THE PORTIONS OF KAC'S ANNUAL REPORT TO STOCKHOLDER
Published on
EXHIBIT 13
TABLE OF CONTENTS
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. 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. Intracompany shipments and sales are excluded from the
information set forth in the table below. The table below provides selected
operational and financial information on a consolidated basis with respect to
the Company for the years ended December 31, 1996, 1995, and 1994. The
following should be read in conjunction with the Company's consolidated
financial statements and the notes thereto, contained elsewhere herein.
(1) All references to tons refer to metric tons of 2,204.6 pounds.
(2) Includes net sales of bauxite.
(3) Includes the portion of net sales attributable to minority interests in
consolidated subsidiaries.
(4) Includes extraordinary loss on early extinguishment of debt of $5.4, net
of tax benefit of $2.9, in 1994.
12 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT
This section contains statements which constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements appear in a number of places in this section (see "Overview,"
"Profit Enhancement and Cost Reduction Initiative," "Results of Operations,"
"Financial Condition and Liquidity," "Income Tax Matters" and "Recent
Accounting Pronouncements"). Such statements can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "estimates,"
"will," "should," "plans" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy.
Readers are cautioned that any such forward-looking statements are not
guarantees of future performance and involve significant risks and
uncertainties, and that actual results may vary materially from those in the
forward-looking statements as a result of various factors. These factors
include the effectiveness of management's strategies and decisions, general
economic and business conditions, developments in technology, new or modified
statutory or regulatory requirements and changing prices and market conditions.
This section and the Company's Annual Report on Form 10-K each identify other
factors that could cause such differences. No assurance can be given that these
are all of the factors that could cause actual results to vary materially from
the forward-looking statements.
OVERVIEW
The Company's operating results are sensitive to changes in prices of alumina,
primary aluminum, and fabricated aluminum products, and also depend to a
significant degree on the volume and mix of all products sold and on KACC's
hedging strategies. Primary aluminum prices have historically been subject to
significant cyclical price fluctuations. See Notes 1 and 9 of the Notes to
Consolidated Financial Statements for a discussion of KACC's hedging
activities.
During the first half of 1996, the Average Midwest United States transaction
price ("AMT Price") for primary aluminum remained relatively stable in the $.75
per pound range. However, during the second half of the year the AMT Price
fell, reaching a low of $.65 per pound for October 1996, before recovering late
in the year. During 1995, the AMT Price for primary aluminum was approximately
$.86 per pound compared to $.72 and $.54 per pound in 1994 and 1993,
respectively. The AMT Price for primary aluminum for the week ended February
14, 1997, was approximately $.75 per pound.
The significant improvement in prices during 1994 and 1995 resulted from strong
growth in Western world consumption of aluminum and the curtailment of
production in response to lower prices in prior periods by many producers
worldwide. In 1995, production of primary aluminum increased and consumption of
aluminum continued to grow, but at a much lower rate than in 1994. In general,
the overall aluminum market was strongest in the first half of 1995. By the
second half of 1995, orders and shipments for certain products had softened and
the rate of decline in London Metal Exchange ("LME") inventories had leveled
off. By the end of 1995, some small increases in LME inventories occurred, and
prices of aluminum weakened from first-half levels. This trend continued
throughout most of 1996. Net reported primary aluminum inventories increased by
approximately 62,000 tons in 1996 based upon reports of the LME and the
International Primary Aluminium Institute ("IPAI"), following substantial
declines of 764,000 and 1,153,000 tons in 1994 and 1995, respectively.
Increased production of primary aluminum due to restarts of certain previously
idled capacity, the commissioning of a major new smelter in South Africa, and
the continued high level of exports from the Commonwealth of Independent States
("CIS") contributed to increased supplies of primary aluminum to the Western
world in 1996. While the economies of the major aluminum consuming regions--the
United States, Japan, Western Europe, and Asia--are, in the aggregate,
performing relatively well, the Company believes that the reduction of aluminum
inventories by customers, as prices have continued to decline, has mitigated
the growth in primary aluminum demand that normally accompanies growth in
economic and industrial activity.
KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT 13
Kaiser Aluminum Corporation and Subsidiary Companies
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
PROFIT ENHANCEMENT AND COST REDUCTION INITIATIVE
The Company has set a goal of achieving significant cost reduction and other
profit improvements during 1997, with the full effect planned to be realized in
1998. The initiative is based on the Company's conclusion that the current
level of performance of its existing facilities and businesses will not achieve
the level of profits the Company considers satisfactory based upon historic
long-term average prices for primary aluminum and alumina. To achieve this
goal, the Company plans reductions in production costs, decreases in corporate
selling, general and administrative expenses, and enhancements to product mix.
There can be no assurance that the initiative will result in the desired cost
reduction and other profit improvements.
RESULTS OF OPERATIONS
1996 AS COMPARED TO 1995
Summary--For the year ended December 31, 1996, the Company's net income was
$8.2 million, or $.00 per common and common equivalent share, compared to net
income of $60.3 million, or $.69 per common and common equivalent share, in
1995. Net sales for 1996 were $2,190.5 million, compared to $2,237.8 million in
1995. Results for the year ended December 31, 1996, include an after tax
benefit of approximately $17.0 million resulting from settlements of certain
tax matters in December 1996. Excluding the impact of these non-recurring
items, the Company would have reported a net loss for the year ended December
31, 1996.
Results for the year ended December 31, 1996, reflect the substantial reduction
in market prices for primary aluminum more fully discussed above. Alumina
prices, which are significantly influenced by changes in primary aluminum
prices, also declined from period to period. The decrease in product prices
more than offset the positive impact of increases in shipments in several
segments of the Company's business, as more fully discussed below. Results for
1996 also include approximately $20.5 million in research and development
expenses and other costs related to the Company's new Micromill, as well as
additional expenses related to other strategic initiatives.
Results for 1995 include approximately $17.0 million of first quarter 1995
pre-tax expenses associated with an eight-day strike at five major U.S.
locations, a six-day strike at the Company's 65% owned Alumina Partners of
Jamaica ("Alpart") bauxite mining and alumina refinery in Jamaica, and a
four-day disruption of alumina production at Alpart caused by a boiler failure.
Bauxite and Alumina--Net segment sales for 1996 were basically unchanged from
1995 as a nominal decline in the average realized price of alumina was offset
by a modest increase in alumina shipments. The reduction in prices realized
reflects the substantial decline in primary aluminum prices experienced in 1996
discussed above.
Operating income for this segment of the Company's business declined
significantly from prior year periods as a result of reduced gross margins from
alumina sales resulting from the previously discussed price declines and
increased natural gas costs at the Company's Gramercy, Louisiana, alumina
refinery. Operating income for the year ended December 31, 1996, was also
unfavorably impacted by high operating costs associated with disruptions in the
power supply at the Company's Alpart alumina refinery, higher manufacturing
costs resulting from higher market prices for fuel and caustic soda, and a
temporary raw material quality problem experienced at the Company's Gramercy
facility during the second quarter of 1996.
Aluminum Processing--An increase in primary aluminum shipments in 1996 of 31%
more than offset a 15% decline in the average realized price for primary
aluminum from period to period. The increase in shipments during the year ended
December 31, 1996, was the result of increased shipments of primary aluminum to
third parties as a result of a decline in intracompany transfers.
