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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Kaiser Aluminum Corporation ("Kaiser" or the "Company"), through its
wholly owned subsidiary, Kaiser Aluminum & Chemical Corporation
("KACC"), operates in two business segments: bauxite and alumina, and
aluminum processing. Intracompany shipments and sales are excluded
from the information set forth below. The following should be read in
conjunction with the Company's consolidated financial statements and
the notes thereto, contained elsewhere herein.
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Results of Operations
----------------------
The previous table provides selected operational and financial
information on a consolidated basis with respect to the Company for
the years ended December 31, 1994, 1993, and 1992. As an integrated
aluminum producer, the Company uses a portion of its bauxite, alumina,
and primary aluminum production for additional processing at certain
of its facilities.
Net Sales
Bauxite and Alumina - Revenue from net sales of bauxite and alumina to
third parties was $432.5 million in 1994, compared with $423.4 million
in 1993 and $466.5 million in 1992. Revenue from alumina increased 4%
to $352.8 million in 1994 from $338.2 million in 1993 because of
increased shipments. Revenue from alumina decreased 13% to $338.2
million in 1993 from $390.8 million in 1992 because of lower average
realized prices. The remainder of the segment's sales revenues were
from sales of bauxite, which remained about the same throughout the
three years, and the portion of sales of alumina attributable to the
minority interest in Alumina Partners of Jamaica ("Alpart").
Aluminum Processing - Revenue from net sales to third parties for the
aluminum processing segment was $1,349.0 million in 1994, compared
with $1,295.7 million in 1993 and $1,442.6 million in 1992. The bulk
of the segment's sales represents Kaiser's primary aluminum and
fabricated aluminum products, with the remainder attributable to the
portion of sales of primary aluminum related to the minority interest
in Volta Aluminium Company Limited.
Revenue from primary aluminum decreased 3% to $292.0 million in 1994
from $301.7 million in 1993 as higher average realized prices were
more than offset by lower shipments. Average realized prices in 1994
reflected the defensive hedging of primary aluminum prices in respect
of 1994 shipments, which was initiated prior to recent improvements in
metal prices. In 1994, the Company's average realized price from sales
of primary aluminum was approximately $.59 per pound, compared to the
average Midwest United States transaction price of approximately $.72
per pound during the year. Shipments in 1994 reflected production
curtailments at the Company's smelters in the Pacific Northwest and
Ghana. Revenue from primary aluminum decreased 41% to $301.7 million
in 1993 from $515.0 million in 1992 because of lower shipments and
lower average realized prices. Shipments of primary aluminum to third
parties were approximately 36% of total aluminum products shipments in
1994, compared with approximately 39% in 1993 and 51% in 1992.
Revenue from fabricated aluminum products increased 6% to $1,043.0
million in 1994 from $981.4 million in 1993, principally due to
increased shipments of most of these products. Revenue from fabricated
aluminum products increased 7% to $981.4 million in 1993 from $913.7
million in 1992, principally due to increased shipments of most
fabricated aluminum products, partially offset by a decrease in
average realized prices of most of these products.
Operating Income (Loss)
The Company had an operating loss of $56.2 million in 1994, compared
with a loss of $123.4 million in 1993 and income of $89.9 million in
1992. In 1993, the Company recorded a pre-tax charge of $35.8 million
related to restructuring charges (see Note 2 of the Notes to
Consolidated Financial Statements) and a pre-tax charge of $19.4
million ($29.0 million in 1992) because of a reduction in the carrying
value of its inventories caused principally by prevailing lower prices
for alumina, primary aluminum, and fabricated aluminum products.
Bauxite and Alumina - This segment's operating income in 1994 was
$19.8 million, compared with a loss of $4.5 million in 1993 and income
of $62.6 million in 1992. In 1994 compared with 1993, operating income
was favorably affected by increased shipments and lower manufacturing
costs. In 1993 compared with 1992, operating income was adversely
affected principally due to a decrease in average realized prices for
alumina, which more than offset above-market prices for virtually all
of the Company's excess alumina sold forward in prior periods under
long-term contracts.
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Aluminum Processing - This segment's operating loss was $8.4 million
in 1994, compared with $46.3 million in 1993 and income of $104.9
million in 1992. The decrease in operating loss in 1994 compared with
1993 was caused principally by the $35.8 million restructuring charges
previously described, increased shipments of fabricated aluminum
products and higher average realized prices of primary aluminum,
partially offset by lower shipments of primary aluminum.
The decrease in 1993 compared with 1992 was caused principally by
reduced shipments and lower average realized prices of primary
aluminum, which more than offset increased shipments of fabricated
aluminum products. In 1993, KACC implemented a restructuring plan for
its flat-rolled products operation at its Trentwood plant in response
to overcapacity in the aluminum rolling industry, flat demand in U.S.
can stock markets, and declining demand for aluminum products sold to
customers in the commercial aerospace industry, all of which resulted
in declining prices in Trentwood's key markets. Additionally, KACC
implemented a plan to streamline its casting operations, which
included the shutdown of two facilities located in Ohio. This entire
restructuring is expected to be completed by the end of 1995 and will
affect approximately 620 employees. The pre-tax charge for this
restructuring of $35.8 million included $25.2 million for pension,
severance, and other termination benefits at Trentwood; $8.0 million
related to casting facilities; and $2.6 million for various other
items. At December 31, 1994, Trentwood was ahead of its restructuring
plan, which is expected to result in annual cost savings of at least
$50.0 million after it has been fully implemented. Other contributing
factors were lower production at the Company's smelters in the Pacific
Northwest in 1993 as a result of the removal of three reduction
potlines from production in January 1993 in response to the Bonneville
Power Administration's (the "BPA") reduction during the first quarter
of 1993 of the amount of power it normally provides to the Company,
and the increased cost of substitute power in such quarter. In both
1993 and 1992, the Company realized above-market prices for
significant quantities of primary aluminum sold forward in prior
periods under long-term contracts.
Corporate - Corporate operating expenses of $67.6 million, $72.6
million, and $77.6 million in 1994, 1993, and 1992, respectively,
represented corporate general and administrative expenses that were
not allocated to segments.
Income (Loss) Before Extraordinary Loss and Cumulative Effect of
Changes in Accounting Principles
Loss before extraordinary loss and cumulative effect of changes in
accounting principles was $101.4 million in 1994, compared with $123.1
million in 1993, as a result of the reduction in operating loss
previously described, partially offset by a lower credit for income
taxes. Loss before extraordinary loss and cumulative effect of changes
in accounting principles was $123.1 million in 1993, compared with
income of $26.9 million in 1992. This decrease resulted from the lower
operating income previously described and $10.8 million of other pre-
tax charges in 1993, principally related to establishing additional
litigation and environmental reserves.
Net Income (Loss)
The Company reported a net loss of $106.8 million or $2.18 per common
and common equivalent share in 1994, compared with $652.2 million or
$11.47 per common and common equivalent share in 1993 and net income
of $26.9 million or $.47 per common share in 1992. The principal
reasons for reduced net loss in 1994 compared with 1993 were the
reduction in the operating loss previously described and the
cumulative effect of changes in accounting principles of $507.3
million related to adoption of Statement of Financial Accounting
Standards No. 106, 109, and 112 (see Note 1 of the Notes to
Consolidated Financial Statements). The principal reasons for the
earnings decline in 1993 compared with 1992 were the cumulative effect
of changes in accounting principles of $507.3 million (see above), the
extraordinary loss on early extinguishment of debt of $21.8 million,
and the operating losses described above.
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Financial Condition and Capital Spending
---------------------------------------
Capital Structure
On February 17, 1994, the Company and KACC entered into a credit
agreement with BankAmerica Business Credit, Inc. (as agent for itself
and other lenders), Bank of America National Trust and Savings
Association, and certain other lenders (as amended, the "1994 Credit
Agreement"). The 1994 Credit Agreement consists of a $275.0 million
five-year secured, revolving line of credit, scheduled to mature in
1999, and replaced the credit agreement entered into in December 1989
by the Company and KACC with a syndicate of commercial banks and other
financial institutions (as amended, the "1989 Credit Agreement"). KACC
is able to borrow under the facility by means of revolving credit
advances and letters of credit (up to $125.0 million) in an aggregate
amount equal to the lesser of $275.0 million or a borrowing base
relating to eligible accounts receivable plus eligible inventory. The
Company recorded a pre-tax extraordinary loss of $8.3 million ($5.4
million after taxes) in the first quarter of 1994, consisting
primarily of the write-off of unamortized deferred financing costs
related to the 1989 Credit Agreement. As of February 17, 1995, $137.3
million (of which $59.3 million could have been used for letters of
credit) was available to KACC under the 1994 Credit Agreement. The
1994 Credit Agreement is unconditionally guaranteed by the Company and
by certain significant subsidiaries of KACC. Loans under the 1994
Credit Agreement bear interest at a rate per annum, at KACC's
election, equal to a Reference Rate (as defined) plus 1-1/2% or LIBO
Rate (Reserve Adjusted) (as defined) plus 3-1/4%. After June 30, 1995,
the interest rate margins applicable to borrowings under the 1994
Credit Agreement may be reduced by up to 1-1/2% (non-cumulatively),
based upon a financial test, determined quarterly.
