-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MW7qdaq3m+dxOee6RgGozePzQPaP1WCzqcz4fWfpTmDUPk48oZyE4ccuGw2B5BiY D7IJxut88ZLoBiKuA0/PIw== 0000950147-98-000916.txt : 19981116 0000950147-98-000916.hdr.sgml : 19981116 ACCESSION NUMBER: 0000950147-98-000916 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHELPS DODGE CORP CENTRAL INDEX KEY: 0000078066 STANDARD INDUSTRIAL CLASSIFICATION: PRIMARY SMELTING & REFINING OF NONFERROUS METALS [3330] IRS NUMBER: 131808503 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-00082 FILM NUMBER: 98747409 BUSINESS ADDRESS: STREET 1: 2600 NORTH CENTRAL AVE CITY: PHOENIX STATE: AZ ZIP: 85004 BUSINESS PHONE: 6022348100 MAIL ADDRESS: STREET 1: 2600 NORTH CENTRAL AVENUE CITY: PHOENIX STATE: AZ ZIP: 85004-3089 10-Q 1 FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended September 30, 1998 Commission file number 1-82 PHELPS DODGE CORPORATION (a New York corporation) 13-1808503 (I.R.S. Employer Identification No.) 2600 N. Central Avenue, Phoenix, AZ 85004-3089 Registrant's telephone number: (602) 234-8100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No _____ . Number of Common Shares outstanding at November 9, 1998: 57,942,591 shares. ================================================================================ PHELPS DODGE CORPORATION Quarterly Report on Form 10-Q For the Quarter Ended September 30, 1998 TABLE OF CONTENTS Part I. Financial Information Item 1. Financial Statements Statement of Consolidated Income Consolidated Balance Sheet Consolidated Statement of Cash Flows Consolidated Statement of Common Shareholders' Equity Notes to Consolidated Financial Information Review by Independent Accountants Report of Independent Accountants on Review of Interim Financial Information Item 2. Management's Discussion and Analysis Results of Operations Results of Phelps Dodge Mining Company Results of Phelps Dodge Industries Other Matters Relating to the Statement of Consolidated Income Changes in Financial Condition Part II. Other Information Item 1. Legal Proceedings Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signatures Index to Exhibits PHELPS DODGE CORPORATION AND SUBSIDIARIES Part I. Financial Information Item 1. Financial Statements STATEMENT OF CONSOLIDATED INCOME (Unaudited; in millions except per share data)
First Nine Third Quarter Months ------------- ---------- 1998 1997 1998 1997 ---- ---- ---- ---- SALES AND OTHER OPERATING REVENUES $ 764.0 961.7 2,356.7 3,048.4 ---------- ----- ------- ------- OPERATING COSTS AND EXPENSES Cost of products sold 594.7 664.1 1,790.8 2,102.9 Depreciation, depletion and amortization 74.0 72.9 218.5 211.5 Selling and general administrative expense 27.4 33.3 91.6 102.2 Exploration and research expense 15.2 20.6 41.5 64.3 (Gain) loss on asset dispositions and other non-recurring charges (see Note 4) (12.6) 20.8 (198.7) 20.8 ---------- ----- ------- ------- 698.7 811.7 1,943.7 2,501.7 ---------- ----- ------- ------- OPERATING INCOME 65.3 150.0 413.0 546.7 Interest expense (23.3) (20.5) (67.9) (53.3) Capitalized interest 0.5 5.0 1.7 11.2 Miscellaneous income and expense, net 7.1 7.2 29.4 32.1 ---------- ----- ------- ------- INCOME BEFORE TAXES, MINORITY INTERESTS AND EQUITY IN NET EARNINGS OF AFFILIATED COMPANIES 49.6 141.7 376.2 536.7 Provision for taxes on income (19.0) (43.9) (138.5) (166.3) Minority interests in consolidated subsidiaries (2.9) 1.0 (6.7) (4.1) Equity in net earnings of affiliated companies 0.9 5.4 1.7 10.2 ---------- ----- ------- ------- NET INCOME $ 28.6 104.2 232.7 376.5 ========== ===== ======= ======= BASIC EARNINGS PER SHARE $ 0.49 1.74 3.98 6.07 ========== ===== ======= ======= DILUTED EARNINGS PER SHARE $ 0.49 1.72 3.97 6.02 ========== ===== ======= ======= AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC 58.3 60.0 58.4 62.0 AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED 58.5 60.5 58.6 62.5
See Notes to Consolidated Financial Information. BUSINESS SEGMENTS (Unaudited; in millions)
First Nine Third Quarter Months ------------- ---------- 1998 1997 1998 1997 ---- ---- ---- ---- SALES AND OTHER OPERATING REVENUES Phelps Dodge Mining Company $ 421.9 542.3 1,303.5 1,736.4 Phelps Dodge Industries 342.1 419.4 1,053.2 1,312.0 ---------- ----- ------- ------- $ 764.0 961.7 2,356.7 3,048.4 ========== ===== ======= ======= OPERATING INCOME (LOSS) Phelps Dodge Mining Company (see Note 4) $ 27.5 116.3 117.0 430.5 Phelps Dodge Industries (see Note 4) 46.8 44.0 324.1 149.2 Corporate and other (9.0) (10.3) (28.1) (33.0) ---------- ----- ------- ------- $ 65.3 150.0 413.0 546.7 ========== ===== ======= =======
See Notes to Consolidated Financial Information. CONSOLIDATED BALANCE SHEET (Unaudited; in millions)
Sept. 30, Dec. 31, 1998 1997 --------- --------- ASSETS Cash and cash equivalents $ 309.5 157.9 Accounts receivable, net 395.1 420.5 Inventories 289.0 297.8 Supplies 114.0 115.1 Prepaid expenses 10.6 7.8 Deferred income taxes 45.4 52.0 ---------- ------- Current assets 1,163.6 1,051.1 Investments and long-term accounts receivable 99.1 131.8 Property, plant and equipment, net 3,512.9 3,445.1 Other assets and deferred charges 255.4 337.2 ---------- ------- $ 5,031.0 4,965.2 ========== ======= LIABILITIES Short-term debt $ 83.1 91.4 Current portion of long-term debt 61.5 54.8 Accounts payable and accrued expenses 463.4 553.2 Accrued income taxes 29.5 1.7 ---------- ------- Current liabilities 637.5 701.1 Long-term debt 815.4 857.1 Deferred income taxes 514.8 439.2 Other liabilities and deferred credits 342.1 344.1 ---------- ------- 2,309.8 2,341.5 ---------- ------- MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 96.7 113.3 ---------- ------- COMMON SHAREHOLDERS' EQUITY Common shares, 58.0 outstanding (12/31/97 - 58.6) 362.6 366.5 Retained earnings 2,420.8 2,301.0 Accumulated other comprehensive income (loss) (151.0) (146.9) Other (7.9) (10.2) ---------- ------- 2,624.5 2,510.4 ---------- ------- $ 5,031.0 4,965.2 ========== =======
