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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 1-3605
KAISER ALUMINUM & CHEMICAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-0928288
(State of Incorporation) (I.R.S. Employer Identification No.)
5847 SAN FELIPE, SUITE 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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Cumulative Convertible Preference Stock
(par value $100)
4 1/8% Series None
4 3/4% (1957 Series) None
4 3/4% (1959 Series) None
4 3/4% (1966 Series) None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
-------------------
Cumulative (1985 Series A) Preference Stock
Cumulative (1985 Series B) Preference Stock
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 46,171,365 shares of the common stock of the
registrant outstanding, all of which were owned by Kaiser Aluminum Corporation,
the parent corporation of the registrant. As of February 28, 2001,
non-affiliates of the registrant held 313,619 shares of Cumulative (1985 Series
A) Preference Stock and 36,532 shares of Cumulative (1985 Series B) Preference
Stock of the registrant (together the "Redeemable Preference Stock"). The
aggregate value of the Redeemable Preference Stock, based upon the redemption
price for such stock, is $17.5 million. During March 2001, the registrant
redeemed all of the Redeemable Preference Stock. See Note 11 of Notes to
Consolidated Financial Statements for additional information concerning such
redemption.
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 & Chemical Corporation's Report on Form 10-K filed with the
Securities and Exchange Commission includes all exhibits required to be filed
with the Report. Copies of this Report on Form 10-K, including only Exhibit 21
of the exhibits listed on pages 67 - 73 of this Report, are available without
charge upon written request. The registrant will furnish copies of the other
exhibits to this Report on Form 10-K upon payment of a fee of 25 cents per page.
Please contact the office set forth below to request copies of this Report on
Form 10-K and for information as to the number of pages contained in each of the
exhibits and to request copies of such exhibits:
Corporate Secretary
Kaiser Aluminum & Chemical Corporation
5847 San Felipe, Suite 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
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 & Chemical Corporation (the "Company"), a Delaware
corporation organized in 1940, is a direct subsidiary of Kaiser Aluminum
Corporation ("Kaiser") and an indirect subsidiary of MAXXAM Inc. ("MAXXAM").
Kaiser owns all of the Company's Common Stock, and MAXXAM and one of its
wholly-owned subsidiaries together own approximately 63% of Kaiser's Common
Stock, with the remaining approximately 37% publicly held. The Company operates
in all principal aspects of the aluminum industry - the mining of bauxite, the
refining of bauxite into alumina, the production of primary aluminum from
alumina, and the manufacture of fabricated (including semi-fabricated) aluminum
products. See Note 15 of Notes to Consolidated Financial Statements for segment
and geographical financial information. In addition to the production utilized
by the Company in its operations, the Company sells significant amounts of
alumina and primary aluminum in domestic and international markets. The
Company's operations are conducted through its 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 - The Company's $300.0 million credit agreement,
as amended (the "Credit Agreement") expires in August 2001. It is the Company'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, the Company 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, the Company 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, the Company 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, the Company 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. The Company
expects that at least one operating asset will be sold. The Company has multiple
transactions under way. It is unlikely, however, that the Company 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, the Company'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, the Company 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 the Company will likely not
be recovered until the Company and the insurers resolve certain outstanding
issues. The insurers have asserted that no additional business interruption
amounts are due after November 30, 2000. The Company 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. The Company continues to believe that a
minimum of at least $290.0 million of insurance recoveries are probable, that
additional amounts are owed to the Company by the insurers, and that the
likelihood of any refund by the Company 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, the
Company 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 the Company 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 the Company. The Company believes that the remaining charges made
against it by the USWA are without merit. See Note 13 of Notes to Consolidated
Financial Statements, "- Labor Matters" for a discussion of the ULP charges.
Asbestos-Related Liability and Expected Recoveries - The Company is a defendant
in a number of lawsuits that generally relate to products it has not sold for
more than 20 years. The Company believes that it 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 13 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, the Company
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, the Company 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. The Company has made additional power sales in 2001. Also, during
October 2000, the Company signed a new power contract with the Bonneville Power
Administration ("BPA") under which the BPA will provide the Company's operations
in the State of Washington with sufficient power to operate the Company's
Trentwood facility as well as approximately 40% of the combined capacity of the
Company'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 the Company'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 the Company's current BPA contract.
