PHELPS DODGE CORP - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended June 30, 2003

Commission file number 1-82

PHELPS DODGE CORPORATION

(a New York corporation)

13-1808503

(I.R.S. Employer Identification No.)

One North Central Avenue, Phoenix, AZ 85004

Registrant’s telephone number: (602) 366-8100

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o .

Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o .

Number of Common Shares outstanding at July 24, 2003: 89,040,960 shares.

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PHELPS DODGE CORPORATION

Quarterly Report on Form 10-Q

For the Quarter Ended June 30, 2003

Table of Contents


			Page

Part I. Financial Information
	Item 1. Financial Statements (unaudited)
		Statement of Consolidated Operations		1
		Consolidated Balance Sheet		2
		Consolidated Statement of Cash Flows		3
		Consolidated Statement of Shareholders’ Equity		4
		Financial Data by Business Segment		5
		Notes to Consolidated Financial Information		7
		Review by Independent Accountants		25
		Report of Independent Accountants		26
	Item 2. Management’s Discussion and Analysis
		Results of Operations		27
		Results of Phelps Dodge Mining Company		31
		Results of Phelps Dodge Industries		49
		Other Matters Relating to the Statement of Consolidated Operations		51
		Changes in Financial Condition		54
	Item 3. Quantitative and Qualitative Disclosure About Market Risk			57
	Item 4. Controls and Procedures			57
Part II. Other Information
	Item 1. Legal Proceedings			57
	Item 4. Submission of Matters to a Vote of Security Holders			58
	Item 6. Exhibits and Reports on Form 8-K			58
	Signatures			58
	Certifications			58
	Index to Exhibits			60

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PHELPS DODGE CORPORATION AND SUBSIDIARIES

Part I. Financial Information

Item 1. Financial Statements

STATEMENT OF CONSOLIDATED OPERATIONS
(Unaudited; in millions except per share data)


								Six Months Ended
		Second Quarter						June 30,

		2003			2002			2003			2002

					(As Restated)*						(As Restated)*
Sales and other operating revenues		$	962.2			966.8			1,940.2			1,885.3

Operating costs and expenses
	Cost of products sold (exclusive of items shown separately below)		787.0			804.6			1,594.3			1,570.4
	Depreciation, depletion and amortization		107.2			103.1			208.8			206.0
	Selling and general administrative expense		35.8			29.8			68.5			62.0
	Exploration and research expense		12.9			9.2			22.5			17.9
	Special items and provisions, net (see Note 5)		2.1			30.3			0.2			26.5

			945.0			977.0			1,894.3			1,882.8

Operating income (loss)			17.2			(10.2	)		45.9			2.5
	Interest expense		(37.0	)		(49.2	)		(73.0	)		(102.0	)
	Capitalized interest		0.1			—			0.2			—
	Miscellaneous income (expense), net		12.3			(0.3	)		13.2			1.7

Loss before taxes, minority interests, equity in net earnings of affiliated companies and cumulative effect of accounting change			(7.4	)		(59.7	)		(13.7	)		(97.8	)
	Benefit (provision) for taxes on income (see Note 10)		(6.5	)		27.5			(21.9	)		64.5
	Minority interests in consolidated subsidiaries		(1.9	)		(2.7	)		(4.0	)		(4.0	)
	Equity in net earnings of affiliated companies		0.6			0.6			1.0			1.1

Loss before cumulative effect of accounting change			(15.2	)		(34.3	)		(38.6	)		(36.2	)
	Cumulative effect of accounting change, net of tax of $(1.3) in 2003 and $10.1 in 2002		—			—			8.4			(22.9	)

Net loss		$	(15.2	)		(34.3	)		(30.2	)		(59.1	)
	Preferred stock dividends		(3.4	)		(2.4	)		(6.8	)		(2.4	)

Loss applicable to common shares		$	(18.6	)		(36.7	)		(37.0	)		(61.5	)

Average number of common shares outstanding — basic			88.6			80.6			88.6			79.6
Basic loss per common share before cumulative effect of accounting change		$	(0.21	)		(0.46	)		(0.51	)		(0.48	)
	Cumulative effect of accounting change		—			—			0.09			(0.29	)

Basic loss per common share		$	(0.21	)		(0.46	)		(0.42	)		(0.77	)

Average number of common shares outstanding — diluted**			88.6			80.6			88.6			79.6
Diluted loss per common share before cumulative effect of accounting change		$	(0.21	)		(0.46	)		(0.51	)		(0.48	)
	Cumulative effect of accounting change		—			—			0.09			(0.29	)

Diluted loss per common share**		$	(0.21	)		(0.46	)		(0.42	)		(0.77	)

* Refer to Note 2 to Consolidated Financial Information.

** Diluted loss per share would have been anti-dilutive if based on fully diluted shares adjusted to reflect the assumed conversion of mandatory convertible preferred shares to common shares and stock option exercises.