Net sales of fabricated aluminum products were down 7% for the year ended
December 31, 1996, as compared to the prior year as a result of a decrease in
shipments (primarily related to can sheet activities) resulting from reduced
14 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT
growth in demand and the reduction of customer inventories. The impact of
reduced product shipments was to a limited degree offset by a 4% increase in
the average realized price from the sale of fabricated aluminum products,
resulting primarily from a shift in product mix to higher value added products.
Operating income for the aluminum processing segment for the year was also
impacted by approximately $5.6 million of scheduled non-recurring maintenance
costs at the Company's Trentwood, Washington, rolling mill facility in the
fourth quarter of 1996, offset by $11.5 million ($7.2 on an after-tax basis) of
reduced operating costs resulting from the non-cash settlement in December
1996 of certain tax matters.
Corporate--Corporate operating expenses represent corporate general and
administrative expenses which are not allocated to the Company's business
segments. A substantial portion of the 1996 reduction in operating losses of
the corporate segment as compared to 1995 is due to reduced incentive
compensation accruals resulting from the decline in earnings from the prior
year period. Reduced post employment benefit plan and pension plan costs also
contributed to the 1996 reduction.
1995 AS COMPARED TO 1994
Summary--The Company reported net income of $60.3 million or $.69 per common
and common equivalent share ($.72 on a fully diluted basis) in 1995, compared
with a net loss of $106.8 million or $2.18 per common and common equivalent
share in 1994. The principal reason for the improvement in 1995 compared to
1994 was the improvement in operating results previously described, partially
offset by other charges, principally related to the establishment of additional
litigation reserves.
Improved operating results in 1995 were partially offset by expenses related to
the Company's smelting joint venture in China, accelerated expenses for the
Company's Micromill technology, maintenance expenses as a result of an
electrical lightning strike at the Company's Trentwood, Washington, facility,
and a work slowdown at the Company's 49%-owned Kaiser Jamaica Bauxite Company
prior to the signing of a new labor contract. The combined impact of these
expenditures on the results for 1995 was approximately $6.0 million in the
aggregate (on a pre-tax basis). Operating results in 1995 were further impacted
by (i) an eight-day strike at five major domestic locations by the United
Steelworkers of America ("USWA"), (ii) a six-day strike by the National Workers
Union at Alpart, and (iii) a four-day disruption of alumina production at
Alpart caused by a boiler failure. The combined impact of these events on the
results for 1995 was approximately $17.0 million in the aggregate (on a pre-tax
basis), principally from lower production volume and other related costs.
Bauxite and Alumina--Net sales to third parties for the bauxite and alumina
segment were 19% higher in 1995 than in 1994. Revenue from alumina increased
20% in 1995 from 1994, due to higher average realized prices partially offset
by lower shipments. The remainder of the segment's sales revenues were from
sales of bauxite and the portion of sales of alumina attributable to the
minority interest at Alpart.
This segment's operating income was $54.0 million in 1995, compared with $19.8
million in 1994. The increase in operating income in 1995 compared with 1994
was principally due to higher revenue, partially offset by the effect of the
strike and boiler failure.
Aluminum Processing--Net sales to third parties for the aluminum processing
segment were 28% higher in 1995 than in 1994. The bulk of the segment's sales
represents Kaiser's primary aluminum and fabricated aluminum products, with the
remainder representing the portion of sales of primary aluminum attributable to
the minority interest in the Company's 90%-owned Volta Aluminium Company
Limited ("Valco") aluminum smelter in Ghana. Revenue from primary aluminum
increased 67% in 1995 from 1994, due primarily to higher average realized
prices and higher shipments. In 1995, the Company's average realized price from
sales of primary aluminum was approximately $.81 per pound, as compared to the
AMT Price of approximately $.86 per pound during the year. Average realized
prices in 1994 reflected the defensive hedging of primary aluminum prices in
respect of 1994 shipments,
KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT 15
Kaiser Aluminum Corporation and Subsidiary Companies
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
which was initiated prior to the then-recent improvements in metal prices. The
higher shipments of primary aluminum in 1995 were due to increased production
at the Company's smelters in the Pacific Northwest and Valco, and reduced
intracompany consumption of primary metal at the Company's fabricated products
units. Shipments in 1994 reflected production curtailments at the Company's
smelters in the Pacific Northwest and Valco. Shipments of primary aluminum to
third parties were approximately 42% of total aluminum products shipments in
1995, compared with approximately 36% in 1994. Revenue from fabricated aluminum
products increased 17% in 1995 from 1994, due to higher average realized prices
partially offset by lower shipments for most of these products.
The increase in net sales for 1995 was partially offset by decreased shipments
caused by the strike by the USWA discussed above.
This segment's operating income was $238.9 million in 1995, compared with a
loss of $8.4 million in 1994. Improvement in operating results in 1995 compared
with 1994 was principally due to higher revenue, partially offset by the effect
of the strike by the USWA.
Corporate--Corporate operating expenses represent corporate general and
administrative expenses that were not allocated to segments.
LIQUIDITY AND CAPITAL RESOURCES
See Note 4 of the Notes to Consolidated Financial Statements for a listing of
the Company's indebtedness and information concerning certain restrictive debt
covenants.
OPERATING ACTIVITIES
Cash provided by operating activities was $21.9 million in 1996 as compared to
$118.7 million in 1995. In 1994, $22.1 million of cash was used by operating
activities. The reduction in cash generated by operating activities from 1995
to 1996 is primarily due to lower earnings resulting from the reduction in
prices realized by the Company from the sale of primary aluminum and alumina.
The improvement in cash flows from operating activities in 1995 compared with
1994 was primarily due to higher earnings resulting from increased product
prices and a refund of margin deposits of $50.5 million under certain hedging
contracts.
At December 31, 1996, the Company had working capital of $414.3 million,
compared with working capital of $331.7 million at December 31, 1995. The
increase in working capital was due primarily to an increase in Cash and cash
equivalents as a result of the debt offerings discussed below.
INVESTING ACTIVITIES
The Company's capital expenditures of $319.9 million during the three years
ended December 31, 1996 (of which $23.2 million was funded by the Company's
minority partners in certain foreign joint ventures) were made primarily to
construct new facilities, improve production efficiency, reduce operating
costs, and expand capacity at existing facilities. Total consolidated capital
expenditures were $161.5 million in 1996, compared with $88.4 million in 1995
and $70.0 million in 1994 (of which $7.4, $8.3, and $7.5 million were funded by
the minority partners in certain foreign joint ventures in 1996, 1995, and
1994, respectively). A substantial portion of the increase in capital
expenditures in 1996 over prior years levels is attributable to the development
and construction of the Company's proprietary Micromill technology for the
production of can sheet from molten metal. The first Micromill, which was
constructed in Nevada during 1996 as a demonstration and production facility,
achieved operational start-up by year-end 1996. The Company expects that the
Nevada Micromill will be in a start-up mode for the first half of 1997 and will
be able to commence limited product shipments to customers in the second half
of the year. Total consolidated capital expenditures are expected to be between
$70.0 and $140.0 million per annum in each of 1997 through 1999 (of which
approximately 7% is expected to be funded by the Company's minority partners in
certain foreign joint ventures). Management continues to evaluate numerous
projects all of which require substantial capital, both in the United States
and overseas.