The Company 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
The Company conducts its business through its five main business units (Bauxite
and alumina, Primary aluminum, Commodities marketing, Flat-rolled products and
Engineered products), each of which is discussed below.
- - Bauxite and Alumina Business Unit
The following table lists the Company's bauxite mining and alumina refining
facilities as of December 31, 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
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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.
The Company is a major producer of alumina and sells significant amounts of its
alumina production in domestic and international markets. The Company's strategy
is to sell a substantial portion of the alumina available to it in excess of its
internal smelting requirements under multi-year sales contracts with prices
linked to the price of primary aluminum. See "- Competition" and "- Commodity
Marketing" in this Report. During 2000, the Company 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 the Company'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. The Company'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 the Company a mining lease for the
mining of bauxite which will, at a minimum, satisfy the bauxite requirements of
the Company's Gramercy, Louisiana, alumina refinery so that it will be able to
produce at its current rated capacity until 2020. Kaiser Jamaica Bauxite Company
("KJBC") mines bauxite from the land which is subject to the mining lease as an
agent for the Company. Although the Company owns 49% of KJBC, it is entitled to,
and generally takes, all of its bauxite output. A substantial majority of the
bauxite mined by KJBC is refined into alumina at the Gramercy facility and the
remainder is sold to two third-party customers. KJBC's operations have been
impacted by the Gramercy incident. The Government of Jamaica has agreed to grant
the Company an additional bauxite mining lease. The new mining lease will be
effective upon the expiration of the current lease in 2020 and will enable the
Gramercy facility to produce at its rated capacity for an additional ten year
period. 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, the Company purchased
alumina from third parties, in excess of the amounts of alumina available from
other Company-owned facilities, to supply major customers' needs as well as to
meet intersegment requirements. 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. The Company owns a 65% interest in Alpart, and Hydro
Aluminium a.s ("Hydro") owns the remaining 35% interest. The Company has
management responsibility for the facility on a fee basis. The Company 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. The Company 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 the Company, purchase bauxite
from another QAL shareholder under long-term supply contracts. The Company has
contracted with QAL to take approximately 868,000 tons per year of alumina or
pay standby charges. The Company 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 the Company'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.
The Company uses proprietary retrofit and control technology in all of its
smelters. This technology - which includes the redesign of the cathodes, anodes
and bus that conduct electricity through reduction cells, improved feed systems
that add alumina to the cells, computerized process control and energy
management systems, and furnace technology for baking of anode carbon - has
significantly contributed to increased and more efficient production of primary
aluminum and enhanced the Company's ability to compete more effectively with the
industry's newer smelters.
The Company's principal primary aluminum customers consist of large trading
intermediaries and metal brokers. In 2000, the Company 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 the Company's Trentwood,
Washington, rolling mill and other Company-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, the Company has continued to operate the Tacoma rod-mill. See
additional discussion below regarding electric power.
International Operations. The Company 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 the Company
and the other participant into primary aluminum under tolling contracts which
provide for proportionate payments by the participants. The Company's share of
the primary aluminum is sold to third parties. Valco's operating level has been
subject to fluctuations resulting from the amount of power it is allocated by
the Volta River Authority ("VRA"). The operating level over the last five years
has ranged from one to four out of a total of five potlines. During 2000 and
1999, Valco operated an average of four and three potlines, respectively.
The Company owns a 49% interest in the Anglesey Aluminium Limited ("Anglesey")
aluminum smelter at Holyhead, Wales. The Anglesey smelter uses pre-bake
technology. The Company supplies 49% of Anglesey's alumina requirements and
purchases 49% of Anglesey's aluminum output. The Company sells its share of
Anglesey's output to third parties.
Availability of Affordable Electric Power - Electric power represents an
important production input for the Company at its aluminum smelters and its cost
can significantly affect the Company's profitability.