See Notes to Consolidated Financial Information

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CONSOLIDATED BALANCE SHEET
(Unaudited; in millions except per share prices)


			June 30,			December 31,
			2003			2002

Assets
	Current assets:
		Cash and cash equivalents	$	298.2			349.8
		Accounts receivable, less allowance for doubtful accounts (2003 - $15.4; 2002 - $14.1)		492.1			391.1
		Mill and leach stockpiles		32.6			48.9
		Inventories		385.4			398.5
		Supplies		142.2			142.8
		Prepaid expenses and other current assets		22.9			26.5
		Deferred income taxes		72.2			70.6

		Current assets		1,445.6			1,428.2
	Investments and long-term receivables			134.1			132.3
	Property, plant and equipment, net (see Note 3)			4,740.9			4,813.7
	Long-term mill and leach stockpiles			77.3			64.3
	Deferred income taxes			8.5			11.0
	Goodwill			99.6			90.7
	Intangible assets (see Note 3)			334.6			345.9
	Other assets and deferred charges			117.3			142.9

			$	6,957.9			7,029.0

Liabilities
	Current liabilities:
		Short-term debt	$	61.5			35.2
		Current portion of long-term debt		134.7			127.0
		Accounts payable and accrued expenses		562.9			609.1
		Dividends payable		3.4			3.4
		Accrued income taxes		22.0			9.4

		Current liabilities		784.5			784.1
	Long-term debt			1,864.9			1,948.4
	Deferred income taxes			434.7			430.8
	Other liabilities and deferred credits			983.0			986.8

				4,067.1			4,150.1

Minority interests in consolidated subsidiaries				71.8			65.3

Shareholders’ equity
	Common shares, par value $6.25; 200.0 shares authorized; 89.0 outstanding in 2003 and 88.9 outstanding in 2002			556.2			555.6
	Cumulative preferred shares, par value $1.00; 6.0 shares authorized; 2.0 outstanding in 2003 and 2002			2.0			2.0
	Capital in excess of par value			1,554.6			1,552.1
	Retained earnings			1,136.3			1,173.3
	Accumulated other comprehensive loss			(418.3	)		(458.5	)
	Other			(11.8	)		(10.9	)

				2,819.0			2,813.6

			$	6,957.9			7,029.0

See Notes to Consolidated Financial Information

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CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited; in millions)


				Six Months Ended
				June 30,

				2003			2002

							(As Restated)*
Operating activities
	Net loss			$	(30.2	)		(59.1	)
	Adjustments to reconcile net loss to net cash provided by operating activities:
		Depreciation, depletion and amortization			208.8			206.0
		Deferred income taxes			3.5			(3.1	)
		Equity earnings (losses), net of dividends received			(0.3	)		1.2
		Special items and provisions			(6.2	)		27.7
		Cumulative effect of accounting change			(9.7	)		33.0
		Changes in current assets and liabilities:
			Accounts receivable		(86.8	)		(24.2	)
			Proceeds from sale of accounts receivable		(5.3	)		4.7
			Mill and leach stockpiles		16.3			11.5
			Inventories		18.8			37.4
			Supplies		1.6			(0.3	)
			Prepaid expenses		(2.7	)		(9.9	)
			Interest payable		0.5			(7.5	)
			Other accounts payable		(9.2	)		(29.7	)
			Accrued income taxes		13.9			1.5
			Other accrued expenses		(47.9	)		(15.6	)
		Other adjustments, net			(28.1	)		6.1

			Net cash provided by operating activities		37.0			179.7

Investing activities
	Capital outlays				(76.7	)		(48.9	)
	Capitalized interest				(0.2	)		—
	Investment in subsidiaries, net of cash received				(0.6	)		(1.9	)
	Proceeds from asset dispositions				13.1			24.6
	Other investing, net				3.4			(28.7	)

			Net cash used in investing activities		(61.0	)		(54.9	)

Financing activities
	Proceeds from issuance of debt				23.2			16.8
	Payment of debt				(78.3	)		(246.7	)
	Preferred dividends				(6.8	)		—
	Issuance of shares				—			592.2
	Other financing, net				34.3			(3.7	)

			Net cash provided by (used in) financing activities		(27.6	)		358.6

(Decrease) increase in cash and cash equivalents					(51.6	)		483.4
Cash and cash equivalents at beginning of period					349.8			386.9

Cash and cash equivalents at end of period				$	298.2			870.3

* Refer to Note 2 to Consolidated Financial Information.

See Notes to Consolidated Financial Information

-4-

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(Unaudited; in millions)


		Common Shares				Preferred Shares								Accumulated
										Capital in				Other
		Number		At Par		Number		At Par		Excess of		Retained		Comprehensive						Shareholders’
		of Shares		Value		of Shares		Value		Par Value		Earnings		Income (Loss)			Other			Equity

Balance at December 31, 2002			88.9	$	555.6		2.0	$	2.0	$	1,552.1	$	1,173.3	$	(458.5	)	$	(10.9	)	$	2,813.6
	Stock options exercised										0.1

*		Refer to Note 2 to Consolidated Financial Information.

**		Diluted loss per share would have been anti-dilutive if based on fully diluted shares adjusted to reflect the assumed conversion of mandatory convertible preferred shares to common shares and stock option exercises.