumina and Primary aluminum business segments with
third-party brokers (other than mark-to-market charges on certain non-qualifying
hedges which are reflected in Other income (expense) - see Notes 1 and 13 of
Notes to Consolidated Financial Statements) and (2) internal hedging with
Flat-rolled products and Engineered products business segments so as to
eliminate the commodity price risk on the underlying aluminum whenever these
segments enter into a fixed price contract with a third-party customer.
Net sales for this segment represent net settlements with third-party brokers
for derivative positions. Operating income represents the combined effect of
such net settlements, any net premium costs associated with the purchase or sale
of options, as well as net results of internal hedging activities with KACC's
fabricated products segments. The decrease in net sales as well as a decrease in
operating income in 2000 as compared to 1999 results from the 2000 hedging
positions having lower ceilings than the positions in 1999. This is primarily
the result of the timing of when the hedging position activities were completed.
Eliminations. Eliminations of intersegment profit vary from period to period
depending on fluctuations in market prices as well as the amount and timing of
the affected segments' production and sales.
Corporate and Other. Corporate operating expenses (excluding non-recurring
items) represent corporate general and administrative expenses which are not
allocated to the Company's business segments. Corporate operating results for
2000 exclude costs related to staff reduction and efficiency initiatives of $5.5
million. Corporate operating results for 1999 exclude the expense of insurance
deductibles related to the Gramercy incident allocated to the Corporate segment
of $1.0 million.
1999 AS COMPARED TO 1998
Bauxite and Alumina. Third party net sales were down 11% in 1999 as compared to
1998 as a result of a 4% decline in third party average realized prices and a 7%
decrease in third party alumina shipments. The decline in the average realized
prices in 1999 as compared to 1998 was primarily attributable to lower
realizations under KACC's primary aluminum linked alumina sales contracts caused
by lower primary aluminum market prices. The decrease in year-over- year
shipments was primarily the net effect of the Gramercy incident after
considering the 264,000 tons of alumina purchased by KACC from third parties to
fulfill third party sales contract.
Intersegment net sales for 1999 declined 5% as compared to 1998. The decline was
primarily due to a 6% decline in the intersegment average realized price, offset
in part by a 1% increase in intersegment shipments, resulting from potline
restarts at Valco and at the Company's Washington smelters. Intersegment net
sales include approximately 131,000 tons of alumina purchased from third-parties
and transferred to the primary aluminum business unit.
Segment operating income (before non-recurring items) for 1999 was down as
compared to 1998 primarily as a result of the price and volume factors discussed
above. Segment operating income for 1999 was favorably impacted by the fact that
depreciation on the Gramercy facility was suspended in July 1999.
Segment operating income for 1999, discussed above, excludes the segment's
allocated share of the expense of insurance deductibles related to the Gramercy
incident of $4.0 million. Segment operating income for 1998 excludes the adverse
impact of approximately $11.0 million of incremental strike-related costs.
Primary Aluminum. Third party net sales of primary aluminum were up 11% as
compared to 1998 as a result of a 12% increase in third party shipments offset
by a 1% decrease in the average realized third party sales prices. The increase
in shipments was primarily due to the favorable impact of Valco operating three
potlines in 1999 as compared to one potline in 1998.
Intersegment net sales for 1999 were up 3% as compared to 1998. Intersegment
shipments increased 5% due to the timing of shipments to the Company's
fabricated business units while intersegment average realized prices were down
2%.
Segment operating income (before non-recurring items) for 1999 was down compared
to 1998. The most significant component of this decline was the reduction in the
average realized prices discussed above. Results for 1999 were also adversely
impacted by costs of approximately $12.8 million associated with preparing and
restarting potlines at Valco and the Washington smelters. The favorable impact
of Valco operating at a higher rate in 1999 (as compared to 1998) was
substantially offset by the fact that Valco earned mitigating compensation of
approximately $29.0 million in 1998 for two of its curtailed potlines.
Segment operating income for 1998, discussed above, excludes the adverse impact
of approximately $29.0 of incremental strike-related costs.