See Notes to Consolidated Financial Information. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited; in millions)
Nine months ended September 30, ------------------- 1998 1997 --------- ------- OPERATING ACTIVITIES Net income $ 232.7 376.5 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 218.5 211.5 Deferred income taxes 40.8 37.6 Equity earnings net of dividends received (0.1) (7.3) Changes in current assets and liabilities: (Increase) decrease in accounts receivable (34.8) (18.2) (Increase) decrease in inventories (17.3) (26.2) (Increase) decrease in supplies (3.0) 1.1 (Increase) decrease in prepaid expenses (3.5) (10.6) (Increase) decrease in deferred income taxes 6.7 2.2 Increase (decrease) in interest payable 17.3 4.0 Increase (decrease) in other accounts payable (44.8) (28.9) Increase (decrease) in accrued income taxes 28.8 3.2 Increase (decrease) in other accrued expenses (6.9) (2.6) Gain on asset disposition (see Note 4) (198.7) -- Other adjustments, net (7.8) 11.5 --------- ------- Net cash provided by operating activities 227.9 553.8 --------- ------- INVESTING ACTIVITIES Capital outlays (248.8) (444.3) Capitalized interest (1.7) (11.2) Investment in subsidiaries (135.4) (53.1) Proceeds from asset dispositions and other (see Note 4) 466.5 6.8 --------- ------- Net cash provided by (used in) investing activities 80.6 (501.8) --------- ------- FINANCING ACTIVITIES Increase in debt 16.0 316.0 Payment of debt (54.0) (46.3) Common dividends (88.3) (93.3) Purchase of common shares (31.5) (451.0) Other, net 0.9 5.3 --------- ------- Net cash used in financing activities (156.9) (269.3) --------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 151.6 (217.3) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 157.9 470.1 --------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 309.5 252.8 ========= =======
See Notes to Consolidated Financial Information. CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY (Unaudited; in millions)
Common Shares Accumulated --------------- Other Number Comprehensive Common of At Par Retained Income Shareholders' shares Value Earnings (Loss) Other Equity ------ ----- -------- ------- ----- ------ BALANCE AT DECEMBER 31, 1997 58.6 $ 366.5 $ 2,301.0 $ (146.9) $ (10.2) $ 2,510.4 Stock options exercised 0.1 0.2 1.8 2.0 Common shares purchased (0.7) (4.1) (27.4) (31.5) Restricted shares issued, net -- -- (0.4) 2.3 1.9 Other investment adjustments 1.4 1.4 Dividends on common shares (88.3) (88.3) Comprehensive income: Net income 232.7 232.7 Other comprehensive income, net of tax: Translation adjustment (4.1) (4.1) Unrealized gains on securities -- -- ------- -------- Other comprehensive income (4.1) (4.1) ------- -------- Comprehensive income 228.6 ------- -------- ---------- -------- ------- ---------- BALANCE AT SEPTEMBER 30, 1998 58.0 $ 362.6 $ 2,420.8 $ (151.0) $ (7.9) $ 2,624.5 ======= ======== ========== ======== ======= ==========
See Notes to Consolidated Financial Information. NOTES TO CONSOLIDATED FINANCIAL INFORMATION (Unaudited) 1. The unaudited consolidated financial information presented herein has been prepared in accordance with the instructions to Form 10-Q and does not include all of the information and note disclosures required by generally accepted accounting principles. Therefore, this information should be read in conjunction with the consolidated financial statements and notes thereto included in the Corporation's Form 10-K for the year ended December 31, 1997. This information reflects all adjustments that are, in the opinion of management, necessary to present a fair statement of the results for the interim periods reported. 2. The results of operations for the three-month and nine-month periods ended September 30, 1998, are not necessarily indicative of the results to be expected for the full year. 3. Depending on market circumstances, the Corporation may periodically purchase or liquidate various copper price protection contracts for a portion of its expected future mine production to mitigate the risk of adverse price fluctuations. The Corporation currently has no copper price protection contracts in place. 4. Effective January 1, 1998, the Corporation sold a 90 percent interest in Accuride Corporation and related subsidiaries, its wheel and rim manufacturing business, to an affiliate of Kohlberg Kravis Roberts and Co. (KKR) and the existing management of Accuride. That sale resulted in a pre-tax gain to the Corporation of $186.1 million, ($122.8 million after taxes, or $2.10 per common share). The remaining 10 percent interest in Accuride was sold to RSTW Partners III, L.P. on September 30, 1998 resulting in a pre-tax gain of $12.6 million ($8.3 million after taxes, or $0.14 per common share). Under the terms of the sales agreements, the Corporation received total proceeds of $465.9 million from the two transactions. The Corporation's 1997 third quarter earnings included non-recurring, pre-tax charges of $20.8 million ($14.4 million, or 24 cents per common share, after taxes) primarily due to an early retirement program at Phelps Dodge Mining Company. 