16 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT
In 1995, Kaiser Yellow River Investment Limited ("KYRIL"), a subsidiary of the
Company, entered into a joint venture agreement and related agreements (the
"Joint Venture Agreements") with the Lanzhou Aluminum Smelters ("LAS") of the
China National Nonferrous Metals Industry Corporation relating to the formation
and operation of Yellow River Aluminum Industry Company Limited, a Sino-foreign
joint equity enterprise (the "Joint Venture") organized under the laws of the
People's Republic of China ("PRC"). KYRIL contributed $9.0 million to the
capital of the Joint Venture in July 1995. The parties to the Joint Venture are
currently engaged in discussions concerning the future of the Joint Venture.
Governmental approval in the PRC will be necessary in order to implement any
arrangements agreed to by the parties, and there can be no assurance such
approvals will be obtained. At a meeting of the board of directors of the Joint
Venture held on January 16, 1997, LAS reported that negotiations had begun with
an investor regarding the possible purchase of KYRIL's interest in the Joint
Venture. Based on such report, the Joint Venture directors adopted a resolution
that, among other things, (i) extended until June 30, 1997, discussions
concerning the future of the Joint Venture, (ii) provided that KYRIL grant to
LAS the right to seek a buyer to purchase KYRIL's equity interest in the Joint
Venture, and (iii) provided that if a buyer to purchase KYRIL's equity interest
in the Joint Venture was not found by June 30, 1997, the Joint Venture would be
terminated and dissolved.
FINANCING ACTIVITIES AND LIQUIDITY
On February 17, 1994, the Company and KACC entered into a five year credit
agreement (as amended, the "Credit Agreement") under which KACC is able to
borrow by means of revolving credit advances and letters of credit (up to
$125.0 million) in an aggregate amount equal to the lesser of $325.0 million or
a borrowing base relating to eligible accounts receivable plus eligible
inventory. As of February 14, 1997, $271.9 million (of which $71.9 million
could have been used for letters of credit) was available to KACC under the
Credit Agreement. The Credit Agreement is unconditionally guaranteed by the
Company and by certain significant subsidiaries of KACC. The 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
Credit Agreement is secured by, among other things, (i) mortgages on KACC's
major domestic plants (excluding KACC's Gramercy alumina plant and Nevada
Micromill); (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.
During the fourth quarter of 1996, KACC sold a total of $225.0 million
principal amount of two separate series of 10-7/8% Senior Notes due 2006 (the
"10-7/8% Notes") in separate transactions. A net premium of $.9 million was
realized from the issuance of the 10-7/8% Notes. The 10-7/8% Notes rank pari
passu in right and priority of payment with the indebtedness under the Credit
Agreement and KACC's 9-7/8% Senior Notes due 2002 (the "9-7/8% Notes") and are
guaranteed on a senior, unsecured basis by certain of KACC's subsidiaries.
The indentures governing the 9-7/8% Notes, the 10-7/8% Notes and KACC's 12-3/4%
Senior Subordinated Notes due 2003 (the "12-3/4% Notes") (collectively, the
"Indentures") restrict, among other things, KACC's ability to incur debt and
liens, make investments, undertake transactions with affiliates, and pay
dividends. Further, the Indentures provide that KACC must offer to purchase the
9-7/8% Notes, the 10-7/8% Notes and the 12-3/4% Notes, respectively, upon the
occurrence of a Change of Control (as defined therein), and the Credit
Agreement provides that the occurrence of a Change in Control (as defined
therein) shall constitute an Event of Default thereunder.
As of December 31, 1996, the Company's total consolidated indebtedness was
$961.9 million and $269.7 million of borrowing capacity was unused under the
revolving credit facility of the Credit Agreement. During the year ended
December 31, 1996, total borrowings and repayments under the revolving credit
facility of the Credit Agreement were $464.3 million and $477.4 million,
respectively. During the year ended December 31, 1995, total
KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT 17
Kaiser Aluminum Corporation and Subsidiary Companies
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
borrowings and repayments under the revolving credit facility of the Credit
Agreement were $532.2 million and $525.8 million, respectively.
Management believes that the Company's existing cash resources, together with
cash flows from operations and borrowings under the Credit Agreement, will be
sufficient to satisfy its working capital and capital expenditure requirements
for the next year. With respect to long-term liquidity, management believes
that operating cash flows, together with the ability to obtain both short and
long-term financing, should provide sufficient funds to meet the Company's
working capital and capital expenditure requirements.
CAPITAL STRUCTURE
MAXXAM Inc. ("MAXXAM") and one of its wholly owned subsidiaries collectively
own approximately 62% of the Company's Common Stock, par value $.01 per share,
assuming the conversion of each outstanding share of the Company's 8.255%
PRIDES, Convertible Preferred Stock (the "PRIDES") into one share of the
Company's Common Stock. The remaining approximately 38% of the Company's Common
Stock is publicly held.
MAXXAM Group Holdings Inc. ("MGHI"), a wholly owned subsidiary of MAXXAM, has
pledged 27,938,250 shares of the Company's Common Stock beneficially owned by
it (the "Pledged Shares") as security for $225.7 million of debt securities of
one of its wholly owned subsidiaries. Additionally, MGHI has agreed to pledge
up to 16,055,000 of such Pledged Shares as security for $130.0 million of its
debt securities should the MAXXAM security pledge be released due to an early
retirement of the related debt (other than by a refinancing).
The Company has an effective "shelf" registration statement covering the
offering of up to 10,000,000 shares of the Company's Common Stock that are
owned by MAXXAM. Any such offering will only be made by means of a prospectus.
The Company will not receive any of the net proceeds from any transaction
initiated by MAXXAM pursuant to this registration statement.
The Company also has an effective shelf registration statement covering the
offering from time to time of up to $150.0 million of equity securities. Any
such offering will only be made by means of a prospectus.
On December 31, 1997, unless either previously redeemed by the Company 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.
The 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
with respect to the outstanding PRIDES is expressly permitted by the terms of
the Credit Agreement to the extent the Company receives payments on certain
intercompany notes or certain other permitted distributions from KACC.
In February 1996, the Company filed a preliminary proxy statement relating to a
proposed recapitalization and a special meeting of stockholders to consider and
vote upon the proposal with the Securities and Exchange Commission ("SEC"). The
proposed recapitalization would have provided for two separate classes of
common stock with different voting rights, but was ultimately abandoned as a
result of an unfavorable court ruling in a suit that had challenged the
proposal.
See Note 7 of the Notes to Consolidated Financial Statements.
ENVIRONMENTAL CONTINGENCIES
The Company and KACC are subject to a number of environmental laws, to fines or
penalties assessed for alleged breaches of the environmental laws, and to
claims and litigation based upon such laws. KACC currently is subject to a
number of lawsuits under the Comprehensive Environmental Response, Compensation
and Liability Act of
18 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT
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. At December
31, 1996, the balance of such accruals, which are primarily included in
Long-term liabilities, was $33.3 million. 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
actions 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 $9.0
million for the years 1997 through 2001 and an aggregate of approximately $6.0
million 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 an estimated $24.0 million
and that, subject to further regulatory review and approval, the factors upon
which a substantial portion of this estimate is based are expected to be
resolved over the next twelve months. 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,
results of operations, or liquidity. See Note 8 of the Notes to Consolidated
Financial Statements for further description of these contingencies.
ASBESTOS CONTINGENCIES
KACC is a defendant in a number of lawsuits, some of which involve claims of
multiple persons, in which the plaintiffs allege that certain of their injuries
were caused by, among other things, exposure to asbestos during, and as a
result of, their employment or association with KACC or exposure to products
containing asbestos produced or sold by KACC. The lawsuits generally relate to
products KACC has not manufactured for at least 15 years. At December 31, 1996,
the number of such claims pending was approximately 71,100, as compared with
59,700 at December 31, 1995. In 1996, approximately 21,100 of such claims were
received and 9,700 were settled or dismissed.