Flat-Rolled Products. Net sales of flat-rolled products for 1999 declined by 19%
compared to 1998 as a result of a 13% decline in average realized prices and an
8% decline in product shipments. The decline in average realized prices resulted
primarily from a shift in product mix (from aerospace products, which have a
higher price and operating margin, to other products) and a reduction in prices
resulting from reduced demand for heat treat products. The reduction in
shipments was primarily due to reduced demand in 1999 for aerospace heat-treat
products offset, in small part, by increased shipments of general engineered
products.
The decline in 1999 prices and shipments as compared to 1998 was responsible for
the decline in segment operating income for 1999. Segment operating income for
1998 excluded the adverse impact of approximately $16.0 million of incremental
strike-related costs.
Engineered Products. Net sales of engineered products for 1999 decreased 7%
compared to 1998 primarily due to an 8% decline in average realized prices.
Product shipments were essentially flat. The decline in the average sales
realized prices in 1999 was attributable to a change in product mix (higher
ground transportation products offset by lower aerospace shipments). While there
was a strong increase in 1999 in the demand for ground transportation products
it was offset by a reduced demand for aerospace products.
Segment operating income for 1999 decreased compared to 1998 as a result of the
factors discussed above as well as the reduced equity in earnings from AKW
(which partnership interests were sold in April 1999). Segment operating income
for 1998 excluded the adverse impact of approximately $4.0 million of
incremental strike-related costs.
Commodities Marketing. Net sales for this segment represent net settlements with
third-party brokers for derivative positions. Operating income represents the
combined effect of such net settlements, any net premium costs associated with
the purchase or sale of options, as well as net results of internal hedging
activities with KACC's fabricated products segments. The decrease in net sales
as well as a decrease in operating income in 1999 as compared to 1998 results
primarily from the 1999 hedging positions having lower floors than the positions
in 1998. This is primarily the result of the timing of when the hedging position
activities were completed.
Eliminations. Eliminations of intersegment profits vary from period to period
depending on fluctuations in market prices as well as the amount and timing of
the affected segments' production and sales.
Corporate and Other. Corporate operating expenses (before non-recurring items)
represent corporate general and administrative expenses which are not allocated
to the Company's business segments. Corporate operating expenses for 1999 were
lower than 1998 primarily due to reduced incentive compensation expense
resulting from the decline in operating results. Corporate operating results for
1999 exclude the expense of insurance deductibles related to the Gramercy
incident allocated to the Corporate segment of $1.0 million.
LIQUIDITY AND CAPITAL RESOURCES
See Note 8 of Notes to Consolidated Financial Statements for a listing of the
Company's indebtedness and information concerning certain restrictive debt
covenants. See Note 12 of Notes to Consolidated Financial Statements for a
discussion of the material commitments and contingencies affecting the Company's
liquidity and capital resources.
Operating Activities. In 2000, operating activities provided $84.6 million of
cash. This amount compares with 1999 when operating activities used cash of
$89.3 million and 1998 when operating activities provided cash of $170.7
million. The increase in cash flows from operating activities between 2000 and
1999 resulted primarily from the impact of the improved 2000 operating results,
driven primarily by the net proceeds received from power sales of approximately
$119.8 million, and a decline in inventories of approximately $125.8 million,
offset in part by an increase in receivables of approximately $168.8 million.
The decrease in inventories was primarily due to improved inventory management
and the exit from the can body product line at the Flat-rolled products business
unit. The increase in receivables was primarily due to power sale proceeds that
were received in the first quarter of 2001 and Gramercy-related items. The
decrease in cash flows from operating activities between 1999 and 1998 was due
primarily to the impact of 1999 results, excluding non-cash charges, and an
increased investment in working capital (excluding cash).
Investing Activities. Total consolidated capital expenditures were $296.5, $68.4
and $77.6 million in 2000, 1999 and 1998, respectively (of which $5.4, $4.8 and
$7.2 million were funded by the minority partners in certain foreign joint
ventures). The $296.5 million capital expenditures in 2000 included $239.1
million spent with respect to rebuilding the Gramercy facility and $13.3 million
spent with respect to the purchase of the non-working capital assets of the
Chandler, Arizona drawn tube aluminum fabricating operation. The remaining
capital expenditures in 2000 and the capital expenditures in 1999 and 1998 were
made primarily to improve production efficiency, reduce operating costs and
expand capacity at existing facilities. Total consolidated capital expenditures,
excluding the expenditures in 2001 to finish rebuilding the Gramercy, Louisiana
facility, are currently expected to be between $60.0 and $80.0 million per year
in each of 2001 and 2002 (of which approximately 15% is expected to be funded by
the Company's minority partners in certain foreign joint ventures). See " -
Financing Activities and Liquidity" below for a discussion of Gramercy related
capital spending. Management continues to evaluate numerous projects, all of
which would require substantial capital, both in the United States and overseas.