5. On February 3, 1998, the Corporation acquired the stock of Cobre Mining Company Inc. (Cobre) for $113.3 million, including acquisition costs. The Corporation also assumed Cobre's outstanding debt of $14.8 million. The acquisition was at a price of $3.85 per common share for substantially all of Cobre's 27 million common shares, including shares issuable upon the exercise of outstanding warrants and options. The primary assets of Cobre include the Continental Mine, which comprises an open-pit copper mine, two underground copper mines, two mills, and the surrounding 11,000 acres of land located in southwestern New Mexico adjacent to the Corporation's Chino operations. 6. In the 1998 first quarter, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." The Corporation has presented the required information in the Consolidated Statement of Common Shareholders' Equity. SFAS No. 130 has no effect on the Corporation's results of operations, financial position, capital resources or liquidity. 7. On March 4, 1998, and April 3, 1998, respectively, the Accounting Standards Executive Committee issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" and SOP 98-5, "Reporting on the Costs of Start-Up Activities." These statements become effective for fiscal periods beginning after December 15, 1998. The Corporation will adopt both SOPs in 1999. The Corporation does not expect either SOP to have a material effect on its results of operations or financial position. 8. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement requires recognition of all derivatives as either assets or liabilities on the balance sheet and measurement of those instruments at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. This Statement is effective for fiscal years beginning after June 15, 1999. Phelps Dodge plans to adopt SFAS No. 133 effective January 1, 2000. The Corporation is evaluating the effect this Statement will have on its financial reporting and disclosures. 9. In October 1998, the Corporation acquired the Brazilian carbon black manufacturing business of Copebras S.A., a subsidiary of Minorco, for $220.0 million. Columbian Chemicals, the Corporation's specialty chemicals division, has assumed management and operating responsibility of the new company. The manufacturing facility has an annual production capacity of 170,000 metric tons of carbon black. REVIEW BY INDEPENDENT ACCOUNTANTS The financial information as of September 30, 1998, and for the three-month and nine-month periods ended September 30, 1998 and 1997, included in Part I pursuant to Rule 10-01 of Regulation S-X has been reviewed by PricewaterhouseCoopers LLP, the Corporation's independent accountants, in accordance with standards established by the American Institute of Certified Public Accountants. PricewaterhouseCoopers' report is included in this quarterly report. PricewaterhouseCoopers does not carry out any significant or additional audit tests beyond those that would have been necessary if its report had not been included in this quarterly report. Accordingly, such report is not a "report" or "part of a registration statement" within the meaning of Sections 7 and 11 of the Securities Act of 1933 and the liability provisions of Section 11 of such Act do not apply. PRICEWATERHOUSECOOPERS LLP REPORT OF INDEPENDENT ACCOUNTANTS October 12, 1998 To the Board of Directors and Shareholders of the Phelps Dodge Corporation We have reviewed the accompanying consolidated balance sheet of Phelps Dodge Corporation and its subsidiaries as of September 30, 1998, the statement of consolidated income for the three-month and nine-month periods ended September 30, 1998 and 1997, the consolidated statement of cash flows for the nine-month periods ended September 30, 1998 and 1997, and the consolidated statement of common shareholders' equity for the nine-month period ended September 30, 1998. This financial information is the responsibility of the Corporation's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated financial information referred to above for it to be in conformity with generally accepted accounting principles. We previously audited in accordance with generally accepted auditing standards, the consolidated balance sheet as of December 31, 1997, and the related consolidated statements of income, of cash flows and of common shareholders' equity for the year then ended (not presented herein), and in our report dated January 15, 1998, except as to Note 2, which is as of February 3, 1998, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 1997, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. PricewaterhouseCoopers LLP Phoenix, Arizona Item 2. Management's Discussion and Analysis RESULTS OF OPERATIONS Phelps Dodge Corporation had consolidated earnings in the 1998 third quarter of $20.3 million, or 35 cents per common share, before a non-recurring, after-tax gain of $8.3 million, or 14 cents per common share, from the completion of the disposition of Accuride Corporation, the Corporation's wheel and rim business (see Note 4 to the Consolidated Financial Information). Earnings in the 1997 third quarter were $118.6 million, or $1.96 per common share, before non-recurring, after-tax charges of $14.4 million, or 24 cents per common share, which