The 1994 Credit Agreement requires KACC to maintain certain financial
covenants and places restrictions on the Company's and KACC's ability
to, among other things, incur debt and liens, make investments, pay
dividends, undertake transactions with affiliates, make capital
expenditures, and enter into unrelated lines of business. The 1994
Credit Agreement is secured by, among other things, (i) mortgages on
KACC's major domestic plants (excluding the Gramercy plant); (ii)
subject to certain exceptions, liens on the accounts receivable,
inventory, equipment, domestic patents and trademarks, and
substantially all other personal property of KACC and certain of its
subsidiaries; (iii) a pledge of all the stock of KACC owned by Kaiser;
and (iv) pledges of all of the stock of a number of KACC's wholly
owned domestic subsidiaries, pledges of a portion of the stock of
certain foreign subsidiaries, and pledges of a portion of the stock of
certain partially owned foreign affiliates.
In the first quarter of 1994, the Company consummated the public
offering of 8,855,550 shares of its 8.255% PRIDES, Convertible
Preferred Stock (the "PRIDES"). The net proceeds from the sale of the
shares of PRIDES were approximately $100.1 million. The Company used
such net proceeds to make non-interest-bearing loans to KACC in the
aggregate principal amount of $33.2 million (the aggregate dividends
scheduled to accrue on the shares of PRIDES from the issuance date
until December 31, 1997, the date on which the outstanding PRIDES will
be mandatorily converted into shares of the Company's common stock),
evidenced by intercompany notes, and used the balance of such net
proceeds to make capital contributions to KACC in the aggregate amount
of $66.9 million.
On February 17, 1994, KACC issued $225.0 million of its 9-7/8% Senior
Notes due 2002 (the "Senior Notes"). The net proceeds of the offering
of the Senior Notes were used to reduce outstanding borrowings under
the revolving credit facility of the 1989 Credit Agreement immediately
prior to the effectiveness of the 1994 Credit Agreement and for
working capital and general corporate purposes.
The offering of the PRIDES, the issuance of the Senior Notes, and the
replacement of the 1989 Credit Agreement were the final steps of a
comprehensive refinancing plan which the Company and KACC began in
January 1993 to extend the maturities of the Company's outstanding
indebtedness, enhance its liquidity, and raise new equity capital. At
December 31, 1994, the Company's total consolidated indebtedness was
$762.6 million, compared to $729.4 million at December 31, 1993.
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The obligations of KACC with respect to the Senior Notes and the
12-3/4% Notes (see Note 5 of the Notes to Consolidated Financial
Statements) are guaranteed, jointly and severally, by certain
subsidiaries of KACC. The indentures governing the Senior Notes and
the 12-3/4% Notes restrict, among other things, KACC's ability to
incur debt, undertake transactions with affiliates, and pay dividends.
Cash from Operations
Cash used for operations was $41.3 million in 1994, compared with cash
provided by operations of $24.2 million in 1993 and $26.3 million in
1992. The decrease in cash provided in 1994 compared with 1993 was
primarily due to margin deposits of $50.5 million under certain
hedging contracts and an increase in inventories.
Capital Expenditures
The Company's capital expenditures of $252.1 million (of which $34.0
million was funded by the Company's minority partners in certain
foreign joint ventures) during the three years ended December 31,
1994, were made primarily to improve production efficiency, reduce
operating costs, expand capacity at existing facilities, and construct
new facilities. Total consolidated capital expenditures were $70.0
million in 1994, compared with $67.7 million in 1993 and $114.4
million in 1992 (of which $7.5, $9.4, and $17.1 million were funded by
the minority partners in certain foreign joint ventures in 1994, 1993,
and 1992, respectively). Total consolidated capital expenditures (of
which approximately 11% is expected to be funded by the minority
partners in certain foreign joint ventures) are expected to be between
$80.0 and $130.0 million per year in the years 1995-1997, subject to
necessary approvals, if required, from the lenders under the 1994
Credit Agreement.
Dividends and Distributions
The declaration and payment of dividends by the Company and KACC on
shares of their common stock is subject to certain covenants contained
in the 1994 Credit Agreement and, in the case of KACC, the Senior Note
Indenture and the 12-3/4% Note Indenture. The 1994 Credit Agreement
does not permit the Company or KACC to pay any dividends on their
common stock. The declaration and payment of dividends by the Company
on the shares of the Series A Mandatory Conversion Premium Dividend
Preferred Stock (the "Series A Shares") and the PRIDES is expressly
permitted by the terms of the 1994 Credit Agreement to the extent the
Company receives payments on the intercompany notes or certain other
permitted distributions from KACC.
Joint Venture Indebtedness
The Company historically has participated in various raw material
joint ventures outside the United States. At December 31, 1994, the
Company was unconditionally obligated for $78.7 million of
indebtedness of one such joint venture affiliate.
Environmental Contingencies
The Company and KACC are subject to a wide variety of environmental
laws and regulations and to fines or penalties assessed for alleged
breaches of the environmental laws and to claims and litigation based
upon such laws. KACC currently is subject to a number of lawsuits
under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended by the Superfund Amendments
Reauthorization Act of 1986 ("CERCLA"), and, along with certain other
entities, has been named as a potentially responsible party for
remedial costs at certain third-party sites listed on the National
Priorities List under CERCLA.
Based on the Company's evaluation of these and other environmental
matters, the Company has established environmental accruals, primarily
related to potential solid waste disposal and soil and groundwater
remediation matters, totaling $40.1 million at December 31, 1994.
These environmental accruals represent the Company's estimate of costs
reasonably expected to be incurred based on presently enacted laws and
regulations, currently available facts, existing technology, and the
Company's assessment of the likely remediation action to be taken. As
additional facts are
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
developed and definitive remediation plans and necessary
regulatory approvals for implementation of remediation are
established, or alternative technologies are developed, changes in
these and other factors may result in actual costs exceeding the
current environmental accruals. The Company believes that it is
reasonably possible that costs associated with these environmental
matters may exceed current accruals by amounts that could range, in
the aggregate, up to approximately $20.0 million. While uncertainties
are inherent in the final outcome of these environmental matters, and
it is presently impossible to determine the actual costs that
ultimately may be incurred, management currently believes that the
resolution of such uncertainties should not have a material adverse
effect on the Company's consolidated financial position or results of
operations. See Note 9 of the Notes to Consolidated Financial
Statements for further description of these contingencies.
Asbestos Contingencies
KACC is a defendant in a number of lawsuits in which the plaintiffs
allege that certain of their injuries were caused by exposure to
asbestos during, and as a result of, their employment or association
with KACC or exposure to products containing asbestos produced or sold
by KACC. The lawsuits generally relate to products KACC has not
manufactured for at least 15 years. At December 31, 1994, the number
of such lawsuits pending was approximately 25,200 with approximately
14,300 received and 12,500 settled or dismissed in 1994.
Based on past experience and reasonably anticipated future activity,
the Company has established an accrual of $102.0 million at December
31, 1994, for estimated asbestos-related costs for claims filed and
estimated to be filed and settled through 2007. The Company does not
presently believe there is a reasonable basis for estimating such
costs beyond 2007 and, accordingly, no accrual has been recorded for
such costs which may be incurred.
The Company believes that KACC has insurance coverage available to
recover a substantial portion of its asbestos-related costs. While
claims for recovery from some of KACC's insurance carriers are
currently subject to pending litigation and other carriers have raised
certain defenses, the Company believes, based on prior insurance-
related recoveries in respect of asbestos-related claims, existing
insurance policies, and the advice of counsel, that substantial
recoveries from the insurance carriers are probable. Accordingly, an
estimated aggregate insurance recovery of $86.4 million, determined on
the same basis as the asbestos-related cost accrual, is recorded
primarily in Other assets at December 31, 1994.
While uncertainties are inherent in the final outcome of these
asbestos matters and it is presently impossible to determine the
actual costs that ultimately may be incurred and insurance recoveries
that will be received, management currently believes that, based on
the factors discussed in the preceding paragraphs, the resolution of
asbestos-related uncertainties and the incurrence of asbestos-related
costs net of related insurance recoveries should not have a material
adverse effect on the Company's consolidated financial position or
results of operations. See Note 9 of the Notes to Consolidated
Financial Statements for further description of this contingency.
Income Tax Matters
------------------
The Company's net deferred income tax assets as of December 31, 1994,
were $281.0 million, net of valuation allowances of $133.9 million.
Approximately $125.1 million of these net deferred income tax assets
relate to the benefit of loss and credit carryforwards, net of
valuation allowances. The Company evaluated all appropriate factors to
determine the proper valuation allowances for these carryforwards,
including any limitations concerning their use and the year the
carryforwards expire, as well as the levels of taxable income
necessary for utilization. The Company believes, based on the cyclical
nature of its business, its history of prior operating earnings, and
its expectations for future years, that it will more likely than not
generate sufficient taxable income to realize the benefit attributable
to the loss and credit carryforwards for which valuation allowances
were not provided. A principal component of the remaining amount of
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
the net deferred income tax assets is the tax benefit associated with
the accrual for postretirement benefits other than pensions. The
future tax deductions with respect to the turnaround of this accrual
will occur over a thirty to forty-year period. The Company believes a
long-term view of profitability is appropriate and has concluded that
this net deferred income tax asset will more likely than not be
realized despite the operating losses incurred in recent years. See
Note 6 of the Notes to Consolidated Financial Statements for a
discussion of these and other income tax matters.