A substantial portion of the asbestos-related claims that were filed and served
on KACC during 1995 and 1996 were filed in Texas. KACC has been advised by its
counsel that, although there can be no assurance, the increase in pending
claims may have been attributable in part to tort reform legislation in Texas.
Although asbestos-related claims are currently exempt from certain aspects of
the Texas tort reform legislation, management has been advised that efforts to
remove the asbestos-related exemption in the tort reform legislation relating
to the doctrine of forum non conveniens, as well as other developments in the
legislative and legal environment in Texas, may be responsible for the
accelerated pace of new claims experienced in late 1995 and its continuance in
1996, albeit at a somewhat reduced rate.
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 through 2008. There are inherent uncertainties
involved in estimating asbestos-related costs, and the Company's actual costs
could exceed or be less than these estimates. The Company's accrual was
calculated based on the current and anticipated number of asbestos-related
claims, the prior timing and amounts of asbestos-related payments, and the
advice of Wharton Levin Ehrmantraut Klein & Nash, P.A. with respect to the
current state of the law related to asbestos claims. Accordingly, an estimated
asbestos-related cost accrual of $136.7 million, before consideration of
insurance recoveries, is
KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT 19
Kaiser Aluminum Corporation and Subsidiary Companies
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
included primarily in Long-term liabilities at December 31, 1996. While the
Company does not presently believe there is a reasonable basis for estimating
such costs beyond 2008 and, accordingly, no accrual has been recorded for such
costs which may be incurred beyond 2008, there is a reasonable possibility that
such costs may continue beyond 2008, and such costs may be substantial. The
Company estimates that annual future cash payments in connection with such
litigation will be approximately $8.0 to $17.0 million for each of the years
1997 through 2001, and an aggregate of approximately $80.0 million thereafter.
The Company believes that KACC has insurance coverage available to recover a
substantial portion of its asbestos-related costs. Claims for recovery from
some of KACC's insurance carriers are currently subject to pending litigation
and other carriers have raised certain defenses, which have resulted in delays
in recovering costs from the insurance carriers. The timing and amount of
ultimate recoveries from these insurance carriers are dependent upon the
resolution of these disputes. The Company believes, based on prior
insurance-related recoveries in respect of asbestos-related claims, existing
insurance policies, and the advice of Thelen, Marrin, Johnson & Bridges LLP
with respect to applicable insurance coverage law relating to the terms and
conditions of those policies, that substantial recoveries from the insurance
carriers are probable. Accordingly, an estimated aggregate insurance recovery
of $109.8 million, determined on the same basis as the asbestos-related cost
accrual, is recorded primarily in Other assets at December 31, 1996.
Management continues to monitor claims activity, the status of lawsuits
(including settlement initiatives), legislative progress, and costs incurred in
order to ascertain whether an adjustment to the existing accruals should be
made to the extent that historical experience may differ significantly from the
Company's underlying assumptions. 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, results of operations, or liquidity. See Note
8 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, 1996, were
$309.2 million, net of valuation allowances of $127.2 million. 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.
See Note 5 of the Notes to Consolidated Financial Statements for a discussion
of these and other income tax matters.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1996 the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 96-1 ("SOP 96-1") which provides
authoritative guidance intended to improve and narrow the manner in which
existing accounting literature is applied to the recognition, measurement,
display, and disclosure of environmental remediation liabilities arising
pursuant to existing federal, state and local laws and regulations. SOP 96-1
addresses the nature of items that are to be included in the measurement of a
company's liability related to any environmental remediation efforts it is
currently undertaking or required to complete in the future. In this regard,
SOP 96-1 requires that all incremental direct third party costs, as well as any
internal compensation costs (including benefits) for employees expected to
devote a significant amount of time directly to remediation efforts, should be
included in the determination of the estimated liability. The term "remediation
effort" is defined in SOP 96-1 to include such things as remedial risk
assessment, feasibility studies and operations and maintenance associated with
corrective actions. SOP 96-1 must be adopted in the first quarter of 1997. The
adoption of SOP 96-1 is not currently expected to have a material impact on the
Company's financial position or results of operations.
20 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT
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, 1996
and 1995, and the related statements of consolidated income (loss) and cash
flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 14, 1997
KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT 21
Kaiser Aluminum Corporation and Subsidiary Companies
Consolidated Balance Sheets
The accompanying notes to consolidated financial statements are an integral
part of these statements.
22 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT
Statements of Consolidated Income (Loss)
The accompanying notes to consolidated financial statements are an integral
part of these statements.
KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT 23
Kaiser Aluminum Corporation and Subsidiary Companies
Statements of Consolidated Cash Flows
The accompanying notes to consolidated financial statements are an integral
part of these statements.
24 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT
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.
The Company is a subsidiary of MAXXAM Inc. ("MAXXAM") and conducts its
operations through its wholly owned subsidiary, Kaiser Aluminum & Chemical
Corporation ("KACC"). KACC operates in all principal aspects of the aluminum
industry--the mining of bauxite (the major aluminum-bearing ore), the refining
of bauxite into alumina (the intermediate material), the production of primary
aluminum, and the manufacture of fabricated and semi- fabricated aluminum
products. Kaiser's production levels of alumina and primary aluminum exceed its
internal processing needs, which allows it to be a major seller of alumina and
primary aluminum to domestic and international third parties (see Note 10).
The preparation of financial statements in accordance with generally accepted
accounting principles requires the use of estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities known to exist as of the date the financial statements are
published, and the reported amounts of revenues and expenses during the
reporting period. Uncertainties, with respect to such estimates and
assumptions, are inherent in the preparation of the Company's consolidated
financial statements; accordingly, it is possible that the actual results could
differ from these estimates and assumptions, which could have a material effect
on the reported amounts of the Company's consolidated financial position and
results of operation.
Investments in 50%-or-less-owned entities are accounted for primarily by the
equity method. Intercompany balances and transactions are eliminated.
Certain reclassifications of prior-year information were made to conform to the
current presentation.
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:
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 of land improvements, buildings, and machinery and
equipment are 8 to 25 years, 15 to 45 years, and 10 to 22 years, respectively.
KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT 25
Kaiser Aluminum Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
STOCK-BASED COMPENSATION
The Company applies the intrinsic value method to account for a stock-based
compensation plan whereby compensation cost is recognized only to the extent
that the quoted market price of the stock at the measurement date exceeds the
amount an employee must pay to acquire the stock. No compensation cost has been
recognized for this plan as no stock options were granted in 1996 or 1995 and
as the stock options granted in 1994 were at the market price (see Note 6).
OTHER INCOME (EXPENSE)
Other expense in 1996, 1995, and 1994 includes $3.1, $17.8, and $16.5 of
pre-tax charges related principally to establishing additional: (i) litigation
reserves for asbestos claims, net of estimated aggregate insurance recoveries,
and (ii) environmental reserves for potential soil and ground water remediation
matters, each pertaining to operations which were discontinued prior to the
acquisition of the Company by MAXXAM in 1988.
DEFERRED FINANCING COSTS
Costs incurred to obtain debt financing are deferred and amortized over the
estimated term of the related borrowing. Such amortization is included in
interest expense.
FOREIGN CURRENCY
The Company uses the United States dollar as the functional currency for its
foreign operations.
