Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-3610
ALCOA INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-0317820
(State of incorporation) (I.R.S. Employer Identification No.)
Alcoa Corporate Center, 201 Isabella Street,
Pittsburgh, Pennsylvania 15212-5858
(Address of principal executive offices) (Zip code)
Registrant's telephone number--area code 412
Investor Relations------------553-3042
Office of the Secretary-------553-4707
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, par value $1.00 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months, and (2) has been
subject to such filing requirements for the past 90 days. Yes [x] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
As of March 5, 1999 there were 366,845,135 shares of common stock,
par value $1.00, of the registrant outstanding. The aggregate market
value of such shares, other than shares held by persons who may be
deemed affiliates of the registrant, was approximately $14,695 million.
Documents incorporated by reference.
Parts I and II of this Form 10-K incorporate by reference certain
information from the registrant's 1998 Annual Report to Shareholders.
Part III of this Form 10-K incorporates by reference the registrant's
Proxy Statement dated March 8, 1999, except for the performance graph
and Compensation Committee Report.
1
ALCOA INC.
Formed in 1888 under the laws of the Commonwealth of Pennsylvania,
Alcoa Inc. has its registered office in Pittsburgh, Pennsylvania. The
name of the Company was changed, effective January 1, 1999, from
Aluminum Company of America to Alcoa Inc. In this report, unless the
context otherwise requires, Alcoa or the Company means Alcoa Inc. and
all subsidiaries consolidated for the purposes of its financial
statements.
PART I
Item. 1. Business.
Overview
Alcoa is the world's leading producer of primary aluminum,
fabricated aluminum and alumina and a major participant in all segments
of the industry: mining, refining, smelting, fabricating and recycling.
Alcoa serves customers worldwide primarily in the packaging,
transportation (including aerospace, automotive, rail and shipping),
building and industrial markets with a great variety of fabricated and
finished products.
Alcoa is organized into 24 independently managed business units
and has over 215 operating locations in 31 countries. Alcoa gives
business unit leaders clear responsibilities that concentrate authority
closer to customers.
The U.S. remains the largest market for aluminum. Europe, Asia
and Latin America, however, present opportunities for substantial
growth in aluminum use. To take advantage of these growth
opportunities, Alcoa has made acquisitions or formed joint ventures and
strategic alliances in key regional markets.
Recent Developments
In July 1998, Alcoa acquired all of the outstanding shares of
Alumax Inc. (Alumax) for approximately $3.8 billion, consisting of cash
of approximately $1.5 billion, stock of approximately $1.3 billion and
assumed debt of approximately $1 billion. Alumax operated over 70
plants and other manufacturing facilities in 22 states, Canada, Western
Europe and Mexico.
The description of each Alcoa operating segment below includes a
discussion of the impact of the Alumax acquisition. That discussion
indicates how the newly-acquired Alumax operations complement or expand
Alcoa's existing products and markets.
In February 1998, Alcoa completed its acquisition of Inespal, S.A.
(Inespal) of Madrid, Spain. Alcoa paid approximately $150 million in
cash and assumed $260 million of debt and liabilities in exchange for
substantially all of Inespal's businesses. The acquisition included an
alumina refinery, three aluminum smelters, three aluminum rolling
facilities, two extrusion plants and an administrative center. These
facilities are discussed below in connection with the applicable Alcoa
operating segment.
2
Market and Geographic Information
Alcoa serves a variety of customers in a number of markets.
Consolidated revenues from these markets during the past three years
were:
(dollars in millions)
1998 1997 1996
---- ---- ----
Transportation $ 3,738 $ 3,119 $ 2,655
Packaging 3,304 3,201 3,326
Distributor and Other 2,764 2,151 2,154
Aluminum Ingot 2,012 1,521 1,449
Alumina and Chemicals 1,781 1,961 1,940
Building and Construction 1,741 1,366 1,537
------- ------- -------
Total $15,340 $13,319 $13,061
======= ======= =======
Countries other than the U.S. now contribute close to one-half of
Alcoa's consolidated revenues, reflecting the Company's growing global
presence.