The level of capital expenditures may be adjusted from time to time depending on
the Company's price outlook for primary aluminum and other products, KACC's
ability to assure future cash flows through hedging or other means, the
Company's financial position and other factors.
Financing Activities and Liquidity: Short-Term. KACC uses its credit agreement,
as amended (the "Credit Agreement") to provide short-term liquidity requirements
and for letters of credit to support operations. During 2000, month-end
borrowing amounts outstanding under the Credit Agreement have been as high as
approximately $53.4 million, which occurred in August 2000, primarily as a
result of costs incurred and capital spending related to the Gramercy rebuild,
net of insurance reimbursements. The average amount of borrowings outstanding
under the Credit Agreement during 2000 was approximately $25.6 million. The
average interest rate on loans outstanding under the Credit Agreement during
2000, was approximately 10.3% per annum. Outstanding letters of credit monthly
balances have primarily been in the range of $55.0 to $65.0 million. As of
February 28, 2001, there were $94.0 million of borrowings outstanding under the
Credit Agreement and remaining availability of approximately $120.0 million.
However, proceeds of approximately $130.0 million related to 2001 power sales
are expected to be received at or near March 30, 2001, and an additional $130.0
million of power proceeds will be received periodically through October 2001
with respect to other power sales made during the first quarter of 2001.
The Credit Agreement expires in August 2001. It is the Company's and KACC's
intention to extend or replace the Credit Agreement prior to its expiration.
However, in order for the Credit Agreement to be extended, on a short-term
basis, beyond August 2001, KACC will have to have a plan to mitigate the $225.0
million of 97/8% Senior Notes, due February 2002 (the "97/8% Senior Notes"). For
the Credit Agreement to be extended past February 2003, both the 97/8% Senior
Notes and the $400.0 million of 12 3/4% Senior Subordinated Notes, due February
2003, will have to be retired and/or refinanced. As of February 28, 2001, KACC
had received approval from the Credit Agreement lenders to purchase up to $50.0
million of the 97/8% Senior Notes. As of February 28, 2001, KACC had purchased
approximately $1.0 million of 97/8% Senior Notes.
In addition to being impacted by power sales and normal operating variables, the
Company's and KACC's near-term liquidity will also, as more fully discussed
below, be affected by, among other things, three significant items: the Gramercy
incident, the amount of net payments for asbestos liabilities and possible
proceeds from asset dispositions.
KACC will continue to incur business interruption costs and capital spending
until all construction activity at the Gramercy facility is completed and full
production is restored. As more fully discussed in Note 2 of Notes to
Consolidated Financial Statements, unless KACC is successful in its arbitration
process against its insurers, it will have to fund all of the remaining
Gramercy-related capital expenditures as well as any incremental costs or losses
incurred at Gramercy. It is believed that such amounts will total between $100.0
and $150.0 million depending on, among other things, the ultimate cost of the
rebuild, the elapsed time of the rebuild and the amount of start-up
costs/inefficiencies. The Company now believes that the total cost of the
rebuild will be between $300.0 and $325.0 million. As previously announced,
however, the plant will include several additional enhancements from its
original design including the installation of additional safety features in the
digestion unit and enhancements to increase the annual production capacity of
the plant from 1,125,000 tons to 1,250,000 tons on an extremely favorable
cost-per-ton basis.