Trends
------
During 1994, the expansion of world economies increased the demand for
aluminum. This factor, together with primary aluminum smelter cutbacks
caused by previous excessive aluminum inventories and low prices,
resulted in lower London Metal Exchange inventories of primary
aluminum at year-end 1994 than at year-end 1993. Average Midwest U.S.
transaction prices for aluminum increased from a low of $.504 per
pound in November 1993 to $.915 per pound in December 1994. The
Company expects to be profitable in 1995, considering KACC's hedging
program in place at December 31, 1994.
Sensitivity to Prices and Hedging Programs
The Company's operating results are sensitive to changes in the prices
of alumina, primary aluminum, and fabricated aluminum products, and
also depend to a significant degree on the volume and mix of all
products sold and on KACC's hedging strategies. Consequently, the
Company has developed strategies to mitigate its exposure to possible
declines in the market prices of alumina, primary aluminum, and
fabricated aluminum products while retaining the ability to
participate in favorable pricing environments that may materialize.
KACC enters into a number of financial instruments with
off-balance-sheet risk in the normal course of business that are
designed to reduce its exposure to fluctuations in foreign exchange
rates, alumina, primary aluminum, and fabricated aluminum products
prices, and the cost of purchased commodities.
KACC has significant expenditures which are denominated in foreign
currencies related to long-term purchase commitments with its
affiliates in Australia and the United Kingdom, which expose KACC to
certain exchange rate risks. In order to mitigate its exposure, KACC
periodically enters into forward foreign exchange and currency option
contracts in Australian dollars and Pounds Sterling to hedge these
commitments. The forward foreign currency exchange contracts are
agreements to purchase or sell a foreign currency, for a price
specified at the contract date, with delivery and settlement in the
future. At December 31, 1994, KACC had net forward foreign exchange
contracts totaling approximately $74.4 million for the purchase of
102.0 million Australian dollars through December 31, 1996.
To mitigate its exposure to declines in the market prices of alumina,
primary aluminum, and fabricated aluminum products, while retaining
the ability to participate in favorable pricing environments that may
materialize, KACC has developed strategies which include forward sales
of primary aluminum at fixed prices and the purchase or sale of
options for primary aluminum. Under the principal components of KACC's
price risk management strategy, which can be modified at any time, (i)
varying quantities of KACC's anticipated production are sold forward
at fixed prices; (ii) call options are purchased to allow KACC to
participate in certain higher market prices, should they materialize,
for a portion of KACC's primary aluminum and alumina sold forward;
(iii) option contracts are entered into to establish a price range
KACC will receive for a portion of its primary aluminum and alumina;
and (iv) put options are purchased to establish minimum prices KACC
will receive for a portion of its primary aluminum and alumina. In
this regard, in respect of its 1995 anticipated production, as of
December 31, 1994, KACC had sold forward 170,950 metric tons of
primary aluminum at fixed prices, purchased call options in respect of
69,000 metric tons of primary aluminum, purchased put options to
establish a minimum price for 193,500 metric tons of primary aluminum,
and entered into option contracts that established a price range for
90,000 metric tons of primary aluminum. KACC will not receive the
benefit of market price increases to the extent (i) the quantity of
production sold forward is greater than the tonnage covered by the
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KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
purchased call options; (ii) market prices exceed the prices at which
primary aluminum is sold forward, but are less than the strike price
of the purchased call options, on the tonnage covered by the options;
or (iii) market prices exceed the maximum of the price range on the
tonnage covered by the option contracts entered to establish a price
range.
In addition, KACC enters into forward fixed price arrangements with
certain customers which provide for the delivery of a specific
quantity of fabricated aluminum products over a specified future
period of time. In order to establish the cost of primary aluminum for
a portion of such sales, KACC may enter into forward and option
contracts. In this regard, at December 31, 1994, KACC had purchased
4,500 metric tons of primary aluminum under forward purchase contracts
at fixed prices that expire at various times through June 1995.
KACC has also entered into a natural gas pricing contract to fix
future prices of a portion (20,000 million BTUs per day) of a plant's
natural gas supply through March 1995.
At December 31, 1994, the net unrealized gain on KACC's position in
forward foreign exchange was $3.5 million and the net unrealized loss
on aluminum forward sales and option contracts and the natural gas
pricing contract was $80.4 million, based on a price of $1,955 per
metric ton of aluminum and $1.59 per million BTUs of natural gas. See
Note 10 of the Notes to Consolidated Financial Statements.
Since December 31, 1994, KACC has entered into:
o Additional forward foreign exchange contracts totaling
approximately $44.3 million for the purchase of 60.0 million
Australian dollars from July 1995 through December 1996 in
respect of its commitments for 1995 and 1996 expenditures
denominated in Australian dollars.
o Additional hedge positions in respect of its anticipated 1995
and 1996 production. As of the date of this report, KACC had
sold forward an additional 121,025 metric tons of primary
aluminum at fixed prices.
o A natural gas pricing contract to fix future prices of a
portion (20,000 million BTUs per day) of a plant's natural gas
supply through September 1995.
At February 28, 1995, the net unrealized loss on KACC's position in
forward foreign exchange was $.7 million, and the net unrealized loss
on aluminum forward sales and option contracts and natural gas pricing
contracts was $3.6 million, based on a price of $1,808 per metric ton
of aluminum and $1.42 per million BTUs of natural gas.
Labor Matter
On February 17, 1995, KACC's approximately 3,000 hourly-paid employees
represented by the United Steelworkers of America ("USWA") failed to
ratify a proposed master labor agreement (47 months duration effective
November 1, 1994 through September 30, 1998) with KACC which had been
recommended for ratification by the USWA, and on February 20, 1995, a
strike by such employees began which affected five plants: aluminum
smelters at Tacoma and Mead (Spokane), Washington; a sheet and plate
rolling mill at Trentwood (Spokane), Washington; an alumina refinery
at Gramercy, Louisiana; and a rod and bar plant at Newark, Ohio. The
strike continued for eight days until the agreement (including two
technical modifications) was ratified by those employees on February
28, 1995. During the strike, operations at all five plant locations
continued at various levels of production, and all five plants
continued to ship product to customers. Management believes that the
temporary disruptions to normal production and shipments resulting
from the strike should not have a material adverse effect on the
financial condition or results of operations of the Company for 1995
and that KACC's employee relations will continue to be satisfactory.
27
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors of Kaiser Aluminum
Corporation:
We have audited the accompanying consolidated balance sheets of Kaiser
Aluminum Corporation (a Delaware corporation) and subsidiaries as
of December 31, 1994 and 1993, and the related statements
of consolidated income and cash flows for each of the three years in
the period ended December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Kaiser
Aluminum Corporation and subsidiaries as of December 31, 1994 and
1993, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles.
As explained in Note 1 of the Notes to Consolidated Financial
Statements, effective January 1, 1993, the Company changed its methods
of accounting for postretirement benefits other than pensions,
postemployment benefits, and income taxes.
Houston, Texas
February 17, 1995
28
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
The accompanying notes to consolidated financial statements are
an integral part of these statements.
29
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
The accompanying notes to consolidated financial statements are
an integral part of these statements.
30
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
The accompanying notes to consolidated financial statements are
an integral part of these statements.
31
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions of dollars, except share amounts)
1. Summary of Significant Accounting Policies
----------------------------------------------
Principles of Consolidation
The consolidated financial statements include the statements of Kaiser
Aluminum Corporation ("Kaiser" or the "Company") and its majority-
owned subsidiaries. Investments in 50%-or-less-owned entities are
accounted for primarily by the equity method. Intercompany balances
and transactions are eliminated. The Company is a subsidiary of MAXXAM
Inc. ("MAXXAM") and conducts its operations through its wholly owned
subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"). Certain
reclassifications of prior-year information were made to conform to
the current presentation.
Changes in Accounting Principles
The Company adopted Statement of Financial Accounting Standards No.
106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" ("SFAS 106"), and Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits"
("SFAS 112"), as of January 1, 1993. The costs of postretirement
benefits other than pensions and postemployment benefits are now
accrued over the period employees provide services to the date of
their full eligibility for such benefits. Previously, such costs were
expensed as actual claims were incurred. The cumulative effect of the
changes in accounting principles for the adoption of SFAS 106 and SFAS
112 were recorded as charges to results of operations of $497.7 and
$7.3, net of related income taxes of $234.2 and $3.5, respectively.
These deferred income tax benefits were recorded at the federal
statutory rate in effect on the date the accounting standards were
adopted, before giving effect to certain valuation allowances. The new
accounting standards had no effect on the Company's cash outlays for
postretirement or postemployment benefits, nor did these one-time
charges affect the Company's compliance with its existing debt
covenants. The Company reserves the right, subject to applicable
collective bargaining agreements and applicable legal requirements, to
amend or terminate these benefits.
The Company adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS 109"), as of January 1, 1993.
The adoption of SFAS 109 changes the Company's method of accounting
for income taxes to an asset and liability approach from the deferral
method prescribed by Accounting Principles Board Opinion No. 11,
"Accounting for Income Taxes" ("APB 11"). The asset and liability
approach requires the recognition of deferred income tax assets and
liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax
returns. Under this method, deferred income tax assets and liabilities
are determined based on the temporary differences between the
financial statement and tax bases of assets and liabilities using
enacted tax rates. The cumulative effect of the change in accounting
principle reduced the Company's results of operations by $2.3. The
adoption of SFAS 109 required the Company to restate certain assets
and liabilities to their pre-tax amounts from their net-of-tax amounts
originally recorded in connection with the acquisition by MAXXAM in
October 1988. As a result of restating the assets and liabilities, the
loss before income taxes, minority interests, extraordinary loss, and
cumulative effect of changes in accounting principles for the year
ended December 31, 1993, was increased by $9.3.