DERIVATIVE FINANCIAL INSTRUMENTS
Hedging transactions using derivative financial instruments are primarily
designed to mitigate KACC's exposure to changes in prices for certain of the
products which KACC sells and consumes and, to a lesser extent, to mitigate
KACC's exposure to changes in foreign currency exchange rates. KACC does not
utilize derivative financial instruments for trading or other speculative
purposes. KACC's derivative activities are initiated within guidelines
established by management and approved by KACC's and the Company's boards of
directors. Hedging transactions are executed centrally on behalf of all of
KACC's business segments to minimize transactions costs, monitor consolidated
net exposures and allow for increased responsiveness to changes in market
factors.
Most of KACC's hedging activities involve the use of option contracts (which
establish a maximum and/or minimum amount to be paid or received) and forward
sales contracts (which effectively fix or lock-in the amount KACC will pay or
receive). Option contracts typically require the payment of an up-front premium
in return for the right to receive the amount (if any) by which the price at
the settlement date exceeds the strike price. Any interim fluctuations in
prices prior to the settlement date are deferred until the settlement date of
the underlying hedged transaction, at which point they are reflected in net
sales or cost of sales (as applicable) together with the related premium cost.
Forward sales contracts do not require an up-front payment and are settled by
the receipt or payment of the amount by which the price at the settlement date
varies from the contract price. No accounting recognition is accorded to
interim fluctuations in prices of forward sales contracts.
KACC has established margin accounts and credit limits with certain
counterparties related to open forward sales and option contracts. When
unrealized gains or losses are in excess of such credit limits, KACC is
entitled to receive advances from the counterparties on open positions or is
required to make margin deposits to counterparties, as the case may be. At
December 31, 1996, KACC had received $13.0 of margin advances from
counterparties. At December 31, 1995, KACC had neither received nor made any
margin deposits. Management considers credit risk related to possible failure
of the counterparties to perform their obligations pursuant to the derivative
contracts to be minimal.
26 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
Deferred gains or losses as of December 31, 1996, are included in Prepaid
expenses and other current assets and Other accrued liabilities (See Note 9).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates the fair value of its outstanding indebtedness to be
$1,006.9 and $806.3 at December 31, 1996, and 1995, respectively, based on
quoted market prices for KACC's 97/8% Senior Notes due 2002 (the "97/8% Notes")
and 123/4% Senior Subordinated Notes due 2003 (the "123/4% Notes"), the
issuance price of the 107/8% Notes (as defined in Note 4), and the discounted
future cash flows for all other indebtedness, using the current rate for debt
of similar maturities and terms. The Company believes that the carrying amount
of other financial instruments is a reasonable estimate of their fair value,
unless otherwise noted.
EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Primary--Earnings (loss) per common and common equivalent share are computed by
deducting preferred stock dividends from net income (loss) in order to
determine net income (loss) available to common shareholders. This amount is
then divided by the weighted average number of common and common equivalent
shares outstanding during the period. The weighted average number of common and
common equivalent shares outstanding for the year ended December 31, 1996,
excludes the impact of outstanding stock options since they were antidilutive.
The impact of outstanding stock options on weighted average number of common
and common equivalent shares on the other periods presented was immaterial.
Fully Diluted--The Company's 8.255% PRIDES, Convertible Preferred Stock
("PRIDES") were excluded from the calculation of the weighted average number of
common and common equivalent shares outstanding for all periods presented
because they were antidilutive. For the year ended December 31, 1995, dividends
of $9.2 attributable to the Company's Mandatory Conversion Premium Dividend
Preferred Stock (the "Series A Shares") which were exchanged for approximately
13.1 million shares of the Company's Common Stock and certain cash payments on
September 19, 1995, have not been deducted from net income and the weighted
average number of common and common equivalent shares outstanding have been
adjusted to reflect the shares of common stock issued in the exchange as if
they had been outstanding for the entire period. As a result of the conversion
of the Series A Shares, fully diluted earnings per share for the 1995 periods
are presented even though the results are antidilutive.
2. 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, 1996 and 1995, KACC's net receivables from these affiliates
were not material.
KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT 27
Kaiser Aluminum Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
SUMMARY OF COMBINED FINANCIAL POSITION
SUMMARY OF COMBINED OPERATIONS
The Company's equity in income (loss) differs from the summary net income
(loss) due to various percentage ownerships in the entities and equity method
accounting adjustments. At December 31, 1996, KACC's investment in its
unconsolidated affiliates exceeded its equity in their net assets by
approximately $42.0 which amount will be fully amortized over the next four
years.
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
$281.6, $284.4, and $219.7 in the years ended December 31, 1996, 1995, and
1994, respectively.
3. PROPERTY, PLANT, AND EQUIPMENT
The major classes of property, plant, and equipment are as follows:
28 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
4. LONG-TERM DEBT
Long-term debt and its maturity schedule are as follows:
CREDIT AGREEMENT
In February 1994, the Company and KACC entered into a credit agreement (as
amended, the "Credit Agreement") which provides a $325.0 five-year secured,
revolving line of credit. 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 $325.0 or a borrowing base relating to eligible
accounts receivable plus eligible inventory. As of December 31, 1996, $269.7
(of which $71.9 could have been used for letters of credit) was available to
KACC under the Credit Agreement. The Credit Agreement is unconditionally
guaranteed by the Company and by certain significant subsidiaries of KACC.
Interest on outstanding balances will bear a premium (which varies based on the
results of a financial test) over either a base rate or LIBOR at the Company's
option.
1996 ISSUANCES
During the fourth quarter of 1996, KACC sold a total of $225.0 principal amount
of two separate series of 10 7/8% Senior Notes due 2006 (the "10 7/8% Notes")
in separate transactions. A net premium of $.9 was realized from the issuance
of the 10 7/8% Notes. The 10 7/8% Notes rank pari passu in right and priority
of payment with the indebtedness under the Credit Agreement and the 9 7/8%
Notes and are guaranteed on a senior, unsecured basis by certain of KACC's
subsidiaries.
LOAN COVENANTS AND RESTRICTIONS
The Credit Agreement requires KACC to comply with 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 Credit Agreement is secured by, among other
things, (i) mortgages on KACC's major domestic plants (excluding KACC's
Gramercy alumina plant and Nevada Micromill); (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.
KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT 29
Kaiser Aluminum Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
The obligations of KACC with respect to its 9 7/8% Notes, its 10 7/8% Notes and
its 12 3/4% Notes are guaranteed, jointly and severally, by certain
subsidiaries of KACC. The indentures governing the 9 7/8% Notes, the 10 7/8%
Notes and the 12 3/4% Notes (collectively, the "Indentures") restrict, among
other things, KACC's ability, to incur debt, undertake transactions with
affiliates, and pay dividends. Further, the Indentures provide that KACC must
offer to purchase the 9 7/8% Notes, the 10 7/8% Notes and the 12 3/4% Notes,
respectively, upon the occurrence of a Change of Control (as defined therein),
and the Credit Agreement provides that the occurrence of a Change in Control
(as defined therein) shall constitute an Event of Default thereunder.
Under the most restrictive of the covenants in the Indentures and the Credit
Agreement, neither the Company nor KACC currently is permitted to pay dividends
on its common stock.
In December 1991, Alpart entered into a loan agreement with the Caribbean Basin
Projects Financing Authority ("CARIFA"). Pursuant to the loan agreement,
Alpart must remain a qualified recipient for Caribbean Basin Initiative funds
as defined in applicable laws. Alpart has also 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).