primarily reflected an early retirement program at Phelps Dodge Mining Company. Earnings for the nine-months ended September 30, 1998, were $101.6 million, or $1.73 per common share, before a non-recurring, after-tax gain of $131.1 million, or $2.24 per common share, from the disposition of Accuride Corporation. Earnings for the corresponding nine-month period in 1997 were $390.9 million, or $6.25 per common share, before non-recurring charges. Net income including the non-recurring gain was $28.6 million, or 49 cents per common share, in the 1998 third quarter and $232.7 million, or $3.97 per common share, for the nine months ended September 30, 1998. Net income including non-recurring items was $104.2 million, or $1.72 per common share for the 1997 third quarter, and $376.5 million, or $6.02 per common share for the first nine months of 1997. Earnings before non-recurring items were less in the 1998 third quarter and nine-month period than in the corresponding 1997 periods principally as a result of lower average copper prices. The average spot price per pound of cathode copper on the New York Commodity Exchange (COMEX) was 27 cents per pound (26 percent) lower in the third quarter of 1998 than the third quarter of 1997, and 32 cents per pound (29 percent) lower in the 1998 nine-month period than in the first nine months of 1997. The effect of this price decrease was offset slightly by increased volumes of copper sold from mine production and improved results at the Corporation's carbon black business. The COMEX spot price per pound of copper cathode, upon which the Corporation bases its selling price for a majority of its production, averaged 75 cents in the third quarter and 77 cents in the first nine months of 1998, compared with $1.02 and $1.09 in the corresponding 1997 periods. From October 1 to November 9, 1998, the COMEX price averaged 72 cents per pound, closing at 72 cents on November 9, 1998. Any material change in the price the Corporation receives for copper, or in its unit production costs, has a significant effect on the Corporation's results. The Corporation's present share of annual production is approximately 1.8 billion pounds of copper. Accordingly, each 1 cent per pound change in the average annual copper price received by the Corporation, or in average annual unit production costs, causes a variation in annual operating income before taxes of approximately $18 million. Depending on market circumstances, the Corporation may periodically purchase or liquidate various copper price protection contracts for a portion of its expected future mine production to mitigate the risk of adverse price fluctuations. The Corporation currently has no such copper price protection contracts in place. Sales were $764.0 million in the 1998 third quarter and $2,356.7 million in the first nine months of 1998, compared with $961.7 million and $3,048.4 million in the corresponding 1997 periods. The 1998 decreases principally resulted from lower average copper prices and the absence of Accuride Corporation, partially offset by higher sales volumes of copper and carbon black. RESULTS OF PHELPS DODGE MINING COMPANY Phelps Dodge Mining Company is an international business comprising a group of companies involved in vertically integrated copper operations including mining, concentrating, electrowinning, smelting and refining, rod production, marketing and sales, and related activities. Copper is sold primarily to others as rod, cathode or in concentrates, and as rod to the Phelps Dodge Industries segment. In addition, Phelps Dodge Mining Company at times smelts and refines copper and produces copper rod for others on a toll basis. Phelps Dodge Mining Company also produces gold, silver, molybdenum and copper chemicals, principally as by-products, and sulfuric acid from its air quality control facilities. This segment also includes the Corporation's other mining operations and investments (including fluorspar, silver, lead and zinc operations) and its worldwide mineral exploration and development programs. ================================================================================
First Nine Third Quarter Months ------------- ------------- 1998 1997 1998 1997 ---- ---- ---- ---- Copper production (short tons): Total production 265,400 250,200 792,300 726,900 Less minority participants' shares * 44,800 43,800 134,100 126,400 ------- ------- ------- ------- Net Phelps Dodge share 220,600 206,400 658,200 600,500 ======= ======= ======= ======= Copper sales (short tons): Net Phelps Dodge share from own mines 220,600 210,500 650,700 593,000 Plus purchased copper 73,700 63,400 232,700 219,600 ------- ------- ------- ------- Total copper sales 294,300 273,900 883,400 812,600 ======= ======= ======= ======= New York Commodity Exchange average spot price per pound - copper cathodes $ 0.75 1.02 0.77 1.09 (in millions) Sales and other operating revenues $ 421.9 542.3 1,303.5 1,736.4 Operating income $ 27.5 116.3 117.0 430.5 - -------------------------