Cash and Cash Equivalents
The Company considers only those short-term, highly liquid investments
with original maturities of 90 days or less to be cash equivalents.
Inventories
Substantially all product inventories are stated at last-in, first-out
("LIFO") cost, not in excess of market value. Replacement cost is not
in excess of LIFO cost. Other inventories, principally operating
supplies and repair and maintenance parts, are stated at the lower of
average cost or market. Inventory costs consist of material, labor,
and manufacturing overhead, including depreciation. Inventories
consist of the following:
32
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
Depreciation
Depreciation is computed principally by the straight-line method at
rates based on the estimated useful lives of the various classes of
assets. The principal estimated useful lives by class of assets are:
Other Income
Other income in 1994 and 1993 includes $10.3 and $10.8 of pre-tax
charges related principally to establishing additional litigation and
environmental reserves in the fourth quarters, respectively. Other
income in 1992 includes $14.0 of pre-tax income for non-recurring
adjustments to previously recorded liabilities and reserves in the
fourth quarter.
Deferred Financing Costs
Costs incurred to obtain debt financing are deferred and amortized
over the estimated term of the related borrowing. Amortization of
deferred financing costs of $6.0, $11.2, and $10.9 for the years ended
December 31, 1994, 1993, and 1992, respectively, are included in
interest expense.
Foreign Currency
The Company uses the United States dollar as the functional currency
for its foreign operations.
Derivative Financial Instruments
Gains and losses arising from the use of derivative financial
instruments are reflected in the Company's operating results
concurrently with the consummation of the underlying hedged
transactions. Deferred gains or losses as of December 31, 1994, are
included in Prepaid expenses and other current assets and Other
accrued liabilities. The Company does not hold or issue derivative
financial instruments for trading purposes (see Note 10).
Fair Value of Financial Instruments
The following table presents the estimated fair value of the Company's
financial instruments, together with the carrying amounts of the
related assets or liabilities. Unless otherwise noted, the carrying
amount of all financial instruments is a reasonable estimate of fair
value.
33
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Debt - The quoted market prices were used for the Senior Notes and
12-3/4% Notes (see Note 5). The fair value of all other debt is based
on discounting the future cash flows using the current rate for debt
of similar maturities and terms.
Foreign Currency Contracts - The fair value generally reflects the
estimated amounts that the Company would receive to enter into
similar contracts at the reporting date, thereby taking into account
unrealized gains or losses on open contracts (see Note 10).
Net Income (Loss) per Common and Common Equivalent Share
Net income (loss) per common and common equivalent share is computed
based on the weighted average number of common and common equivalent
shares outstanding during each period. For the year ended December 31,
1994, common stock equivalents of 19,382,950 attributable to the
Series A Shares, 8,855,550 shares attributable to the PRIDES, and
1,122,380 attributable to nonqualified stock options and for the year
ended December 31, 1993, common stock equivalents of 19,382,950
attributable to the Series A Shares and 664,400 attributable to
nonqualified stock options were excluded from the calculation of
weighted average shares because they were antidilutive (see Notes 7
and 8). Dividends declared on the Series A Shares and the PRIDES
($20.1 and $6.3 for the years ended December 31, 1994 and 1993) are
added to net loss for the purpose of calculating loss per common and
common equivalent share.
2. Restructuring of Operations
-------------------------------
In 1993, KACC implemented a restructuring plan primarily for its flat-
rolled products operation at its Trentwood plant in response to
overcapacity in the aluminum rolling industry, flat demand in the U.S.
can stock markets, and declining demand for aluminum products sold to
customers in the commercial aerospace industry, all of which had
resulted in declining prices in Trentwood's key markets. As of
December 31, 1994, the costs related to the 1993 pre-tax charge for
this restructuring of $35.8 have been substantially incurred.
3. Investments In and Advances To Unconsolidated Affiliates
------------------------------------------------------------
Summary combined financial information is provided below for
unconsolidated aluminum investments, most of which supply and process
raw materials. The investees are Queensland Alumina Limited ("QAL")
(28.3% owned), Anglesey Aluminium Limited ("Anglesey") (49.0% owned),
and Kaiser Jamaica Bauxite Company (49.0% owned). The equity in
earnings (losses) before income taxes of such operations is treated as
a reduction (increase) in cost of products sold. At December 31, 1994
and 1993, KACC's net receivables from these affiliates were not
material.
34
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
Summary of Combined Financial Position
The Company's equity in losses differs from the summary net income
(loss) due to various percentage ownerships in the entities and equity
method accounting adjustments.
At December 31, 1994, KACC's investment in its unconsolidated
affiliates exceeded its equity in their net assets by approximately
$67.9. The Company is amortizing this amount over a 12-year period,
which results in an annual amortization charge of approximately $11.6.
The Company and its affiliates have interrelated operations. KACC
provides some of its affiliates with services such as financing,
management, and engineering. Significant activities with affiliates
include the acquisition and processing of bauxite, alumina, and
primary aluminum. Purchases from these affiliates were $219.7, $206.6,
and $219.4 in the years ended December 31, 1994, 1993, and 1992,
respectively. No dividends were received from investees in the three
years ended December 31, 1994.
4. Property, Plant, and Equipment
----------------------------------
The major classes of property, plant, and equipment are as follows:
35
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
5. Long-Term Debt
------------------
Long-term debt and its maturity schedule are as follows:
1994 Credit Agreement
On February 17, 1994, the Company and KACC entered into a credit
agreement with BankAmerica Business Credit, Inc. (as agent for itself
and other lenders), Bank of America National Trust and Savings
Association, and certain other lenders (as amended, the "1994 Credit
Agreement"). The 1994 Credit Agreement consists of a $275.0 five-year
secured, revolving line of credit, scheduled to mature in 1999, and
replaced the credit agreement entered into in December 1989 by the
Company and KACC with a syndicate of commercial banks and other
financial institutions (as amended, the "1989 Credit Agreement"). KACC
is able to borrow under the facility by means of revolving credit
advances and letters of credit (up to $125.0) in an aggregate amount
equal to the lesser of $275.0 or a borrowing base relating to eligible
accounts receivable plus eligible inventory. The Company recorded a
pre-tax extraordinary loss of $8.3 ($5.4 after taxes) in the first
quarter of 1994, consisting primarily of the write-off of unamortized
deferred financing costs related to the 1989 Credit Agreement. As of
December 31, 1994, $202.5 (of which $59.3 could have been used for
letters of credit) was available to KACC under the 1994 Credit
Agreement. The 1994 Credit Agreement is unconditionally guaranteed by
the Company and by certain significant subsidiaries of KACC. Loans
under the 1994 Credit Agreement bear interest at a rate per annum, at
KACC's election, equal to a Reference Rate (as defined) plus 1-1/2% or
LIBO Rate (Reserve Adjusted) (as defined) plus 3-1/4%. After June 30,
1995, the interest rate margins applicable to borrowings under the
1994 Credit Agreement may be reduced by up to 1-1/2% (non-
cumulatively), based on a financial test, determined quarterly.
The 1994 Credit Agreement requires KACC to maintain certain financial
covenants and places restrictions on the Company's and KACC's ability
to, among other things, incur debt and liens, make investments, pay
dividends, undertake transactions with affiliates, make capital
expenditures, and enter into unrelated lines of business. Neither the
Company nor KACC currently is permitted to pay dividends on its common
stock. The 1994 Credit Agreement is secured by, among other things,
(i) mortgages on KACC's major domestic plants (excluding the Gramercy
plant); (ii) subject to certain exceptions, liens on the accounts
receivable, inventory, equipment, domestic patents and trademarks, and
substantially all other personal property of KACC and certain of its
subsidiaries; (iii) a pledge of all the stock of KACC owned by Kaiser;
and (iv) pledges of all of the stock of a number of KACC's wholly
owned domestic subsidiaries, pledges of a portion of the stock of
certain foreign subsidiaries, and pledges of a portion of the stock of
certain partially owned foreign affiliates.
36
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
Senior Notes
Concurrent with the offering by the Company of its 8.255% PRIDES,
Convertible Preferred Stock (the "PRIDES") (see Note 8), KACC issued
$225.0 of its 9-7/8% Senior Notes due 2002 (the "Senior Notes"). The
net proceeds of the offering of the Senior Notes were used to reduce
outstanding borrowings under the revolving credit facility of the 1989
Credit Agreement immediately prior to the effectiveness of the 1994
Credit Agreement and for working capital and general corporate
purposes.
Senior Subordinated Notes
On February 1, 1993, KACC issued $400.0 of 12-3/4% Senior Subordinated
Notes due 2003 (the "12-3/4% Notes"). The net proceeds from the sale
of the 12-3/4% Notes were used to retire the 14-1/4% Senior
Subordinated Notes due 1995 (the "14-1/4% Notes"), to prepay $18.0 of
the term loan, and to reduce outstanding borrowings under the
revolving credit facility of the 1989 Credit Agreement. These
transactions resulted in a pre-tax extraordinary loss of $33.0 in the
first quarter of 1993, consisting primarily of the write-off of
unamortized discount and deferred financing costs related to the
14-1/4% Notes and the payment of premiums on the 14-1/4% Notes.