United States. The Company 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, the Company 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, the Company 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 the Company 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 the Company'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 the Company's current BPA contract. The Company
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, the Company enters into hedging transactions to provide risk
management in respect of its net exposure of earnings and cash flow related to
primary aluminum price changes. Given the significance of its primary aluminum
hedging activities, 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 the Company's business segments to minimize
transaction costs, to monitor consolidated net exposures and to allow for
increased responsiveness to changes in market factors. See Note 1 of Notes to
Consolidated Financial Statements, " - Derivative Financial Instruments," Note
14 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, the Company 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.
The Company'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 the Company 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 the
Company sales representatives located across the United States.
COMPETITION
The Company competes globally with producers of bauxite, alumina, primary
aluminum, and fabricated aluminum products. Many of the Company's competitors
have greater financial resources than the Company. Primary aluminum and, to some
degree, alumina are commodities with generally standard qualities, and
competition in the sale of these commodities is based primarily upon price,
quality and availability. Aluminum competes in many markets with steel, copper,
glass, plastic, and other materials. The Company competes with numerous domestic
and international fabricators in the sale of fabricated aluminum products. The
Company 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. The Company concentrates its fabricating
operations on selected products in which it believes it has production
expertise, high-quality capability, and geographic and other competitive
advantages. The Company believes that, assuming the current relationship between
worldwide supply and demand for alumina and primary aluminum does not change
materially, the loss of any one of its 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. The Company 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, the Company 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, the Company 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 the
Company as a result of the labor dispute that was settled in September 2000.
During the labor dispute, the Company 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 is subject to a wide variety of international, federal, state and
local environmental laws and regulations. For a discussion of this subject, see
"Factors Affecting Future Performance - the Company's current or past operations
subject it to environmental compliance, clean-up and damage claims that may be
costly" below.
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.
- - Our near-term significant debt maturities could adversely affect us
We have significant near-term debt maturities. The Company's Credit Agreement
expires in August 2001. It is the Company'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, the Company
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, the Company 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, the Company 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. The Company 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. The Company
expects that at least one operating asset will be sold. The Company 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. The Company'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 our control.
- - Our high leverage and debt service requirements could adversely affect us
We are highly leveraged and have significant debt service requirements. As of
December 31, 2000, the Company's total debt was approximately $989.4 million.
The Company's high level of debt affects our operations in several important
ways:
- - a large portion of the cash we generate 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 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 our ability to make capital
expenditures, to borrow additional money and to consolidate or merge with
other companies;
- - we may experience a competitive disadvantage because we are more highly
leveraged than some of our competitors; and
- - the agreements governing such debt permit our creditors to accelerate
payments if we default or experience a change in the control of our
ownership as set forth in such agreements.
The Company'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 our control.
- - The asbestos-related lawsuits against the Company could continue to increase
and could adversely impact our financial position
The Company 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 us, or exposure to products containing
asbestos produced or sold by us. The lawsuits generally relate to products the
Company 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 the Company 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 the Company will recover a substantial portion of these
payments from insurance, but cannot assure you that the Company will receive
substantial insurance payments or that the timing of such payments will occur in
the year the Company is required to make the payments. Delays in receiving
future insurance repayments would have an adverse impact on our liquidity.
Prior to insurance recoveries, we estimate that the Company'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 13 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 the Company at its
aluminum smelters and its cost can significantly affect the Company's
profitability. Power contracts for the Company'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 the
Company's smelters. Under the new contract with the BPA, the Company'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,
the Company may be unable to operate the smelters in the near or long-term.
Under the Company's contract with the USWA, the Company 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, the Company 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 our operating results and liquidity.
- - The Gramercy incident could result in adverse consequences to us
In July 1999, the Company's Gramercy, Louisiana, alumina refinery was
extensively damaged by an explosion in the digestion area of the plant. A number
of employees were injured in the incident, several of them severely. The Company
may be liable for claims relating to the injured employees. The incident has
also resulted in more than ninety lawsuits being filed against the Company
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 the Company's insurance will cover the majority of the costs of these
lawsuits and claims relating to the injured employees.