* Minority participant interests include (i) a 15 percent undivided interest in the Morenci, Arizona, copper mining complex held by Sumitomo Metal Mining Arizona, Inc., (ii) a one-third partnership interest in Chino Mines Company in New Mexico held by Heisei Minerals Corporation, and (iii) a 20 percent interest in Candelaria in Chile held by SMMA Candelaria, Inc., a jointly owned subsidiary of Sumitomo Metal Mining Co., Ltd. and Sumitomo Corporation. ================================================================================ Phelps Dodge Mining Company's sales and other operating revenues decreased by $120.4 million, or 22 percent, in the 1998 third quarter and by $432.9 million, or 25 percent, in the first nine months of 1998 compared with the corresponding 1997 periods. These variances primarily reflected decreased average selling prices for copper that resulted in revenue reductions of approximately $148 million and $520 million, respectively. Partially offsetting that price variance was a 20,400 ton, or 7 percent, increase in the volume of copper sold in the 1998 third quarter and a 70,800 ton, or 9 percent, increase in the volume of copper sold for the first nine months. These sales volume increases included greater availability of Phelps Dodge mined copper resulting from production increases at the Candelaria mine in Chile and the February 1998 acquisition of Cobre Mining Company Inc. (Cobre) (see Note 5 to the Consolidated Financial Information). Phelps Dodge Mining Company reported operating income of $27.5 million in the 1998 third quarter, compared with $137.1 million in the corresponding 1997 period before $20.8 million of non-recurring, pre-tax charges which primarily reflected an early retirement program. For the nine-month period ended September 30, 1998, Phelps Dodge Mining Company contributed operating income of $117.0 million, compared with $451.3 million in the corresponding 1997 period before the effects of the non-recurring charges. These decreases primarily reflected the lower average copper prices, partially offset by the higher volumes of copper sold from mine production. Copper sold from mine production increased by 10,100 tons, or 5 percent, over third quarter 1997 and by 57,700 tons, or 10 percent, over the first nine months of 1997. The comparison for the nine-month period also reflected a first quarter insurance claim recovery that added $11.5 million to Phelps Dodge Mining Company's operating income ($6.7 million or 11 cents per share, after taxes) in the first nine months of 1998. On October 21, 1998, the Corporation announced substantial production curtailments at Chino Mines Company in New Mexico and the indefinite closure of Cobre Mining Company in New Mexico and the Ojos del Salado operation in Chile. These changes will reduce the Corporation's global copper production by nearly 100,000 short tons annually, and will result in the elimination of approximately 700 jobs. The production curtailment at Chino will occur in phases between October 31 and the first half of 1999. Chino's annual copper production will be reduced by approximately 35,000 short tons per year and will result in the elimination of about 300 jobs at the facility. The underground mine at Cobre closed October 21, resulting in the elimination of about 40 jobs. During the first half of 1999, the entire operation will close, reducing copper production by 35,000 short tons per year, and resulting in the loss of an additional 200 jobs. The Ojos del Salado underground mine and concentrator operations in Chile closed October 21, resulting in the elimination of 180 jobs and reducing annual copper production by approximately 22,000 short tons. The collective bargaining agreements at Phelps Dodge Mining Company's Chino operations in New Mexico expired on June 30, 1996. As of November 9, 1998, employees who were covered by the agreements have continued to work without a contract. RESULTS OF PHELPS DODGE INDUSTRIES Phelps Dodge Industries is a business segment comprising a group of companies that manufacture engineered products principally for the global energy, telecommunications, transportation and specialty chemicals sectors. Its operations are characterized by products with significant market share, internationally competitive costs and quality, and specialized engineering capabilities. This business segment includes the Corporation's specialty chemical operations through Columbian Chemicals Company and its subsidiaries; its wire and cable and specialty conductor operations through Phelps Dodge International Corporation and Phelps Dodge Magnet Wire Company and their subsidiaries and affiliates; and, until its disposition in 1998, its wheel and rim operations through Accuride Corporation and its subsidiaries. ================================================================================
First Nine Third Quarter Months ------------- ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- (in millions) Sales and other operating revenues: Specialty chemicals $ 104.6 101.5 326.9 316.6 Wheels and rims * -- 78.4 -- 247.0 Wire and cable 237.5 239.5 726.3 748.4 ------- ------- ------- ------- $ 342.1 419.4 1,053.2 1,312.0 ======= ======= ======= ======= Operating income: Specialty chemicals $ 17.5 15.3 60.6 51.1 Wheels and rims * 12.6 14.1 198.7 33.9 Wire and cable 16.7 14.6 64.8 64.2 ------- ------- ------- ------- $ 46.8 44.0 324.1 149.2 ======= ======= ======= =======