During 2000, KACC paid $99.5 million of asbestos-related settlement and defense
costs and received insurance reimbursement of $62.8 million for asbestos-related
matters. KACC's 2001 and 2002 cash payments, prior to insurance recoveries, for
asbestos-related costs are estimated to be between $110.0 million and $135.0
million per year. The Company believes that KACC will recover a substantial
portion of asbestos payments from insurance. However, insurance reimbursements
have historically lagged KACC's payments. Delays in receiving future insurance
repayments would have an adverse impact on KACC's liquidity. During 2000, KACC
filed suit against a group of its insurers, after negotiations with certain of
the insurers regarding an agreement covering both reimbursement amounts and the
timing of reimbursement payments were unsuccessful. The litigation is intended,
among other things, to: (1) ensure that the insurers provide KACC with timely
and appropriate reimbursement payments for asbestos-related settlements and
related legal costs incurred; and (2) to resolve certain issues between the
parties with respect to how specific provisions of the applicable insurance
policies are to be applied. Given the significance of expected asbestos-related
payments in 2001 and 2002 based on settlement agreements in place at December
31, 2000, the receipt of timely and appropriate reimbursements from such
insurers is critical to KACC's liquidity. The court is not expected to try the
case until late 2001 or 2002. KACC is continuing to receive cash payments from
the insurers.
KACC is considering the possible sale of part or all of its interests in certain
operating assets. The contemplated transactions are in various stages of
development. KACC expects that at least one operating asset will be sold. KACC
has multiple transactions under way. It is unlikely, however, that it will
consummate all of the transactions under consideration. Further, there can be no
assurance as to the likelihood, timing or terms of such sales. The Company would
expect to use the proceeds from any such sales for debt reduction, capital
spending or a combination thereof.
Management believes that the Company's existing cash resources, together with
cash flows from operations, power sales and anticipated asset dispositions, as
well as borrowings under the Credit Agreement, will be sufficient to satisfy its
working capital and capital expenditure requirements for the next year. However,
no assurance can be given that existing cash sources will be sufficient to meet
the Company's short-term liquidity requirements or that additional sources of
cash will not be required.
Long-Term. As of December 31, 2000, the Company's total consolidated
indebtedness was $989.4 million, including $30.4 million outstanding under the
Credit Agreement, which amount is included in current liabilities. KACC's
ability to make payments on and to refinance its debt on a long-term basis
depends on its ability to generate cash in the future. This, to a certain
extent, is subject to general economic, financial, competitive, legislative,
regulatory and other factors beyond KACC's control. With respect to long-term
liquidity, management believes that operating cash flow, together with the
ability to obtain both short and long-term financing, should provide sufficient
funds to meet KACC's and the Company's working capital, financing and capital
expenditure requirements. However, no assurance can be given that KACC will be
able to refinance its debt on acceptable terms.
Capital Structure. MAXXAM Inc. ("MAXXAM") and one of its wholly owned
subsidiaries collectively own approximately 63% of the Company's Common Stock,
with the remaining approximately 37% of the Company's Common Stock being
publicly held. Certain of the shares of the Company's Common Stock beneficially
owned by MAXXAM are subject to certain pledge agreements. See Note 11 of Notes
to Consolidated Financial Statements for a further description of the pledge
agreements.
The Company has an effective "shelf" registration statement covering the
offering from time to time of up to $150.0 million of equity securities. Any
such offering will only be made by means of a prospectus. The Company also has
an effective "shelf" registration statement covering the offering of up to
10,000,000 shares of the Company's Common Stock that are owned by MAXXAM. The
Company will not receive any of the net proceeds from any transaction initiated
by MAXXAM pursuant to this registration statement.
Commitments and Contingencies. The Company and KACC are subject to a number of
environmental laws, to fines or penalties assessed for alleged breaches of the
environmental laws, and to claims and litigation based upon such laws. Based on
the Company's evaluation of these and other environmental matters, the Company
has established environmental accruals of $46.1 million at December 31, 2000.
However, the Company believes that it is reasonably possible that changes in
various factors could cause costs associated with these environmental matters to
exceed current accruals by amounts that could range, in the aggregate, up to an
estimated $35.0 million.