Through February 28, 2001, the Company 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 the Company will likely not be recovered until the Company and
the insurers resolve certain outstanding issues. The insurers have asserted that
no additional business interruption amounts are due after November 30, 2000. The
Company 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 the Company by the insurers, and that the
likelihood of any refund by the Company 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 our near-term liquidity and results of operations.
- - Our profits and cash flows may be adversely impacted by the results of the
Company's hedging programs
The Company enters into hedging transactions to limit its exposure resulting
from (1) its anticipated sales of alumina, primary aluminum, and fabricated
aluminum products, net of expected purchase costs for items that fluctuate with
primary aluminum prices, (2) energy price risk from fluctuating prices for
natural gas, fuel oil and diesel oil used in its production process, and (3)
foreign currency requirements with respect to its cash commitments with foreign
subsidiaries and affiliates. To the extent that the prices for primary aluminum
exceed the fixed or ceiling prices established by the Company's hedging
transactions or that energy costs or foreign exchange rates are below the fixed
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 liquidity. The
Company 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, the Company 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 our liquidity was insignificant. However, future
increases in primary aluminum prices or decreases in foreign exchange rates
could result in the Company having to make margin advances or post additional
letters of credit and such amounts could be significant and could adversely
impact our liquidity.
Information regarding the Company's sensitivity to certain price amounts from
both an earnings and liquidity perspective is provided in "Quantitative and
Qualitative Disclosures About Market Risk."
- - Our current or past operations subject us to environmental compliance,
clean-up and damage claims that may be costly
The operations of the Company's facilities are regulated by a wide variety of
international, federal, state and local environmental laws. These environmental
laws regulate, among other things, air and water emissions and discharges; the
generation, storage, treatment, transportation and disposal of solid and
hazardous waste; and the release of hazardous or toxic substances, pollutants
and contaminants into the environment. Compliance with these environmental laws
is costly. While legislative, regulatory and economic uncertainties make it
difficult for us to project future spending for these purposes, we currently
anticipate that in the 2001 - 2002 period, the Company's environmental capital
spending will be approximately $6.0 million per year and that the Company'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 the Company must operate and may force it to spend more then we
currently project.
Additionally, the Company's current and former operations can subject it to
fines or penalties for alleged breaches of environmental laws and to other
actions seeking clean-up or other remedies under these environmental laws. The
Company also may be subject to damages related to alleged injuries to health or
to the environment, including claims with respect to certain waste disposal
sites and the clean-up of sites currently or formerly used by the Company.
Currently, the Company is subject to certain lawsuits under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended by
the Superfund Amendments and Reauthorization Act of 1986 ("CERCLA"). The
Company, along with certain other companies, has been named as a Potentially
Responsible Party for clean-up costs at certain third-party sites listed on the
National Priorities List under CERCLA. As a result, the Company may be exposed
not only to its assessed share of clean-up but also to the costs of others if
they are unable to pay. Additionally, the Company's Mead, Washington, facility
has been listed on the National Priorities List under CERCLA. The Company and
the regulatory authorities agreed to a plan of remediation in January 2000.
In response to environmental concerns, we have established environmental
accruals representing our estimate of the costs we reasonably expect the Company
to incur in connection with these matters. At December 31, 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 the Company's actual costs will
not exceed our current estimates. We believe that it is reasonably possible that
costs associated with these environmental matters may exceed current accruals by
amounts that could range, in the aggregate, up to an estimated $35.0 million.
See Note 13 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 the Company, 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 the
Company, 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 the
Company. This process could take months or years.
- - Ability to operate profitably in the future
We reported net income of $17.5 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.
- - We are subject to political and regulatory risks in a number of countries
The Company operates facilities in the United States and in a number of other
countries, including Australia, Canada, Ghana, Jamaica, and the United Kingdom.