The obligations of KACC with respect to the Senior Notes and the
12-3/4% Notes are guaranteed, jointly and severally, by certain
subsidiaries of KACC. The indentures governing the Senior Notes and
the 12-3/4% Notes restrict, among other things, KACC's ability, and
the 1994 Credit Agreement restricts, among other things, Kaiser's and
KACC's ability, to incur debt, undertake transactions with affiliates,
and pay dividends.
Gramercy Revenue Bonds
In December 1992, KACC entered into an installment sale agreement (the
"Sale Agreement") with the Parish of St. James, Louisiana (the
"Louisiana Parish"), pursuant to which the Louisiana Parish issued
$20.0 aggregate principal amount of its 7-3/4% Bonds due August 1,
2022 (the "Bonds") to finance the construction of certain solid waste
disposal facilities at KACC's Gramercy plant. The proceeds from the
sale of the Bonds were deposited into a construction fund and may be
withdrawn, from time to time, pursuant to the terms of the Sale
Agreement and the Bond indenture. At December 31, 1994, $6.4 remained
in the construction fund. The Sale Agreement requires KACC to make
payments to the Louisiana Parish in installments due on the dates and
in the amounts required to permit the Louisiana Parish to satisfy all
of its payment obligations under the Bonds.
Alpart CARIFA Loan
In December 1991, Alpart entered into a loan agreement with the
Caribbean Basin Projects Financing Authority ("CARIFA") under which
CARIFA loaned Alpart the proceeds from the issuance of CARIFA's
industrial revenue bonds. The terms of the loan parallel the bonds'
repayment terms. The $38.0 aggregate principal amount of Series A
bonds matures on June 1, 2008. The Series A bonds bear interest at a
floating rate of 87% of the applicable LIBID Rate (LIBOR less 1/8 of
1%) on $37.5 of the principal amount (5.2% at December 31, 1994) with
the remaining $.5 bearing interest at a fixed rate of 6.35%. The $22.0
aggregate principal amount of Series B bonds matures on June 1, 2007,
and bears interest at a fixed rate of 8.25%.
Proceeds from the sale of the bonds were used by Alpart to refinance
interim loans from the partners in Alpart, to pay eligible project
costs for the expansion and modernization of its alumina refinery and
related port and bauxite mining facilities, and to pay certain costs
of issuance. Under the terms of the loan agreement, Alpart must remain
a qualified recipient for Caribbean Basin Initiative funds as defined
in applicable laws. Alpart has agreed to indemnify bondholders of
CARIFA for certain tax payments that could result from events, as
defined, that adversely affect the tax treatment of the interest
income on the bonds. Alpart's obligations under the loan agreement are
secured by a $64.2 letter of credit guaranteed by the partners in
Alpart (of which $22.5 is guaranteed by the Company's minority partner
in Alpart).
37
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
Capitalized Interest
Interest capitalized in 1994, 1993, and 1992 was $2.7, $3.4, and $4.4,
respectively.
Restricted Net Assets of Subsidiary
Certain debt instruments restrict the ability of KACC to transfer
assets, make loans and advances, and pay dividends to the Company. The
assets of KACC, which are substantially all of the Company's assets,
are restricted.
6. Income Taxes
----------------
Income (loss) before income taxes, minority interests, extraordinary
loss, and cumulative effect of changes in accounting principles by
geographic area is as follows:
Income taxes are classified as either domestic or foreign, based on
whether payment is made or due to the United States or a foreign
country. Certain income classified as foreign is also subject to
domestic income taxes.
The credit (provision) for income taxes on income (loss) before income
taxes, minority interests, extraordinary loss, and cumulative effect
of changes in accounting principles consists of:
The 1994 federal deferred credit for income taxes of $71.2 includes
$29.3 for the benefit of operating loss carryforwards generated in
1994. The 1993 federal deferred credit for income taxes of $68.5
includes $29.2 for the benefit of operating loss carryforwards
generated in 1993 and a $3.4 benefit for increasing net deferred
income tax assets (liabilities) as of the date of enactment (August
10, 1993) of the Omnibus Budget Reconciliation Act of 1993, which
retroactively increased the federal statutory income tax rate from 34%
to 35% for periods beginning on or after January 1, 1993.
A reconciliation between the credit (provision) for income taxes and
the amount computed by applying the federal statutory income tax rate
to income (loss) before income taxes, minority interests,
extraordinary loss, and cumulative effect of changes in accounting
principles is as follows:
38
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
As shown in the Statements of Consolidated Income (Loss) for the years
ended December 31, 1994 and 1993, the Company reported extraordinary
losses related to the early extinguishment of debt. The Company
reported the 1994 extraordinary loss net of related deferred federal
income taxes of $2.9 and reported the 1993 extraordinary loss net of
related current federal income taxes of $11.2, which approximated the
federal statutory rate in effect on the dates the transactions
occurred.
The Company adopted SFAS 109 as of January 1, 1993, as discussed in
Note 1. The components of the Company's net deferred income tax assets
are as follows:
The valuation allowances listed above relate primarily to loss and
credit carryforwards and postretirement benefits other than pensions.
As of December 31, 1994, approximately $125.1 of the net deferred
income tax assets listed above relate to the benefit of loss and
credit carryforwards, net of valuation allowances. The Company
evaluated all appropriate factors to determine the proper valuation
allowances for these carryforwards, including any limitations
concerning their use and the year the carryforwards expire, as well as
the levels of taxable income necessary for utilization. For example,
full valuation allowances were provided for certain credit
carryforwards that expire in the near term. With regard to future
levels of income, the Company believes, based on the cyclical nature
of its business, its history of prior operating earnings, and its
39
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
expectations for future years, that it will more likely than not
generate sufficient taxable income to realize the benefit attributable
to the loss and credit carryforwards for which valuation allowances
were not provided. The remaining portion of the Company's net deferred
income tax assets at December 31, 1994, is approximately $155.9. A
principal component of this amount is the tax benefit associated with
the accrual for postretirement benefits other than pensions. The
future tax deductions with respect to the turnaround of this accrual
will occur over a 30- to 40-year period. If such deductions create or
increase a net operating loss in any one year, the Company has the
ability to carry forward such loss for 15 taxable years. For these
reasons, the Company believes a long-term view of profitability is
appropriate and has concluded that this net deferred income tax asset
will more likely than not be realized despite the operating losses
incurred in recent years.
Certain of the deferred income tax assets and liabilities listed above
are included on the Consolidated Balance Sheet in the captions
entitled Receivables, Prepaid expenses and other current assets, Other
accrued liabilities, and Long-term liabilities.
The Company and its subsidiaries were included in the consolidated
federal income tax returns of MAXXAM for the period from October 28,
1988, through June 30, 1993. As a consequence of the issuance of the
Depositary Shares on June 30, 1993, as discussed in Note 8, the
Company and its subsidiaries are no longer included in the
consolidated federal income tax returns of MAXXAM. The Company and its
subsidiaries have become members of a new consolidated return group of
which the Company is the common parent corporation (the "New Kaiser
Tax Group"). The New Kaiser Tax Group files consolidated federal
income tax returns for taxable periods beginning on or after July 1,
1993.
The tax allocation agreement between the Company and MAXXAM (the
"Company Tax Allocation Agreement") and the tax allocation agreement
between KACC and MAXXAM (the "KACC Tax Allocation Agreement")
(collectively, the "Tax Allocation Agreements"), terminated pursuant
to their terms, effective for taxable periods beginning after June 30,
1993. Any unused federal income tax attribute carryforwards under the
terms of the Tax Allocation Agreements were eliminated and are not
available to offset federal income tax liabilities for taxable periods
beginning on or after July 1, 1993. Upon the filing of MAXXAM's 1993
consolidated federal income tax return, the tax attribute
carryforwards of the MAXXAM consolidated return group as of
December 31, 1993, were apportioned in part to the New Kaiser Tax
Group, based on the provisions of the relevant consolidated return
regulations. The benefit of such tax attribute carryforwards
apportioned to the New Kaiser Tax Group approximated the benefit of
tax attribute carryforwards eliminated under the Tax Allocation
Agreements. To the extent the New Kaiser Tax Group generates unused
tax losses or tax credits for periods beginning on or after July 1,
1993, such amounts will not be available to obtain refunds of amounts
paid by the Company or KACC to MAXXAM for periods ending on or before
June 30, 1993, pursuant to the Tax Allocation Agreements.
KACC and MAXXAM entered into the KACC Tax Allocation Agreement, which
became effective as of October 28, 1988. Under the terms of the KACC
Tax Allocation Agreement, MAXXAM computed the federal income tax
liability for KACC and its subsidiaries (collectively, the "Subgroup")
as if the Subgroup were a separate affiliated group of corporations
which was never connected with MAXXAM. During 1991, the Company and
MAXXAM entered into the Company Tax Allocation Agreement, which became
effective as of January 1, 1991. Under the terms of the Company Tax
Allocation Agreement, MAXXAM computed a tentative federal income tax
liability for the Company as if it and its subsidiaries, including
KACC and its subsidiaries, were a separate affiliated group of
corporations which was never connected with MAXXAM. The federal income
tax liability of the Company was the difference between the tentative
federal income tax liability and the liability computed under the KACC
Tax Allocation Agreement.