- ------------------------- * Ninety percent of Accuride Corporation, the Corporation's wheel and rim business, was sold to KKR and the existing management of Accuride effective January 1, 1998, and the remaining 10 percent interest was sold to RSTW Partners III, L.P. on September 30, 1998, resulting in a total pre-tax gain of $198.7 million (see Note 4 to the Consolidated Financial Information). ================================================================================ Phelps Dodge Industries' reported sales of $342.1 million in the third quarter and $1,053.2 million for the first nine months of 1998, compared with $419.4 million and $1,312.0 million in the corresponding 1997 periods. The decreases principally reflected the effect of the sale of Accuride which contributed sales of $78.4 million in the 1997 third quarter and $247.0 million for the first nine months of 1997. Also included in the decreases were reduced sales prices for magnet wire related to low copper prices, and the effect of Asian economic disruptions on the Corporation's wire and cable business, particularly in Thailand. During the 1998 third quarter, Phelps Dodge Industries recorded operating income of $34.2 million, before a $12.6 million pre-tax gain from the sale of the final 10 percent of Accuride, compared with $29.9 million in the corresponding 1997 period before Accuride's $14.1 million contribution. Operating income in the first nine months of 1998 was $125.4 million before a $198.7 million pre-tax gain from the sale of Accuride, compared with $115.3 million in the first nine months of 1997 before Accuride's $33.9 million contribution. The 1998 operating income exceeded corresponding prior year periods, excluding Accuride, despite the continuing Asian economic disruptions. This reflected strong performances by the Corporation's U.S. and European carbon black businesses. In addition, the 60 percent owned wire and cable joint venture in Brazil, which was acquired at the end of 1997, helped offset lower earnings in the wire and cable business in Thailand and Venezuela and in the high performance conductor business in the United States. In October 1998, the Corporation acquired the Brazilian carbon black manufacturing business of Copebras S.A., a subsidiary of Minorco, for $220.0 million. Columbian Chemicals, the Corporation's specialty chemicals division, has assumed management and operating responsibility of the new company. The manufacturing facility has an annual production capacity of 170,000 metric tons of carbon black. The collective bargaining agreement at Phelps Dodge Magnet Wire Company's Hopkinsville, Kentucky, plant expired on October 11, 1996. As of November 9, 1998, employees who were covered by the agreement have continued to work without a contract. OTHER MATTERS RELATING TO THE STATEMENT OF CONSOLIDATED INCOME The Corporation's 1998 third quarter exploration and research expense was $15.2 million, a decrease of 26 percent from the 1997 third quarter. Exploration and research expense for the first nine months of 1998 was $41.5 million, a 35 percent decrease from the corresponding 1997 period. These decreases were principally a result of the closure of the U.S. exploration offices during the 1997 fourth quarter, but also reflected generally lower exploration expenditures worldwide. Miscellaneous income and expense, net, for the first nine months of 1998 included a non-cash, pre-tax gain of $10.0 million from the dissolution of joint venture partnerships between Phelps Dodge and Sumitomo Electric Industries, Ltd. at five international wire and cable manufacturing and support companies. A non-cash, pre-tax gain of $6.0 million was included in miscellaneous income and expense, net, in the corresponding 1997 period from the exchange of shares of a cost-basis investment in a wire and cable business located in Greece. Interest expense net of capitalized interest was $22.8 million in the third quarter of 1998 and $66.2 million in the first nine months, compared with $15.5 million and $42.1 million in the corresponding periods in 1997. The 1998 increases principally reflect interest associated with corporate debt issued in the 1997 fourth quarter and decreases in capitalized interest resulting from the completion of the Candelaria expansion in October 1997. The Corporation continues to review its "Year 2000" readiness. The Year 2000 issue stems from the predominant use in computer applications of a two-digit field to capture the year (e.g., "98" for 1998). Because the "19" is assumed in the date, when computers turn their clocks to the year 2000, the two-digit field will read "00" and some computer programs will assume the year is 1900. Programs that calculate, compare, or sort on a date field may cause erroneous results and errors leading to the risk of business interruption or shutdown and other potential problems. The Year 2000 issue is a global issue that is very complex because of the many programs that may be impacted in any computer system. These computer systems are used to support the activities of the Corporation's businesses including financial systems, process control technology and other computer-controlled equipment. The Corporation has identified the scope of the Year 2000 issue as it relates to its operations and all levels of management are providing leadership to effect workable solutions. A program office team has been assembled to oversee all facets of this project including information technology and process control system conversions, contracts and agreements with vendors, suppliers, and customers, insurance policies, and security systems. The Corporation is working with major industry associations and agencies in North America, Europe, Latin America, and Asia Pacific to facilitate the sharing of strategies and solutions. The Corporation has also hired a consulting firm, PKS Systems Integration