KACC is also a defendant in a number of asbestos-related lawsuits that generally
relate to products KACC has not sold for more than 20 years. Based on past
experience and reasonably anticipated future activity, the Company has
established a $492.4 million accrual at December 31, 2000, for estimated
asbestos-related costs for claims filed and estimated to be filed through 2010,
before consideration of insurance recoveries. However, the Company believes that
substantial recoveries from insurance carriers are probable. The Company reached
this conclusion based on prior insurance-related recoveries in respect of
asbestos-related claims, existing insurance policies and the advice of outside
counsel with respect to applicable insurance coverage law relating to the terms
and conditions of these policies. Accordingly, the Company has recorded an
estimated aggregate insurance recovery of $406.3 million (determined on the same
basis as the asbestos-related cost accrual) at December 31, 2000. Although the
Company has settled asbestos- related coverage matters with certain of its
insurance carriers, other carriers have not yet agreed to settlements and
disputes with certain carriers exist. The timing and amount of future recoveries
from these carriers will depend on the pace of claims review and processing by
such carriers and on the resolution of any disputes regarding coverage under
such policies that may arise.
In connection with the USWA strike and subsequent lock-out by KACC which was
settled in September 2000, certain allegations of unfair labor practices
("ULPs") have been filed with the National Labor Relations Board ("NLRB")by the
USWA. KACC believes that all such allegations are without merit. Twenty-two of
twenty-four allegations of ULPs previously brought against it by the USWA have
been dismissed. A trial before an administrative law judge for the two remaining
allegations commenced in November 2000 and is continuing. The Company is unable
to estimate when the trial will be completed. Any outcome from the trial would
be subject to additional appeals by the general counsel of the NLRB, the USWA or
KACC. This process could take months or years. If these proceedings eventually
resulted in a final ruling against KACC with respect to either allegation, it
could be obligated to provide back pay to USWA members at the five plants and
such amount could be significant.
While uncertainties are inherent in the final outcome of these matters and it is
presently impossible to determine the actual costs that ultimately may be
incurred and insurance recoveries that ultimately may be received, management
currently believes that the resolution of these uncertainties and the incurrence
of related costs, net of any related insurance recoveries, should not have a
material adverse effect on the Company's consolidated financial position or
liquidity. However, amounts paid, if any, in satisfaction of these matters could
be significant to the results of the period in which they are recorded. See Note
12 of Notes to Consolidated Financial Statements for a more detailed discussion
of these contingencies and the factors affecting management's beliefs.
OTHER MATTERS
Income Tax Matters. The Company's net deferred income tax assets as of December
31, 2000, were $464.2 million, net of valuation allowances of $122.3 million.
The Company believes a long-term view of profitability is appropriate and has
concluded that these net deferred income tax assets will more likely than not be
realized. See Note 9 of Notes to Consolidated Financial Statements for a
discussion of these and other income tax matters.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This section contains forward-looking statements that involve risk and
uncertainties. Actual results could differ materially from those projected in
these forward-looking statements. The following disclosures are before
consideration of any impacts resulting from the application of Statement of
Financial Accounting Standards ("SFAS") No. 133 beginning January 1, 2001. See
Note 1 of Notes to Consolidated Financial Statements for a discussion of the
impacts of SFAS No. 133.
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. As discussed
more fully in Notes 1 and 13 of Notes to Consolidated Financial Statements, KACC
utilizes hedging transactions to lock- in a specified price or range of prices
for certain products which it sells or consumes in its production process and to
mitigate KACC's exposure to changes in foreign currency exchange rates. The
following sets forth the impact on future earnings of adverse market changes
related to KACC's hedging positions with respect to commodity, foreign exchange
and energy contracts described more fully in Note 13 of Notes to Consolidated
Financial Statements.
Alumina and Primary Aluminum. Alumina and primary aluminum production in excess
of internal requirements is sold in domestic and international markets, exposing
the Company to commodity price opportunities and risks. KACC's hedging
transactions are intended to provide price risk management in respect of the net
exposure of earnings resulting from (i) anticipated sales of alumina, primary
aluminum and fabricated aluminum products, less (ii) expected purchases of
certain items, such as aluminum scrap, rolling ingot, and bauxite, whose prices
fluctuate with the price of primary aluminum. On average, before consideration
of hedging activities, any fixed price contracts with fabricated aluminum
products customers, variations in production and shipment levels, and timing
issues related to price changes, the Company estimates that each $.01 increase
(decrease) in the market price per price-equivalent pound of primary aluminum
increases (decreases) the Company's annual pre-tax earnings by approximately
$10.0 - $15.0 million, based on recent fluctuations in operating levels.
Based on the average December 2000 London Metal Exchange ("LME") cash price for
primary aluminum of approximately $.71 per pound, the Company es