The provisions of the Tax Allocation Agreements will continue to
govern for periods ended prior to July 1, 1993. Therefore, payments or
refunds may still be required by or payable to the Company or KACC
under the terms of their respective tax allocation agreements for
these periods due to the final resolution of audits, amended returns,
and related matters. However, the 1994 Credit Agreement prohibits the
payment by KACC to MAXXAM of any amounts due under the KACC Tax
40
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
Allocation Agreement, except for certain payments that are required as
a result of audits and only to the extent of any amounts paid after
February 17, 1994, by MAXXAM to KACC under the KACC Tax Allocation
Agreement.
The following table presents the Company's tax attributes for federal
income tax purposes as of December 31, 1994. The utilization of
certain of these tax attributes is subject to limitations:
7. Employee Benefit and Incentive Plans
----------------------------------------
Retirement Plans
Retirement plans are non-contributory for salaried and hourly
employees and generally provide for benefits based on a formula which
considers length of service and earnings during years of service. The
Company's funding policies meet or exceed all regulatory requirements.
The funded status of the employee pension benefit plans and the
corresponding amounts that are included in the Company's Consolidated
Balance Sheets are as follows:
41
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
As required by Statement of Financial Accounting Standards No. 87,
Employers' Accounting for Pensions, the Company recorded an after-tax
credit (charge) to equity of $12.5 and $(14.9) at December 31, 1994
and 1993, respectively, for the reduction (excess) of the minimum
liability over the unrecognized net obligation and prior-service cost.
These amounts were recorded net of the related income tax (provision)
credit of $(7.3) and $8.7 as of December 31, 1994 and 1993,
respectively, which approximated the federal and state statutory
rates.
The components of net periodic pension cost are:
Assumptions used to value obligations at year-end, and to determine
the net periodic pension cost in the subsequent year are:
Postretirement Benefits Other Than Pensions
Kaiser adopted SFAS 106 to account for postretirement benefits other
than pensions effective January 1, 1993 (see Note 1). The Company and
its subsidiaries provide postretirement health care and life insurance
benefits to eligible retired employees and their dependents.
Substantially all employees may become eligible for those benefits if
they reach retirement age while still working for the Company or its
subsidiaries. These benefits are provided through contracts with
various insurance carriers. The Company has not funded the liability
for these benefits.
The Company's accrued postretirement benefit obligation is composed of
the following:
42
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
The components of net periodic postretirement benefit cost are:
The 1995 annual assumed rates of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) are 9.5% and
8.0% for retirees under 65 and over 65, respectively, and are assumed
to decrease gradually to 5.5% in 2007 and remain at that level
thereafter. The health care cost trend rate has a significant effect
on the amounts reported. A one percentage point increase in the
assumed health care cost trend rate would increase the accumulated
postretirement benefit obligation as of December 31, 1994, by
approximately $79.8 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for 1994 by
approximately $9.5. The weighted average discount rate used to
determine the accumulated postretirement benefit obligation at
December 31, 1994 and 1993, was 8.5% and 7.5%, respectively.
Postemployment Benefits
Kaiser adopted the new accounting standard on postemployment benefits
effective January 1, 1993 (see Note 1). The Company provides certain
benefits to former or inactive employees after employment but before
retirement.
Incentive Plans
Effective January 1, 1989, the Company and KACC adopted an unfunded
Long-Term Incentive Plan (the "LTIP") for certain key employees of the
Company, KACC, and their consolidated subsidiaries. All compensation
vested as of December 31, 1992, under the LTIP, as amended in 1991 and
1992, has been paid to the participants in cash or common stock of the
Company as of December 31, 1993. Under the LTIP, as amended, 764,092
restricted shares were distributed to six Company executives during
1993 for benefits generally earned but not vested as of December 31,
1992. These shares generally will vest at the rate of 25% per year.
The Company will record the related expense of $6.5 over the four-year
period ending December 31, 1996. In 1993, the Company adopted the
Kaiser 1993 Omnibus Stock Incentive Plan. A total of 2,500,000 shares
of Kaiser common stock were reserved for awards or for payment of
rights granted under the Plan, of which 504,044 shares were available
to be awarded at December 31, 1994. Under the Kaiser 1993 Omnibus
Stock Incentive Plan, 102,564 restricted shares were distributed to
two Company executives during 1994, which will vest at the rate of 25%
per year. The Company will record the related expense of $1.0 over the
four-year period ending December 31, 1998.
In 1993 and 1994, the Compensation Committee of the Board of Directors
approved the award of "nonqualified stock options" to members of
management other than those participating in the LTIP. These options
generally will vest at the rate of 20-25% per year. Information
relating to nonqualified stock options is shown below:
43
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
Effective January 1, 1990, KACC adopted an unfunded Middle Management
Long-Term Incentive Plan. KACC also has a supplemental savings and
retirement plan for salaried employees, under which the participants
contribute a percentage of their base salaries.
The Company's expense for the above plans was $6.1, $5.3, and $6.6 for
the years ended December 31, 1994, 1993, and 1992, respectively.
8. Stockholders' Equity and Minority Interests
-----------------------------------------------
Changes in stockholders' equity and minority interests were:
44
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
Redeemable Preference Stock
In March 1985, KACC entered into a three-year agreement with the
United Steelworkers of America (USWA) whereby shares of a new series
of "Cumulative (1985 Series A) Preference Stock" would be issued to an
employee stock ownership plan in exchange for certain elements of
wages and benefits. Concurrently, a similar plan was established for
certain nonbargaining employees which provided for the issuance of
"Cumulative (1985 Series B) Preference Stock." Series A Stock and
Series B Stock ("Series A and B Stock") each have a par value of $1
per share and a liquidation and redemption value of $50 per share plus
accrued dividends, if any.
For financial reporting purposes, Series A and B Stock were recorded
at fair market value when issued, based on independent appraisals,
with a corresponding charge to compensation cost. Carrying values have
been increased each year to recognize accretion of redemption values
and, in certain years, there have been other increases for reasons
described below. Changes in Series A and B Stock are shown below.
No additional Series A or B Stock will be issued based on compensation
earned in 1992 or subsequent years. While held by the plan trustee,
Series B Stock is entitled to cumulative annual dividends, when and as
declared by the Board of Directors, payable in stock or in cash at the
option of KACC on or after March 1, 1991, in respect to years
commencing January 1, 1990, based on a formula tied to KACC's income
before tax from aluminum operations. When distributed to plan
participants (generally upon separation from KACC), the Series A and B
Stocks are entitled to an annual cash dividend of $5 per share,
payable quarterly, when and as declared by the Board of Directors.
Redemption fund agreements require KACC to make annual payments by
March 31 each year based on a formula tied to consolidated net income
until the redemption funds are sufficient to redeem all Series A and B
Stock. On an annual basis, the minimum payment is $4.3 and the maximum
payment is $7.3. In March 1993 and 1994, KACC contributed $4.3 for
each of the years 1992 and 1993, and will contribute $4.3 in March
1995 for 1994.
Under the USWA labor contract effective November 1, 1990, KACC was
obligated to offer to purchase up to 80 shares of Series A Stock from
each active participant in 1991 at a price equal to its redemption
value of $50 per share. KACC also agreed to offer to purchase up to an
additional 40 shares from each participant in 1994. The employees
could elect to receive their shares, accept cash, or place the
proceeds into KACC's 401(k) savings plan. Under separate action, KACC
also offered to purchase 80 shares of Series B Stock from active
participants in 1991 and 40 shares in 1994. Under the provisions of
these contracts, in February 1994, KACC purchased $4.6 and $.8 of the
Series A and B Stock, respectively.
Under the USWA labor contract effective November 1, 1994, KACC is
obligated to offer to purchase up to 40 shares of Series A Stock from
each active participant in 1995 at a price equal to its redemption
value of $50 per share. KACC also agreed to offer to purchase up to an
additional 80 shares from each participant in 1998. In addition, if a
profitability test is satisfied for either 1995 or 1996, KACC will
offer to purchase from each active participant an additional 20 shares
of such preference stock held in the stock ownership plan for the
benefit of substantially the same employees in either 1996 or 1997.
The employees could elect to receive their shares, accept cash, or
place the proceeds into KACC's 401(k) savings plan. KACC will provide
comparable purchases of Series B Stock from active participants.
45
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
The Series A and B Stock is distributed in the event of death,
retirement, or in other specified circumstances. KACC also may redeem
such stock at $50 per share plus accrued dividends, if any. At the
option of the plan participant, the trustee shall redeem stock
distributed from the plans at redemption value to the extent funds are
available in the redemption fund. Under the Tax Reform Act of 1986, at
the option of the plan participant, KACC must purchase distributed
shares earned after December 31, 1985, at redemption value on a five-
year installment basis, with interest at market rates. The obligation
of KACC to make such installment payments must be secured.
The Series A and B Stock is entitled to the same voting rights as KACC
common stock and to certain additional voting rights under certain
circumstances, including the right to elect, along with other KACC
preference stockholders, two directors whenever accrued dividends have
not been paid on two annual dividend payment dates or when accrued
dividends in an amount equivalent to six full quarterly dividends are
in arrears. The Series A and B Stock restricts the ability of KACC to
redeem or pay dividends on common stock if KACC is in default on any
dividends payable on the Series A and B Stock.