(dollars in millions)
1998 1997 1996
---- ---- ----
U.S. $ 8,728 $ 7,189 $ 7,246
Australia 1,470 1,875 1,919
Spain 965 44 44
Brazil 934 1,161 1,135
Canada 574 404 351
Germany 554 580 623
Other 2,115 2,066 1,743
------- ------- -------
Total $15,340 $13,319 $13,061
======= ======= =======
Alcoa's Financial Reporting Segments
Alcoa has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which was issued in June 1997.
This new accounting standard requires disclosure of segment information
on the same basis that is used internally for evaluating performance
and allocating resources. Accordingly, Alcoa reports four worldwide
segments: Alumina and Chemicals, Primary Metals, Engineered Products
and Flat-Rolled Products. All of the Company's products that do not
fall into one of those four segments are reported in the category
entitled Other. See Notes A and O to the Financial Statements for
information on the recently adopted accounting standard and for segment
and related geographic financial information.
I. Alumina and Chemicals
The Alumina and Chemicals segment includes the production and sale
of:
- bauxite
- alumina
3
- alumina-based chemicals used principally in industrial
applications and
- transportation services for bauxite and alumina.
The segment consists of a group of companies and assets referred to as
Alcoa World Alumina and Chemicals (AWAC). Alcoa owns 60% and WMC
Limited (WMC) owns 40% of AWAC. AWAC has two businesses with distinct
product lines: Alcoa World Alumina (AWA) produces smelter grade alumina
and Alcoa Industrial Chemicals (AIC) makes alumina-based chemicals.
AWA also has two geographical regions: Alcoa World Alumina - Australia
(AWA - Australia) and Alcoa World Alumina - Atlantic (AWA - Atlantic).
AWA - Australia is the new trading name for Alcoa of Australia Limited
(AofA); all references throughout this report will be to AWA -
Australia instead of AofA.
Bauxite and Alumina
Bauxite is aluminum's principal raw material. Alcoa refines
bauxite into alumina using a chemical process. Alcoa processes into
alumina most of the bauxite that it mines. All of the Company's active
bauxite interests are part of AWAC, except in Brazil.
Alcoa is the world's leading producer of alumina. The Company
sells alumina principally from operations in Australia, Jamaica and
Suriname. Alcoa sold approximately 56% of its alumina production in
1998 under supply contracts to third parties worldwide. Alcoa
negotiates most of its alumina supply contracts on the basis of agreed
volumes over multi-year periods to assure a continuous supply to the
smelters. The parties negotiate the prices periodically. Prices may
be based on formulas related to aluminum ingot market prices or to
alumina production costs.
AWA entities and Sino Mining Alumina Limited (SMAL) have a long-
term agreement for the purchase of alumina for the Chinese aluminum
industry. SMAL is ultimately owned by the China State Nonferrous
Metals Industry Administration (SNMIA), a Chinese state-owned
enterprise that has succeeded the China National Nonferrous Metals
Industry Corporation (CNNC) as the entity responsible for the Chinese
aluminum industry as part of the ongoing governmental restructuring in
China. The arrangements entitle a subsidiary of SMAL to purchase a
minimum of 400,000 metric tons (mt) of alumina per year for 30 years.
The ongoing restructuring of SNMIA and the Chinese aluminum industry
has not impacted this contract. The SMAL subsidiary also has the
option to increase its alumina purchases as the needs of the Chinese
aluminum industry grow.
Alcoa World Alumina - Australia
AWA - Australia's bauxite mineral lease is due for renewal in
2002. Renewal options allow AWA - Australia to extend the lease until
2044.
AWA - Australia's three alumina refineries, located in Kwinana,
Pinjarra and Wagerup, in Western Australia, have an aggregate annual
rated capacity of 6.8 million mt. AWA - Australia has begun a 440,000
mt per year expansion of the Wagerup refinery with completion of
construction expected in the second quarter of 1999. This US$193
million expansion will increase Wagerup's production capacity from 1.75
million mt per year to 2.19 million mt per year. This is the first
stage of a planned expansion to 3.30 million mt per year at Wagerup,
for which AWA - Australia has obtained environmental approval.