LLC, to assist in the assessment and implementation of the Year 2000 conversion. The conversion project has been structured into four phases - Inventory Phase, Assessment Phase, Remediation and Testing Phase and the Field Implementation Phase. At September 30, 1998, the inventory phase was 98 percent complete. The assessment phase, the final cost estimation and action plan identification phase, is projected to be complete by the end of 1998. The remediation and testing phase is expected to be complete by the end of the first quarter of 1999 and the field implementation phase is expected to be complete by the end of the second quarter of 1999 for mission critical processes and systems. The process of identifying and prioritizing critical suppliers and customers has been completed. A formal program to communicate with and evaluate these external organizations is in progress and will be ongoing throughout the conversion process. The Corporation is devoting special attention to the utility and transportation companies due to their importance to this organization. Similarly, the Corporation is giving extra attention to key customers. In addition, the Corporation is in the process of developing contingency plans to offset potential problems related to external organizations. Phelps Dodge's investment in standardizing business system platforms over the past several years has streamlined and facilitated the Year 2000 conversion requirements by eliminating redundant technologies and allowing the sharing of services. In addition, coordination of other initiatives (e.g., replacement of process control and business systems previously identified for retirement or upgrade without regard to the Year 2000 issue, with Year 2000 compliant systems) and concentrating resources on key systems are also expected to allow the Corporation to achieve desired results. The total cost associated with the Year 2000 conversion is not expected to be material to the Corporation's financial position. The estimated total cost of the conversion is approximately $10 million as previously reported in the 1997 Annual Report of Form 10-K. This estimate does not include the Corporation's potential share of Year 2000 costs that may be incurred at operations that the Corporation does not consolidate or those expenditures for planned system and process control upgrades that are undertaken for other reasons and also incorporate Year 2000 compliant technology. Failure to correct a material Year 2000 problem could result in a potential disruption to one or more of the Corporation's operations. Such failures could materially and adversely affect the Corporation's results of operations, liquidity and financial condition. Due to the general uncertainty inherent in the Year 2000 issue, resulting in part from the uncertainty of the readiness of suppliers and customers, the Corporation is unable to determine with any certainty the consequences of Year 2000 failures and the materiality of these potential failures. Therefore, the Corporation is in the process of developing contingency plans in order to mitigate the extent of potential disruptions to the business operations. CHANGES IN FINANCIAL CONDITION Capital expenditures and investments during the first nine months of 1998 were $279.9 million for Phelps Dodge Mining Company, including $113.3 million for the acquisition of the stock of Cobre Mining Company. Capital expenditures and investments were $105.5 million for Phelps Dodge Industries. Capital expenditures and investments in the corresponding 1997 period were $329.8 million for Phelps Dodge Mining Company, including $135.2 million for the expansion of the Corporation's Candelaria mining operations in Chile. Capital expenditures and investments were $149.1 million for Phelps Dodge Industries in the first nine months of 1997. The Corporation expects capital expenditures and investments for the year 1998 to be approximately $325 million for Phelps Dodge Mining Company, including the Cobre acquisition, and approximately $350 million for Phelps Dodge Industries, including $220 million for the acquisition of Copebras (see Note 9 to the Consolidated Financial Information). At September 30, 1998, the Corporation's total debt was $960.0 million, compared with $1,003.3 million at year-end 1997. The Corporation's ratio of debt to total capitalization was 26.1 percent at September 30, 1998, compared with 27.7 percent at December 31, 1997. On September 10, 1998, the Corporation paid a regular quarterly dividend of 50 cents per share on its common shares for the 1998 third quarter; the amount paid was $29.4 million, bringing total 1998 dividends paid through September 30 to $88.3 million. On November 4, 1998, the board of directors declared a 1998 fourth quarter regular dividend of 50 cents per common share to be paid on December 10, 1998, to shareholders of record at the close of business on November 20, 1998. On May 7, 1997, the Corporation announced that its board of directors had authorized the purchase of up to 6 million of its common shares, approximately 10 percent of its then outstanding shares. Under that program, the company purchased a total of 3.6 million of its common shares in 1997, at a total cost of $292.9 million. In 1998 through November 9, the Corporation has purchased 0.7 million shares under that authorization at a total cost of $35.4 million, leaving 1.7 million shares authorized for purchase under