While we believe the Company's relationships in the countries in which it
operates are generally satisfactory, we cannot assure you that future country
developments or governmental actions will not adversely affect the Company's
operations particularly or the aluminum industry generally. Among the risks
inherent in the Company's operations are unexpected changes in regulatory
requirements, unfavorable legal rulings, new or increased taxes and levies, and
new or increased import or export restrictions. The Company's operations outside
of the United States are subject to a number of additional risks, including but
not limited to currency exchange rate fluctuations, currency restrictions, and
nationalization of assets.
ITEM 2. PROPERTIES
The locations and general character of the principal plants, mines, and other
materially important physical properties relating to the Company's operations
are described in Item 1 "- Business Operations" and those descriptions are
incorporated herein by reference. The Company owns in fee or leases all the real
estate and facilities used in connection with its business. Plants and equipment
and other facilities are generally in good condition and suitable for their
intended uses, subject to changing environmental requirements. Although the
Company's domestic aluminum smelters were initially designed early in the
Company'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 its plants are
cost competitive on an international basis. However, the long-term viability of
the Company's Pacific Northwest smelters may be adversely impacted if an
adequate supply of power at reasonable prices is not ultimately available.
The Company's obligations under the Credit Agreement are secured by, among other
things, mortgages on the Company'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, the Company's Gramercy, Louisiana, alumina refinery was
extensively damaged by an explosion in the digestion area of the plant. A number
of employees were injured in the incident, several of them severely. The Company
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 the Company 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, the Company is paying a
fine of $.5 million but denied the alleged violations.
ASBESTOS-RELATED LITIGATION
The Company is a defendant in a number of lawsuits, some of which involve claims
of multiple persons, in which the plaintiffs allege that certain of their
injuries were caused by, among other things, exposure to asbestos during, and as
a result of, their employment or association with the Company or exposure to
products containing asbestos produced or sold by the Company. The lawsuits
generally relate to products the Company has not manufactured for more than 20
years. The portion of Note 13 of Notes to Consolidated Financial Statements
under the heading "Asbestos Contingencies" is incorporated herein by reference.
LABOR MATTERS
In connection with the USWA strike and subsequent lock-out by the Company,
certain allegations of ULPs were filed by the USWA with the NLRB. Twenty-two of
the twenty-four allegations of ULPs brought against the Company by the USWA 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
the Company, 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 the Company.
This process could take months or years. The portion of Note 13 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 the Company. While
uncertainties are inherent in the final outcome of such matters and it is
presently impossible to determine the actual costs that ultimately may be
incurred, management believes that the resolution of such uncertainties and the
incurrence of such costs should not have a material adverse effect on the
Company's consolidated financial position, results of operations, or liquidity.
See Note 13 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
There is no established public trading market for the Company's Common Stock,
which is held solely by Kaiser. The Company has not paid any dividends on its
Common Stock during the two most recent fiscal years. The Indentures and the
Credit Agreement (Exhibits 4.1 through 4.36 to the Report) contain restrictions
on the ability of the Company to pay dividends on or make distributions on
account of the Company's common stock and restrictions on the ability of the
Company's subsidiaries to transfer funds to the Company in the form of cash
dividends, loans or advances. Exhibits 4.1 through 4.36 to this Report and Note
8 of Notes to Consolidated Financial Statements under the heading "Debt
Covenants and Restrictions" in this Report are incorporated herein by reference.
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 63 - 64 in this Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company operates in all principal aspects of the aluminum industry through
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
15 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 (61.1) (61.5) (64.7)
Labor Settlement Charge (38.5) - -
Other Non-Recurring Operating Items, Net 80.4 (24.1) (105.0)
--------- ---------- ----------
Total Operating Income (Loss) $ 139.6 $ (28.6) $ 91.0
======== ========== ==========
Net Income (Loss) $ 17.5 $ (52.4) $ 2.7
======== ========== ==========
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 the Company'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 the Company's hedging strategies. Primary aluminum prices have
historically been subject to significant cyclical price fluctuations. See Notes
1 and 14 of Notes to Consolidated Financial Statements for a discussion of the
Company's hedging activities.