AWA - Australia meets most of the energy requirements of its
Australian refineries through a contract with the North West Shelf Gas
Joint Venture. In December 1997, the parties extended the existing
contract term from 2005 through 2020. These new arrangements may be
subject to review by the Australian competition authorities.
4
Alcoa World Alumina - Atlantic
Suriname
Suriname Aluminum Company, L.L.C. (Suralco) mines bauxite in
Suriname under rights that expire in 2032. Suralco also holds a 24%
minority interest in a bauxite mining joint venture managed by the
majority owner, an affiliate of Billiton plc (Billiton). Bauxite from
both mining operations serves Suralco's share of a refinery in
Suriname. Suralco expects to deplete the current mine reserves at both
operations in the period 2005-2010.
Suralco owns 55% of a 1.7 million mt per year alumina refinery in
Paranam, Suriname and operates the plant. An affiliate of Billiton
holds the remaining 45% interest.
Jamaica
Bauxite mining rights in Jamaica expire after the year 2020. The
bauxite mining rights are held in a joint venture with the Government
of Jamaica.
An Alcoa subsidiary and a corporation owned by the Government of
Jamaica are equal participants in an alumina refinery in Clarendon
Parish, Jamaica. The Alcoa subsidiary manages the joint venture. The
participants expect the refinery's annual capacity to increase from
800,000 to about 1 million mt by the end of 1999.
Brazil
Alcoa owns 59% of Alcoa Aluminio S.A. (Aluminio). Aluminio
manages the operation of the Alumar Consortium (Alumar), a cost-sharing
and production-sharing venture that owns a large refining and smelting
project near Sao Luis, in the northeastern state of Maranhao. For the
refining project, Aluminio owns 35.1% of Alumar, an affiliate of
Billiton owns 36%, Abalco S.A. (owned 60% by Alcoa and 40% by WMC) owns
18.9% and an affiliate of Alcan Aluminium Limited (Alcan) owns 10%.
In 1999, the Alumar refinery will complete an expansion of 260,000
mt, bringing the total annual capacity to approximately 1.25 million
mt. The smelter consumes most of this alumina production.
Aluminio holds an 8.6% interest and Abalco S.A. holds a 4.6%
interest in Mineracao Rio do Norte S.A. (MRN), a mining company jointly
owned by affiliates of Alcan, Companhia Brasileira de Aluminio,
Companhia Vale do Rio Doce, Billiton, Norsk Hydro and Reynolds Metals
Company.
Aluminio and Abalco S.A. purchase bauxite from MRN under long-term
supply contracts.
At Pocos de Caldas, Aluminio mines bauxite and operates a
refinery. The refinery has an annual capacity of 270,000 mt and
primarily supplies Aluminio's nearby smelter.
Spain
Alcoa and a WMC affiliate hold a 60% and 40% interest,
respectively, in the refinery at San Ciprian, which was part of the
Inespal acquisition.
Guinea
Alcoa has long-term contracts to purchase bauxite mined by a
partially-owned entity in the Republic of Guinea in Western Africa.
This bauxite services most of the requirements of the Pt. Comfort,
Texas and San Ciprian, Spain alumina refineries. The contracts expire
after 2011.
U.S.
Alcoa World Alumina LLC, through a majority-owned entity, St.
Croix Alumina, L.L.C., owns a 600,000 mt per year alumina refinery
located on St. Croix, U.S. Virgin Islands. In February 1998, AWA
restarted the refinery to fill customer orders because AWAC's worldwide
demand for alumina, including
5
the material it produced at St. Croix,
sold out for 1998. The refinery had been inactive due to world alumina
market conditions.
Alcoa World Alumina LLC owns an alumina refinery at Pt. Comfort,
Texas with an annual capacity of 2.3 million mt.