RESTRICTED NET ASSETS OF SUBSIDIARIES
Certain debt instruments restrict the ability of KACC to transfer assets, make
loans and advances, and pay dividends to the Company. The restricted net assets
of KACC totaled $56.1 and $24.0 at December 31, 1996 and 1995, respectively.
CAPITALIZED INTEREST
Interest capitalized in 1996, 1995, and 1994 was $4.9, $2.8, and $2.7,
respectively.
EXTRAORDINARY ITEM
The Company recorded a pre-tax extraordinary loss of $5.4 (net of $2.9 of
deferred income taxes provided at a rate which approximates the federal
statutory rate) in the first quarter of 1994 when the Company entered into the
Credit Agreement, as a result of the write-off of unamortized deferred
financing costs related to the previous credit agreement.
5. INCOME TAXES
Income (loss) before income taxes, minority interests and extraordinary loss 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.
30 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
The credit (provision) for income taxes on income (loss) before income taxes,
minority interests and extraordinary loss 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.
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 interest and extraordinary loss is as follows:
Included in revision of prior years' tax estimates and other changes in
valuation allowances for 1996 shown above is $9.8 related to the resolution of
certain income tax matters in the fourth quarter of 1996.
KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT 31
Kaiser Aluminum Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
The components of the Company's net deferred income tax assets are as follows:
The principal component of the Company's net deferred income tax asset is the
tax benefit, net of certain valuation allowances, associated with the accrued
liability 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 that 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.
A substantial portion of the valuation allowances provided by the Company
relates to loss and credit carryforwards. To determine the proper amount of
valuation allowances with respect to these carryforwards, the Company evaluated
all appropriate factors, 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 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.
As of December 31, 1996 and 1995, $69.7 and $53.5, respectively, of the net
deferred income tax assets listed above are included on the Consolidated
Balance Sheets in the caption entitled Prepaid expenses and other current
assets. Certain other portions of the deferred income tax liabilities listed
above are included on the Consolidated Balance Sheets in the captions entitled
Other accrued liabilities and Long-term liabilities.
The Company and its subsidiaries file consolidated federal income tax returns.
For the period from October 28, 1988 through June 30, 1993, the Company and its
subsidiaries were included in the consolidated federal income tax returns of
MAXXAM. Payments or refunds for periods ended prior to July 1, 1993, may still
be required by or payable to the Company or KACC pursuant to their respective
tax allocation agreements with MAXXAM due to the final resolution of audits,
amended returns, and related matters. However, the Credit Agreement prohibits
the payment by KACC to MAXXAM of any amounts due under KACC's tax allocation
agreement with MAXXAM (the "KACC Tax 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
32 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
Allocation Agreement. The respective tax allocation agreements of the Company
and KACC with MAXXAM terminated pursuant to their terms, effective for taxable
periods beginning after June 30, 1993.
The following table presents the Company's tax attributes for federal income
tax purposes as of December 31, 1996. The utilization of certain of these tax
attributes is subject to limitations:
6. 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:
(1) Includes plans with assets exceeding accumulated benefits by
approximately $.3 and $.1 in 1996 and 1995, respectively.
KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT 33
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 $11.0 and $(4.7) at December 31, 1996 and 1995, respectively, for the
deficit (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 $(6.5) and $2.8 as of December 31, 1996 and 1995,
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
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.
The Company has not funded the liability for these benefits, which are expected
to be paid out of cash generated by operations. The Company reserves the right,
subject to applicable collective bargaining agreements, to amend or terminate
these benefits.
In 1995, the Company adopted the Kaiser Aluminum Medicare Program ("KAMP").
KAMP is mandatory for all salaried retirees over 65 and for United Steelworkers
of America ("USWA") retirees who retire after December 31, 1995, when they
become 65, and voluntary for other hourly retirees of the Company's operations
in the states of California, Louisiana, Pennsylvania, Rhode Island, and
Washington.
34 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
The Company's accrued postretirement benefit obligation is composed of the
following:
The components of net periodic postretirement benefit cost are:
The 1997 annual assumed rates of increase in the per capita cost of covered
benefits (i.e., health care cost trend rate) for non-HMO are 8.0% and 6.0% for
retirees under 65 and over 65, respectively, and 5.5% for HMO at all ages.
Non-HMO rates are assumed to decrease gradually to 5.5% in 2004 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, 1996, by approximately $60.4 and the aggregate of
the service and interest cost components of net periodic postretirement benefit
cost for 1996 by approximately $6.1. The weighted average discount rate used to
determine the accumulated postretirement benefit obligation at December 31,
1996 and 1995, was 7.75% and 7.5%, respectively.
POSTEMPLOYMENT BENEFITS
The Company provides certain benefits to former or inactive employees after
employment but before retirement.
KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT 35
Kaiser Aluminum Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
INCENTIVE PLANS
In 1993, the Company adopted the Kaiser 1993 Omnibus Stock Incentive Plan (the
"1993 Incentive Plan"). A total of 2,500,000 shares of the Company's Common
Stock were reserved for awards or for payment of rights granted under the 1993
Incentive Plan, of which 572,254 shares were available to be awarded at
December 31, 1996. During 1994, under the 1993 Incentive Plan, 102,564
restricted shares, which are now fully vested, were distributed to two Company
executives. Compensation expense recognized during 1996, 1995 and 1994
associated with the 1993 Incentive Plan and a prior long-term incentive plan
(the "LTIP") was approximately $.7, $1.4 and $2.2, respectively.
In 1994, the Compensation Committee of the Board of Directors approved the
award of "nonqualified stock options" to certain members of management. These
options generally vest at the rate of 25% per year. Information relating to
nonqualified stock option activity is shown below. The weighted average price
per share is shown parenthetically.
In 1995, the Company adopted the Kaiser Aluminum Total Compensation System, an
unfunded incentive compensation program. The program provides incentive pay
based on performance against annual plans and over rolling three-year periods.
KACC also has a defined contribution plan for salaried employees. The Company's
expense for these plans was $(2.1), $11.9 and $6.1 for the years ended December
31, 1996, 1995, and 1994, respectively.
36 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT
(In millions of dollars, except share amounts)
7. STOCKHOLDERS' EQUITY AND MINORITY INTERESTS
Changes in stockholders' equity and minority interests were:
KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT 37
Kaiser Aluminum Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
REDEEMABLE PREFERENCE STOCK
In 1985, KACC issued its Cumulative (1985 Series A) Preference Stock and its
Cumulative (1985 Series B) Preference Stock (together, the "Redeemable
Preference Stock") each of which has a par value of $1 per share and a
liquidation and redemption value of $50 per share plus accrued dividends, if
any. No additional Redeemable Preference Stock is expected to be issued.
Holders of the Redeemable Preference Stock are entitled to an annual cash
dividend of $5 per share, or an amount based on a formula tied to KACC's
pre-tax income from aluminum operations, when and as declared by the Board of
Directors.
The carrying values of the Redeemable Preference Stock are increased each year
to recognize accretion between the fair value (at which the Redeemable
Preference Stock was originally issued) and the redemption value. Changes in
Redeemable Preference Stock are shown below.
Redemption fund agreements require KACC to make annual payments by March 31 of
the subsequent year based on a formula tied to consolidated net income until
the redemption funds are sufficient to redeem all of the Redeemable Preference
Stock. On an annual basis, the minimum payment is $4.3 and the maximum payment
is $7.3. KACC also has certain additional repurchase requirements which are,
among other things, based upon profitability tests.