Changes in global, regional, or country-specific economic conditions can have a
significant impact on overall demand for aluminum-intensive fabricated products
in the transportation, distribution, and packaging markets. Such changes in
demand can directly affect the Company's earnings by impacting the overall
volume and mix of such products sold. To the extent that these end-use markets
weaken, demand can also diminish for what the Company sometimes refers to as the
"upstream" products: alumina and primary aluminum.
During 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. The Company has significant near-term debt maturities.
The Company'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 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, the Company'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, the Company 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 the Company will likely not be recovered until the Company and
the insurers resolve certain outstanding issues. The Company 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. The Company continues to believe that a
minimum of approximately $290.0 million of insurance recoveries are probable,
that additional amounts are owed to the Company by the insurers, and that the
likelihood of any refund by the Company 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, the Company 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 the
Company 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 the Company remain to be
settled. The Company believes that the remaining charges made against the
Company by the USWA are without merit. See Note 13 of Notes to Consolidated
Financial Statements for additional discussion on the ULP charges.
Strategic Initiatives. The Company'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, the Company 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.
The Company 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. The Company expects that at least one operating asset will be sold.
The Company 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 it 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, the Company 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. The Company has made additional power sales in 2001.
During October 2000, the Company signed a new power contract with the Bonneville
Power Administration ("BPA") under which the BPA will provide the Company'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
the Company's Trentwood facility as well as approximately 40% of the combined
capacity of the Company's Mead and Tacoma aluminum smelting operations. Power
costs under the new contract are expected to exceed the cost of power under the
Company'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. The Company 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 $17.5 million for 2000 compared to a
net loss of $52.4 million for 1999 and net income of $2.7 million 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 the Company 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 the Company 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 the Company'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 the Company'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 the
Company'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 14 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 the
Company'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 the Company'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 the Company 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 the Company'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 13 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 $85.1 million of
cash. This amount compares with 1999 when operating activities used cash of
$88.8 million and 1998 when operating activities provided cash of $171.2
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, its ability
to assure future cash flows through hedging or other means, its financial
position and other factors.
Financing Activities and Liquidity: Short-Term. The Company 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 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, the Company 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, the Company
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, the Company 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 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.
The Company 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 the Company 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, the Company paid $99.5 million of asbestos-related settlement and
defense costs and received insurance reimbursement of $62.8 million for
asbestos-related matters. The Company'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 it will
recover a substantial portion of asbestos payments from insurance. However,
insurance reimbursements have historically lagged the Company's payments. Delays
in receiving future insurance repayments would have an adverse impact on the
Company's liquidity. During 2000, the Company filed suit against a group of its
insurers, after negotiations with certain of the insurers regarding an agreement
covering both reimbursement amounts and the timing of reimbursement payments
were unsuccessful. The litigation is intended, among other things, to: (1)
ensure that the insurers provide the Company 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 the
Company's liquidity. The court is not expected to try the case until late 2001
or 2002. The Company is continuing to receive cash payments from the insurers.
The Company 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. The Company expects that at least one operating asset will be sold.
The Company 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. The Company'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 the Company'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 the Company's working capital, financing and capital
expenditure requirements. However, no assurance can be given that the Company
will be able to refinance its debt on acceptable terms.
Commitments and Contingencies. The Company is subject to a number of
environmental laws, to fines or penalties assessed for alleged breaches of the
environmental laws, and to claims and litigation based upon such laws. 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.
The Company is also a defendant in a number of asbestos-related lawsuits that
generally relate to products it 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 the Company 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. The Company 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 the Company. This process could take months or years. If these
proceedings eventually resulted in a final ruling against the Company 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
13 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 $462.3 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 14 of Notes to Consolidated Financial Statements, the
Company 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 the Company's exposure to changes in foreign currency exchange
rates. The following sets forth the impact on future earnings of adverse market
changes related to the Company's hedging positions with respect to commodity,
foreign exchange and energy contracts described more fully in Note 14 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. The Company'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 estimates that
there would be no material net aggregate pre-tax impact on operating income from
its hedging positions and fixed price customer contracts during the period 2001
through 2003. The Company estimates that a hypothetical $.10 increase from the
above stated December 2000 price would result in a net aggregate pre-tax
decrease in operating income