Preference Stock
KACC Cumulative Convertible Preference Stock, $100 par value ("$100
Preference Stock"), restricts acquisition of junior stock and payment
of dividends. At December 31, 1994, such provisions were less
restrictive as to the payment of cash dividends than the 1994 Credit
Agreement provisions. KACC has the option to redeem the $100
Preference Stocks at par value plus accrued dividends. KACC does not
intend to issue any additional shares of the $100 Preference Stocks.
The 4-1/8% and 4-3/4% (1957 Series, 1959 Series, and 1966 Series) $100
Preference Stock can be exchanged for per share cash amounts of
$69.30, $77.84, $78.38, and $76.46, respectively. KACC records the
$100 Preference Stock at their exchange amounts for financial
statement presentation and the Company includes such amounts in
minority interests. The outstanding shares of KACC preference stock
were:
Preferred Stock
Series A Convertible - On June 30, 1993, Kaiser issued 17,250,000 of
its $.65 Depositary Shares (the "Depositary Shares"), each
representing one-tenth of a share of Series A Mandatory Conversion
Premium Dividend Preferred Stock (the "Series A Shares"). In
connection with the issuance of the Depositary Shares, MAXXAM Group
Inc. ("MGI"), a wholly owned subsidiary of MAXXAM, exchanged a $15.0
promissory note of KACC (the "MAXXAM Note") for an additional
2,132,950 Depositary Shares. On August 4, 1993, MGI transferred the
2,132,950 Depositary Shares to MAXXAM in exchange for satisfaction of
a $15.0 promissory note evidencing a cash loan made to MGI by MAXXAM
in January 1993. MAXXAM sold 1,239,400 of the Depositary Shares
during 1994.
The net cash proceeds from the sale of Depositary Shares were
approximately $119.3. Kaiser used $37.8 of such net proceeds to make a
non-interest-bearing loan to KACC evidenced by an intercompany note,
which matures on June 29, 1996, and is payable in quarterly
installments. The intercompany note is designed to provide sufficient
funds to Kaiser to enable it to make dividend payments on the Series A
Shares until June 30, 1996, the date on which the outstanding Series A
Shares are mandatorily converted into shares of the Company's common
stock. Kaiser used $81.5 of such net proceeds and the MAXXAM Note to
make a capital contribution to KACC. KACC used $13.7 of the funds it
received from Kaiser to prepay the remaining balance of the term loan
46
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
under the 1989 Credit Agreement and $105.6 of such funds to reduce
outstanding borrowings under the revolving credit facility of the 1989
Credit Agreement.
The owners of Depositary Shares are entitled to receive (when, as, and
if the Board of Directors declares dividends on the Series A Shares)
cumulative preferential cash dividends from the date of issue,
accruing at the rate of $.65 per annum for each of the Depositary
Shares, payable quarterly in arrears on the last day of each March,
June, September, and December, commencing September 30, 1993. Holders
of Depositary Shares (based on the voting rights of the Series A
Shares) have one vote for each Depositary Share held of record, except
as required by law, and are entitled to vote with the holders of
common stock on all matters submitted to a vote of common
stockholders.
On June 30, 1996, each of the outstanding Depositary Shares
automatically will convert (upon the automatic conversion of the
Series A Shares) into one share of common stock, plus the right to
receive an amount in cash equal to the accrued and unpaid dividends
payable with respect to such Depositary Share. Automatic conversion of
the outstanding Depositary Shares (and the Series A Shares) will occur
upon certain mergers or consolidations of the Company (as defined). At
any time or from time to time prior to June 30, 1996, the Company may
call the outstanding Depositary Shares (by calling the Series A
Shares) for redemption, in whole or in part, at a call price per
Depositary Share initially equal to $12.46, declining by $.0018 on
each day following the date of issue to $10.624 on April 30, 1996, and
equal to $10.51 thereafter, payable in shares of common stock having
an aggregate Current Market Price (as defined) equal to the applicable
call price, plus an amount in cash equal to all accrued and unpaid
dividends payable with respect to such Depositary Share.
PRIDES Convertible - In the first quarter of 1994, the Company
consummated the public offering of 8,855,550 shares of the PRIDES. The
net proceeds from the sale of the shares of PRIDES were approximately
$100.1. The Company used such net proceeds to make non-interest-
bearing loans to KACC in the aggregate principal amount of $33.2 (the
aggregate dividends scheduled to accrue on the shares of PRIDES from
the issuance date until December 31, 1997, the date on which the
outstanding PRIDES will be mandatorily converted into shares of the
Company's common stock), evidenced by intercompany notes, and used the
balance of such net proceeds to make capital contributions to KACC in
the aggregate amount of $66.9.
Holders of shares of PRIDES are entitled to receive (when, as, and if
the Board of Directors declares dividends on the PRIDES) cumulative
preferential cash dividends at a rate per annum of 8.255% of the per
share offering price (equivalent to $.97 per annum for each share of
PRIDES), from the date of initial issuance, payable quarterly in
arrears on the last day of March, June, September, and December of
each year. Holders of shares of PRIDES have a 4/5 vote for each share
held of record and, except as required by law, are entitled to vote
together with the holders of common stock and together with the
holders of any other classes or series of stock (including the Series
A Shares) who are entitled to vote in such manner on all matters
submitted to a vote of common stockholders.
On December 31, 1997, unless either previously redeemed or converted
at the option of the holder, each of the outstanding shares of PRIDES
will mandatorily convert into one share of the Company's common stock,
subject to adjustment in certain events, and the right to receive an
amount in cash equal to all accrued and unpaid dividends thereon
(other than previously declared dividends payable to a holder of
record on a prior date).
Shares of PRIDES are not redeemable prior to December 31, 1996. At any
time and from time to time on or after December 31, 1996, the Company
may redeem any or all of the outstanding shares of PRIDES. Upon any
such redemption, each holder will receive, in exchange for each share
of PRIDES, the number of shares of common stock equal to (A) the sum
of $11.9925, declining after December 31, 1996, to $11.75 until
December 31, 1997, plus, in the event the Company does not elect to
pay cash dividends to the redemption date, all accrued and unpaid
dividends thereon divided by (B) the Current Market Price (as defined)
47
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
on the applicable date of determination, but in no event less than
.8333 of a share of common stock, subject to adjustment in certain
events. At any time prior to December 31, 1997, unless previously
redeemed, each share of PRIDES is convertible at the option of the
holder thereof into .8333 of a share of common stock (equivalent to a
conversion price of $14.10 per share of common stock), subject to
adjustment in certain events. The number of shares of common stock a
holder will receive upon redemption, and the value of the shares
received upon conversion, will vary depending on the market price of
the common stock from time to time.
Dividends on Common Stock
The Company paid cash dividends on common stock of $2.9 in each
quarter of 1992. As required under the 1989 Credit Agreement, on
December 15, 1992, KACC issued a Pay-in-Kind Note (the "PIK Note") to
MGI in the principal amount of $2.5, representing the entire amount of
the dividend received by MGI in respect of the shares of the Company's
common stock which it owned. The PIK Note bears interest, compounded
semiannually, at a rate equal to 12% per annum, and is due and
payable, together with accrued interest thereon, on June 30, 1995.
The indentures governing the Senior Notes and the 12-3/4% Notes
restrict, among other things, KACC's ability, and the 1994 Credit
Agreement restricts, among other things, Kaiser's and KACC's ability,
to incur debt, undertake transactions with affiliates, and pay
dividends. Under the most restrictive of these covenants, neither the
Company nor KACC currently is permitted to pay dividends on its common
stock.
At December 31, 1994, 28,000,000 shares of the Company's common stock
owned by MAXXAM were pledged as security for debt issued by MGI,
consisting of $100.0 aggregate principal amount of 11-1/4% Senior
Secured Notes due 2003 and $126.7 aggregate principal amount of
12-1/4% Senior Secured Discount Notes due 2003.
9. Commitments and Contingencies
---------------------------------
Commitments
KACC has financial commitments, including purchase agreements, tolling
arrangements, forward foreign exchange and forward sales contracts
(see Note 10), letters of credit, and guarantees. Such purchase
agreements and tolling arrangements include long-term agreements for
the purchase and tolling of bauxite into alumina in Australia by QAL.
These obligations expire in 2008. Under the agreements, KACC is
unconditionally obligated to pay its proportional share of debt,
operating costs, and certain other costs of QAL. The aggregate minimum
amount of required future principal payments at December 31, 1994, is
$78.7, due in 1997. The KACC share of payments, including operating
costs and certain other expenses under the agreement, was $85.6,
$86.7, and $99.2 for the years ended December 31, 1994, 1993, and
1992, respectively. KACC also has agreements to supply alumina to and
to purchase aluminum from Anglesey.
Minimum rental commitments under operating leases at December 31,
1994, are as follows: years ending December 31, 1995 - $22.1; 1996 -
$21.5; 1997 - $21.0; 1998 - $24.1; 1999 - $30.4; thereafter - $213.9.
The future minimum rentals receivable under noncancelable subleases
was $73.2 at December 31, 1994.
Rental expenses were $26.8, $29.0, and $26.2 for the years ended
December 31, 1994, 1993, and 1992, respectively.
Environmental Contingencies
The Company and KACC are subject to a wide variety of environmental
laws and regulations and to fines or penalties assessed for alleged
breaches of the environmental laws and to claims and litigation based
upon such laws. KACC currently is subject to a number of lawsuits
under the Comprehensive Environmental Response, Compensation and
48
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
Liability Act of 1980, as amended by the Superfund Amendments
Reauthorization Act of 1986 ("CERCLA"), and, along with certain other
entities, has been named as a potentially responsible party for
remedial costs at certain third-party sites listed on the National
Priorities List under CERCLA.