the new program. There were 58.0 million common shares outstanding on September 30, 1998. Part II. Other Information Item 1. Legal Proceedings I. Reference is made to Paragraph II, section B.1 of Item 3, Legal Proceedings of the Corporation's Form 10-K for the year ended December 31, 1997 regarding United States v. Gila Valley Irrigation District, et al., Globe Equity No. 59 (D. Ariz.). The Corporation recently purchased farmlands with associated water rights that are the subject of this litigation. As a result, the Corporation has been named and served as a party in this case. The lands and associated water rights are not currently used in connection with any mining operation of the Corporation. II. On September 15, 1998, the Southwest Research and Information Center and the United Steelworkers of America Local 890 (Plaintiffs) filed a complaint in United Steel Workers, Local 890 and Southwest Research and Information Center v. Chino Mines Company and Phelps Dodge Corporation, CIV 98-1123 LH (D. N.M.). The complaint alleges that Chino Mines Company (Chino) (which is two-thirds owned by the Corporation) and the Corporation failed to submit to the United States Environmental Protection Agency and the New Mexico Emergency Response Commission toxic chemical release forms for some or all of the calendar years 1987 through 1997 as required by Section 313 of the Emergency Planning and Community Right-to-Know Act of 1986. This private litigant action asks for, among other things, imposition of monetary penalties of $25,000 per day of alleged violation up to and including December 31, 1996, and penalties of $27,500 per day from January 1997 forward. The Plaintiffs also advised the Corporation through a Notice of Intent to Sue that they intend to assert similar claims against the Corporation's Hidalgo smelting operation near Playas, New Mexico. On October 6, 1998, Chino and the Corporation filed an answer to the complaint denying all alleged violations of the Section 313 reporting requirements. Item 5. Other information The advance notice deadline for a shareholder to notify the Corporation of intent to introduce a proposal for consideration at an annual meeting of shareholders is established by a provision in the Corporation's ByLaws. Article II, Section 7 establishes that, to be timely, a shareholder's notice must be delivered to or mailed and received at the principal office of the Corporation not less than 60 days and not more than 90 days prior to the meeting. The next Annual Meeting of Shareholders will be held on May 5, 1999. Item 6. Exhibits and Reports on Form 8-K (a) Any exhibits required to be filed by the Corporation are listed in the Index to Exhibits. (b) No reports on Form 8-K were filed by the Corporation during the quarter ended September 30, 1998. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Corporation has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PHELPS DODGE CORPORATION ------------------------ (Corporation or Registrant) Date: November 13, 1998 By: Gregory W. Stevens ------------------ Gregory W. Stevens Vice President and Controller (Principal Accounting Officer) PHELPS DODGE CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS 12 Computation of ratios of total debt to total capitalization. 15 Letter from PricewaterhouseCoopers LLP with respect to unaudited interim financial information. EX-12 2 COMPUTATION OF TOTAL DEBT TO TOTAL CAPITALIZATION PHELPS DODGE CORPORATION AND SUBSIDIARIES Exhibit 12 COMPUTATION OF TOTAL DEBT TO TOTAL CAPITALIZATION (Unaudited; dollars in millions)
September 30, December 31, 1998 1997 ---- ---- Short-term debt $ 83.1 91.4 Current portion of long-term debt 61.5 54.8 Long-term debt 815.4 857.1 ---------- ---------- Total debt 960.0 1,003.3 Minority interests in subsidiaries 96.7 113.3 Common shareholders' equity 2,624.5 2,510.4 ---------- ---------- Total capitalization $ 3,681.2 3,627.0 ========== ========== Ratio of total debt to total capitalization 26.1% 27.7% ========== ==========
EX-15 3 LETTER FROM PRICEWATERHOUSECOOPERS LLP Exhibit 15 PRICEWATERHOUSECOOPERS LLP Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Ladies and Gentlemen: We are aware that Phelps Dodge Corporation has incorporated by reference our report dated October 12, 1998 (issued pursuant to the provisions of Statement on Auditing Standards No. 71) appearing on page 7 of the Form 10-Q for the quarterly period ended September 30, 1998 in the Prospectus constituting part of its Registration Statement and Post-Effective Amendment No. 1 on Form S-3 (Nos. 33-44380 and 333-36415) and in the Registration Statements on Form S-8 (Nos. 33-26442, 33-6141, 33-26443, 33-29144, 33-19012, 2-67317, 33-34363, 33-34362, 33-62648, 333-42231 and 333-52175). We are also aware of our responsibilities under the Securities Act of 1933. Yours very truly, PricewaterhouseCoopers LLP Phoenix, Arizona November 9, 1998 EX-27 4 ART. 5 FDS FOR 3RD QUARTER 10-Q
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1998 AND THE RELATED CONSOLIDATED STATEMENTS OF INCOME AND OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 OF PHELPS DODGE CORPORATION AND ITS SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1 309,500 0 395,100 0 289,000 1,163,600 3,512,900 0 5,031,000 637,500 815,400 0 0 362,600 2,261,900 5,031,000 2,356,700 2,356,700 1,790,800 1,790,800 61,300 0 66,200 376,200 138,500 232,700 0 0 0 232,700 3.98 3.97
-----END PRIVACY-ENHANCED MESSAGE-----