The Redeemable Preference 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 Redeemable
Preference Stock restricts the ability of KACC to redeem or pay dividends on
common stock if KACC is in default on any dividends payable on Redeemable
Preference Stock.
PREFERENCE STOCK
KACC has four series of $100 par value Cumulative Convertible Preference Stock
("$100 Preference Stock") with annual dividend requirements of between 4 1/8%
and 4 3/4%. KACC has the option to redeem the $100 Preference Stock at par
value plus accrued dividends. KACC does not intend to issue any additional
shares of the $100 Preference Stock.
The $100 Preference Stock can be exchanged for per share cash amounts between
$69 - $80. KACC records the $100 Preference Stock at their exchange amounts for
financial statement presentation and the Company includes such amounts in
minority interests. At December 31, 1996, and 1995, outstanding shares of $100
Preference Stock were 21,630 and 22,214, respectively.
PREFERRED STOCK
Series A Convertible--In 1993, Kaiser issued 19,382,950 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"). On September 19, 1995, the Company redeemed all 1,938,295 Series A
Shares, which resulted in the simultaneous redemption of all Depositary Shares
in exchange for (i) 13,126,521 shares of the Company's
38 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
Common Stock and (ii) $2.8 in cash in satisfaction of all accrued and unpaid
dividends up to and including the day immediately prior to the redemption date
and any fractional shares of common stock that would have otherwise been
issuable.
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. 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 the Company's Common
Stock and together with the holders of any other classes or series of stock 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 by the Company 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.
At any time and from time to time after December 31, 1996, the Company may
redeem any or all of the outstanding shares of PRIDES. The number of shares of
the Company's Common Stock a holder will receive upon redemption will vary
depending on a formula and the market price of the Company's Common Stock from
time to time, but in no event will be less than .8333 of a share of Common
Stock, subject to adjustment in certain events. At any time prior to December
31, 1997, 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 value of the shares received by a holder will vary depending on the market
price of the Company's Common Stock.
PLEDGED SHARES
At December 31, 1996, 27,938,250 shares of the Company's Common Stock (the
"Pledged Shares") beneficially owned by MAXXAM Group Holdings Inc. ("MGHI"), a
wholly owned subsidiary of MAXXAM, were pledged as security for debt of MAXXAM
Group Inc. ("MGI"), a wholly owned subsidiary of MGHI, consisting of $100.0
aggregate principal amount of 11 1/4% Senior Secured Notes due 2003 and $125.7
aggregate principal amount of 12 1/4% Senior Secured Discount Notes due 2003
(collectively the "MGI Secured Debt"). Additionally, up to 16,055,000 of the
Pledged Shares are to be pledged by MGHI as security for $130.0 principal
amount of 12% Senior Secured Notes due 2003 issued in December 1996 by MGHI, if
any of the Pledged Shares are released as security for the MGI Secured Debt by
reason of an early retirement of such indebtedness (other than by a
refinancing).
PROPOSED RECAPITALIZATION
On February 5, 1996, the Company announced that it filed with the Securities
and Exchange Commission ("SEC") a preliminary proxy statement relating to a
proposed recapitalization and a special meeting of stockholders to consider and
vote upon the proposal. The proposed recapitalization would have: (i) provided
for two classes of
KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT 39
Kaiser Aluminum Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
common stock: Class A Common Shares, $.01 par value, with one vote per share
and a new lesser-voting class designated as Common Stock, $.01 par value, with
1/10 vote per share; (ii) redesignated as Class A Common Shares the 100 million
currently authorized shares of existing common stock and authorize an
additional 250 million shares to be designated as Common Stock; and (iii)
changed each issued share of the Company's existing common stock, par value
$.01 per share, into (a) .33 of a Class A Common Share and (b) .67 of a share
of Common Stock. Although approved by the Company's stockholders, the proposed
recapitalization was not implemented and was ultimately abandoned as a result
of an unfavorable court ruling in a suit that had challenged the plan. The
decision to abandon the proposed recapitalization does not preclude a
recapitalization from being proposed to the Company's stockholders in the
future.
8. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
KACC has a variety of financial commitments, including purchase agreements,
tolling arrangements, forward foreign exchange and forward sales contracts (see
Note 9), 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, 1996, is
$94.4, of which approximately $12.0 is due in each of 2000 and 2001 with the
balance being due thereafter. KACC's share of payments, including operating
costs and certain other expenses under the agreements, has ranged between
$110.0-$120.0 over the past three years. KACC also has agreements to supply
alumina to and to purchase aluminum from Anglesey.
Minimum rental commitments under operating leases at December 31, 1996, are as
follows: years ending December 31, 1997- $23.2; 1998-$25.8; 1999-$30.7;
2000-$27.6; 2001-$27.2; thereafter-$160.3. The future minimum rentals
receivable under noncancelable subleases was $46.7 at December 31, 1996.
Rental expenses were $29.6, $29.0, and $26.8, for the years ended December 31,
1996, 1995, and 1994, respectively.
ENVIRONMENTAL CONTINGENCIES
The Company and KACC are subject to a number of environmental laws, to fines or
penalties assessed for alleged breaches of the environmental laws, and to
claims and litigation based upon such laws. 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. The
following table presents the changes in such accruals, which are primarily
included in Long-term liabilities, for the years ended December 31, 1996, 1995,
and 1994:
40 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
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 $9.0 for the years 1997 through 2001 and
an aggregate of approximately $6.0 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 an estimated $24.0 and that,
subject to further regulatory review and approval, the factors upon which a
substantial portion of this estimate is based are expected to be resolved over
the next twelve months. 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, results of operations,
or liquidity.
ASBESTOS CONTINGENCIES
KACC is a defendant in a number of lawsuits, some of which involve claims of
multiple persons, in which the plaintiffs allege that certain of their injuries
were caused by, among other things, exposure to asbestos during, and as a
result of, their employment or association with KACC or exposure to products
containing asbestos produced or sold by KACC. The lawsuits generally relate to
products KACC has not manufactured for at least 15 years.
The following table presents the changes in number of such claims pending for
the years ended December 31, 1996, 1995, and 1994.
A substantial portion of the asbestos-related claims that were filed and served
on KACC during 1995 and 1996 were filed in Texas. KACC has been advised by its
counsel that, although there can be no assurance, the increase in pending
claims may have been attributable in part to tort reform legislation in Texas.
Although asbestos-related claims are currently exempt from certain aspects of
the Texas tort reform legislation, management has been advised that efforts to
remove the asbestos-related exemption in the tort reform legislation relating
to the doctrine of forum non conveniens, as well as other developments in the
legislative and legal environment in Texas, may be responsible for the
accelerated pace of new claims experienced in late 1995 and its continuance in
1996, albeit at a somewhat reduced rate.
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 through 2008. There are inherent
uncertainties involved in estimating asbestos-related costs, and the Company's
actual costs could exceed these estimates. The Company's accrual was calculated
based on the current and anticipated number of asbestos-related claims, the
KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT 41
Kaiser Aluminum Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
(In millions of dollars, except share amounts)
prior timing and amounts of asbestos-related payments, and the advice of
Wharton Levin Ehrmantraut Klein & Nash, P.A. with respect to the current state
of the law related to asbestos claims. Accordingly, an estimated
asbestos-related cost accrual of $136.7, before consideration of insurance
recoveries, is included primarily in Long-term liabilities at December 31,
1996. While the Company does not presently believe there is a reasonable basis
for estimating such costs beyond 2008 and, accordingly, no accrual has been
recorded for such costs which may be incurred beyond 2008, there is a
reasonable possibility that such costs may continue beyond 2008, and such costs
may be substantial. The Company estimates that annual future cash payments in
connection with such litigation will be approximately $8.0 to $17.0 for each of
the years 1997 through 2001, and an aggregate of approximately $80.0
thereafter.