Based on the Company's evaluation of these and other environmental
matters, the Company has established environmental accruals primarily
related to potential solid waste disposal and soil and groundwater
remediation matters. The following table presents the changes in such
accruals, which are primarily included in Long-term liabilities, for
the years ended December 31, 1994, 1993, and 1992:
These environmental accruals represent the Company's estimate of costs
reasonably expected to be incurred based on presently enacted laws and
regulations, currently available facts, existing technology, and the
Company's assessment of the likely remediation action to be taken. The
Company expects that these remediation actions will be taken over the
next several years and estimates that annual expenditures to be
charged to these environmental accruals will be approximately $3.0 to
$11.0 for the years 1995 through 1999 and an aggregate of
approximately $11.0 thereafter.
As additional facts are developed and definitive remediation plans and
necessary regulatory approvals for implementation of remediation are
established, or alternative technologies are developed, changes in
these and other factors may result in actual costs exceeding the
current environmental accruals. The Company believes that it is
reasonably possible that costs associated with these environmental
matters may exceed current accruals by amounts that could range, in
the aggregate, up to approximately $20.0. While uncertainties are
inherent in the final outcome of these environmental matters, and it
is presently impossible to determine the actual costs that ultimately
may be incurred, management currently believes that the resolution of
such uncertainties should not have a material adverse effect on the
Company's consolidated financial position or results of operations.
Asbestos Contingencies
KACC is a defendant in a number of lawsuits in which the plaintiffs
allege that certain of their injuries were caused by exposure to
asbestos during, and as a result of, their employment or association
with KACC or exposure to products containing asbestos produced or sold
by KACC. The lawsuits generally relate to products KACC has not
manufactured for at least 15 years. At December 31, 1994, the number
of such lawsuits pending was approximately 25,200 with approximately
14,300 received and 12,500 settled or dismissed in 1994.
Based on prior experience, KACC estimates that annual future cash
payments in connection with such litigation will be approximately
$11.0 to $14.0 for the years 1995 through 1999, and an aggregate of
approximately $95.0 thereafter through 2007. Based on past experience
and reasonably anticipated future activity, the Company has
established an accrual for estimated asbestos-related costs for claims
filed and estimated to be filed and settled through 2007. The Company
does not presently believe there is a reasonable basis for estimating
such costs beyond 2007 and, accordingly, no accrual has been recorded
for such costs which may be incurred. This accrual was calculated
based on the current and anticipated number of asbestos-related
claims, the prior timing and amounts of asbestos-related payments, the
current state of case law related to asbestos claims, the advice of
counsel, and the anticipated effects of inflation and discounting at
49
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
an estimated risk-free rate (8% at December 31, 1994). Accordingly, an
asbestos-related cost accrual of $102.0 is included primarily in
Long-term liabilities at December 31, 1994. The aggregate amount of
the undiscounted liability at December 31, 1994 is $158.1, before
considerations for insurance recoveries.
The Company believes that KACC has insurance coverage available to
recover a substantial portion of its asbestos-related costs. While
claims for recovery from some of KACC's insurance carriers are
currently subject to pending litigation and other carriers have raised
certain defenses, the Company believes, based on prior insurance-
related recoveries in respect of asbestos-related claims, existing
insurance policies, and the advice of counsel, that substantial
recoveries from the insurance carriers are probable. Accordingly, an
estimated aggregate insurance recovery of $86.4, determined on the
same basis as the asbestos-related cost accrual, is recorded primarily
in Other assets at December 31, 1994.
While uncertainties are inherent in the final outcome of these
asbestos matters and it is presently impossible to determine the
actual costs that ultimately may be incurred and the insurance
recoveries that will be received, management currently believes that,
based on the factors discussed in the preceding paragraphs, the
resolution of the asbestos-related uncertainties and the incurrence of
asbestos-related costs net of related insurance recoveries should not
have a material adverse effect on the Company's consolidated financial
position or results of operations.
Other Contingencies
The Company or KACC is involved in various other claims, lawsuits, and
other proceedings relating to a wide variety of matters. While
uncertainties are inherent in the final outcome of such matters, and
it is presently impossible to determine the actual costs that
ultimately may be incurred, management currently believes that the
resolution of such uncertainties and the incurrence of such costs
should not have a material adverse effect on the Company's
consolidated financial position or results of operations.
10. Derivative Financial Instruments and Related Hedging Programs
------------------------------------------------------------------
KACC enters into a number of financial instruments with
off-balance-sheet risk in the normal course of business that are
designed to reduce its exposure to fluctuations in foreign exchange
rates, alumina, primary aluminum, and fabricated aluminum products
prices, and the cost of purchased commodities.
KACC has significant expenditures which are denominated in foreign
currencies related to long-term purchase commitments with its
affiliates in Australia and the United Kingdom, which expose KACC to
certain exchange rate risks. In order to mitigate its exposure, KACC
periodically enters into forward foreign exchange and currency option
contracts in Australian dollars and Pounds Sterling to hedge these
commitments. The forward foreign currency exchange contracts are
agreements to purchase or sell a foreign currency, for a price
specified at the contract date, with delivery and settlement in the
future. At December 31, 1994, KACC had net forward foreign exchange
contracts totaling approximately $74.4 for the purchase of 102.0
Australian dollars through December 31, 1996.
To mitigate its exposure to declines in the market prices of alumina,
primary aluminum, and fabricated aluminum products, while retaining
the ability to participate in favorable pricing environments that may
materialize, KACC has developed strategies which include forward sales
of primary aluminum at fixed prices and the purchase or sale of
options for primary aluminum. Under the principal components of KACC's
price risk management strategy, which can be modified at any time, (i)
varying quantities of KACC's anticipated production are sold forward
at fixed prices; (ii) call options are purchased to allow KACC to
participate in certain higher market prices, should they materialize,
for a portion of KACC's primary aluminum and alumina sold forward;
(iii) option contracts are entered into to establish a price range
50
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
KACC will receive for a portion of its primary aluminum and alumina;
and (iv) put options are purchased to establish minimum prices KACC
will receive for a portion of its primary aluminum and alumina. In
this regard, in respect of its 1995 anticipated production, as of
December 31, 1994, KACC had sold forward 170,950 metric tons of
primary aluminum at fixed prices, purchased call options in respect of
69,000 metric tons of primary aluminum, purchased put options to
establish a minimum price for 193,500 metric tons of primary aluminum,
and entered into option contracts that established a price range for
90,000 metric tons of primary aluminum. KACC will not receive the
benefit of market price increases to the extent (i) the quantity of
production sold forward is greater than the tonnage covered by the
purchased call options; (ii) market prices exceed the prices at which
primary aluminum is sold forward, but are less than the strike price
of the purchased call options, on the tonnage covered by the options;
or (iii) market prices exceed the maximum of the price range on the
tonnage covered by the option contracts entered to establish a price
range.
In addition, KACC enters into forward fixed price arrangements with
certain customers which provide for the delivery of a specific
quantity of fabricated aluminum products over a specified future
period of time. In order to establish the cost of primary aluminum for
a portion of such sales, KACC may enter into forward and option
contracts. In this regard, at December 31, 1994, KACC had purchased
4,500 metric tons of primary aluminum under forward purchase contracts
at fixed prices that expire at various times through June 1995.
KACC has also entered into a natural gas pricing contract to fix
future prices of a portion (20,000 million BTUs per day) of a plant's
natural gas supply through March 1995.
At December 31, 1994, the net unrealized gain on KACC's position in
forward foreign exchange was $3.5 and the net unrealized loss on
aluminum forward sales and option contracts and the natural gas
pricing contract was $80.4, based on a price of $1,955 per metric ton
of aluminum and $1.59 per million BTUs of natural gas.
The Company has established margin accounts with its counterparties
related to aluminum forward sales and option contracts. The Company is
entitled to receive advances from counterparties related to unrealized
gains and, in turn, is required to make margin deposits with
counterparties to cover unrealized losses related to these contracts.
At December 31, 1994, the Company had $50.5 on deposit with various
counterparties in respect of such unrealized losses. This amount is
recorded in Prepaid expenses and other current assets.
KACC is exposed to credit risk in the event of non-performance by
other parties to these currency and commodity contracts, but KACC does
not anticipate non-performance by any of these counterparties, given
their credit worthiness. When appropriate, KACC arranges master
netting agreements.
51
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
11. Segment and Geographical Area Information
Sales and transfers among geographic areas are made on a basis
intended to reflect the market value of products.
The aggregate foreign currency gain included in determining net income
was $.8, $4.9, and $12.0 for the years ended December 31, 1994, 1993,
and 1992, respectively.
Sales of more than 10% of total revenue to a single customer were
$58.2, $40.7, and $135.3 of bauxite and alumina and $147.7, $145.7,
and $144.9 of aluminum processing for the years ended December 31,
1994, 1993, and 1992.
Export sales were less than 10% of total revenue during the years
ended December 31, 1994, 1993, and 1992, respectively.
Geographical area information relative to operations is summarized as
follows:
52
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In millions of dollars, except share amounts)
Financial information by industry segment at December 31, 1994 and
1993, and for the years ended December 31, 1994, 1993, and 1992, is as
follows:
53
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
54
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
55
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
56