The Company believes that KACC has insurance coverage available to recover a
substantial portion of its asbestos-related costs. Claims for recovery from
some of KACC's insurance carriers are currently subject to pending litigation
and other carriers have raised certain defenses, which have resulted in delays
in recovering costs from the insurance carriers. The timing and amount of
ultimate recoveries from these insurance carriers are dependent upon the
resolution of these disputes. The Company believes, based on prior
insurance-related recoveries in respect of asbestos-related claims, existing
insurance policies, and the advice of Thelen, Marrin, Johnson & Bridges LLP
with respect to applicable insurance coverage law relating to the terms and
conditions of those policies, that substantial recoveries from the insurance
carriers are probable. Accordingly, an estimated aggregate insurance recovery
of $109.8, determined on the same basis as the asbestos-related cost accrual,
is recorded primarily in Other assets at December 31, 1996.
Management continues to monitor claims activity, the status of lawsuits
(including settlement initiatives), legislative progress, and costs incurred in
order to ascertain whether an adjustment to the existing accruals should be
made to the extent that historical experience may differ significantly from the
Company's underlying assumptions. 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, results of operations, or liquidity.
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, results of operations, or liquidity.
9. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS
At December 31, 1996, the net unrealized gain on KACC's position in aluminum
forward sales and option contracts, (based on an average price of $1,610 per
ton ($.73 per pound) of primary aluminum), natural gas and fuel oil forward
purchase and option contracts, and forward foreign exchange contracts, was
approximately $10.5. However, increases in the price of primary aluminum during
January 1997 caused KACC's net hedging position at January 31, 1997, to change
to an unrealized loss of approximately $2.2. Any gains or losses on the
derivative contracts utilized in KACC's hedging activities are offset by losses
or gains, respectively, on the transactions being hedged.
42 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT
(In millions of dollars, except share amounts)
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ALUMINA AND ALUMINUM
The Company's earnings are sensitive to changes in the prices of alumina,
primary aluminum and fabricated aluminum products, and also depend to a
significant degree upon the volume and mix of all products sold. Primary
aluminum prices have historically been subject to significant cyclical price
fluctuations. Alumina prices as well as fabricated aluminum product prices
(which vary considerably among products) are significantly influenced by
changes in the price of primary aluminum but generally lag behind primary
aluminum price changes by up to three months. During the period January 1, 1993
through December 31, 1996, the Average Midwest United States transaction price
for primary aluminum has ranged from approximately $.50 to $1.00 per pound.
From time to time in the ordinary course of business, KACC enters into hedging
transactions to provide price risk management in respect of the net exposure of
earnings resulting from (i) anticipated sales of alumina, primary aluminum and
fabricated aluminum products, less (ii) expected purchases of certain items,
such as aluminum scrap, rolling ingot, and bauxite, whose prices fluctuate with
the market price of primary aluminum. Forward sales contracts are used by KACC
to effectively lock-in or fix the price that KACC will receive for its
shipments. KACC also uses option contracts (i) to establish a minimum price for
its product shipments, (ii) to establish a "collar" or range of price for
KACC's anticipated sales, and/or (iii) to permit KACC to realize possible
upside price movements. As of December 31, 1996, KACC had sold forward, at
fixed prices, approximately 70,000 and 93,600 tons of primary aluminum with
respect to 1997 and 1998, respectively. As of December 31, 1996, KACC had also
purchased put options to establish a minimum price for approximately 202,700
and 52,000 tons with respect to 1997 and 1998, respectively, and had entered
into option contracts that established a price range for an additional 165,600
tons with respect to 1998. During January 1997, the Company entered into
additional option contracts that establish a price range for 51,500, 60,000 and
51,000 tons with respect to 1997, 1998 and 1999, respectively. During January
1997 KACC also sold forward, at fixed prices, an additional 24,000 tons with
respect to 1999.
As of December 31, 1996, KACC had sold forward approximately 90% of the alumina
available to it in excess of its projected internal smelting requirements for
1997 and 1998. Virtually all of such 1997 and 1998 sales were made at prices
indexed to future prices of primary aluminum.
ENERGY
KACC is exposed to energy price risk from fluctuating prices for fuel oil and
natural gas consumed in the production process. Accordingly, KACC from time to
time in the ordinary course of business enters into hedging transactions with
major suppliers of energy and energy related financial instruments. As of
December 31, 1996, KACC had a combination of fixed price purchase and option
contracts for the purchase of approximately 40,000 MMBtu of natural gas per day
during the first and second quarter of 1997, and for 25,000 MMBtu of natural
gas per day for the period July 1997 through December 1998. At December 31,
1996, KACC also held option contracts for an average of 152,000 barrels of fuel
oil per month for 1997 and 174,000 barrels of fuel oil per month for 1998.
FOREIGN CURRENCY
KACC enters into forward exchange contracts to hedge material cash commitments
to foreign subsidiaries or affiliates. At December 31, 1996, KACC had net
forward foreign exchange contracts totaling approximately $81.6 for the
purchase of 110.0 Australian dollars from January 1997 through June 1998, in
respect of its commitments for 1997 and 1998 expenditures denominated in
Australian dollars.
10. SEGMENT AND GEOGRAPHICAL AREA INFORMATION
The Company's operations are located in many foreign countries, including
Australia, Canada, the People's Republic of China, Ghana, Jamaica, and the
United Kingdom. Foreign operations in general may be more vulnerable than
domestic operations due to a variety of political and other risks. Sales and
transfers among geographic areas are made on a basis intended to reflect the
market value of products.
KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT 43
Kaiser Aluminum Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (continued)
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
The aggregate foreign currency gain included in determining net income was $5.3
for the year ended December 31, 1995, and was immaterial in 1996 and 1994.
No single customer accounted for sales in excess of 10% of total revenue in
1996 and 1995. Sales of more than 10% of total revenue to a single customer
were $58.2 of bauxite and alumina and $147.7 of aluminum processing for the
year ended December 31, 1994, respectively.
Export sales were less than 10% of total revenue during the years ended
December 31, 1996, 1995, and 1994, respectively.
Geographical area information relative to operations is summarized as follows:
44 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT
(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------
Financial information by industry segment at December 31, 1996 and 1995, and
for the years ended December 31, 1996, 1995, and 1994, is as follows:
KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT 45
Kaiser Aluminum Corporation and Subsidiary Companies
Five-Year Financial Data--Consolidated Balance Sheets
(1) Total of long-term debt--current portion and long-term debt (collectively
"total debt") as a ratio of total debt, deferred income tax liabilities,
minority interests, and stockholders' equity.
46 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT
Five-Year Financial Data--Statements of Consolidated Income (Loss)
KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT 47
Kaiser Aluminum Corporation and Subsidiary Companies
Quarterly Financial Data (unaudited)
(1) Includes approximately $17.0 on an after tax basis resulting from
settlements of certain tax matters. Excluding these items, primary loss
per common and common equivalent share would have been approximately
$.32.
(2) After deduction of $5.3 of dividends on preferred stock from net income.
48 KAISER ALUMINUM CORPORATION 1996 ANNUAL REPORT