Industrial Chemicals
Alcoa sells industrial chemicals to customers in a broad spectrum
of markets. These markets include:
- refractories
- ceramics
- abrasives
- chemicals processing and
- other specialty applications.
Alcoa produces or processes industrial chemicals, principally
alumina-based chemicals, at the following locations. Except for the
plants located in Brazil, all of the following facilities are part of
AIC:
- Bauxite, Arkansas
- Ft. Meade, Florida
- Dalton, Georgia
- Port Allen and Vidalia, Louisiana
- Leetsdale, Pennsylvania
- Pt. Comfort, Texas
- Kwinana and Rockingham, Australia
- Pocos de Caldas and Salto, Brazil
- Ludwigshafen, Germany
- Falta, India (joint venture)
- Iwakuni and Naoetsu, Japan
- Moerdijk and Rotterdam, the Netherlands and
- Singapore.
In late 1998, AIC began construction of a facility in China to
process tabular alumina and other alumina-based materials for sale to
the Chinese refractory market.
Alcoa produces aluminum fluoride at two locations, Pt. Comfort and
Ft. Meade, both in the U.S. At Pt. Comfort, the aluminum fluoride is
produced from fluorspar and at Ft. Meade it is produced from
hydrofluosilicic acid. Aluminum fluoride is used in the aluminum
smelting process.
II. Primary Metals
The Company smelts primary aluminum from alumina obtained
principally from its alumina refineries. Following the Alumax
acquisition, Alcoa's consolidated primary aluminum capacity is
approximately 3.2 million mt per year. When operating at capacity,
Alcoa's smelters satisfy most of the primary aluminum requirements of
its fabricating operations. Other Alcoa operations used most of the
Company's primary aluminum production in 1998 for alloying and/or
further fabricating. Purchases of aluminum scrap, principally used
beverage cans, supplemented by purchases of ingot when necessary,
satisfy additional aluminum requirements. Since 1994, Alcoa has had
450,000 mt of its worldwide smelting capacity idle because of an
oversupply of ingot on world markets.
6
Alcoa produces aluminum from alumina by an electrolytic process
requiring large amounts of electric power. Electric power accounts for
approximately 25% of the Company's primary aluminum costs. Alcoa
generates approximately 40% of the power used at its smelters
worldwide. Most purchase contracts for firm power tie prices to
aluminum prices or to prices based on various indices.
Australia
AWA - Australia is a participant in a joint venture smelter at
Portland, in the State of Victoria, with an annual rated capacity of
320,000 mt. The owners of the smelter are:
- AWA - Australia (45% interest)
- Eastern Aluminum Ltd. (10% interest)
- the China International Trust and Investment Corporation (22.5%
interest) and
- Marubeni Aluminium Australia Pty., Ltd. (22.5% interest).
Each participant in this smelter contributes to the cost of operations
and construction in proportion to its interest in the venture. Each
participant also then receives a proportionate share of the output.
AWA - Australia supplies the alumina and operates the smelter.
Power is generated from extensive brown coal deposits covered by a
long-term mineral lease held by AWA - Australia, and that power
currently provides approximately 40% of the electricity for the 180,000
mt Point Henry smelter. The State Electricity Commission of Victoria
(SECV), under contracts with AWA - Australia, provides the remaining
power for this smelter and all power for the Portland smelter. Using a
formula, the parties tie power prices to aluminum prices. Negotiations
have been finalized on favorable economic terms that permit power
interuptibility at both Point Henry and Portland to contribute to
accommodating peak demands in the power grid serving the State of
Victoria.
Brazil
The Alumar smelter at Sao Luis, Brazil has an annual rated
capacity of 362,000 mt. Aluminio receives about 54% of the production
from this smelter. Aluminio purchases electric power from the
government-controlled power grid in Brazil at a small discount from the
applicable industrial tariff price. There is a protective cap on the
price of the electric power based on the London Metal Exchange (LME)
aluminum price.
Aluminio contracted with Central Eletricas de Minas Gerais S.A.
(CEMIG), the government-controlled electric utility, to supply power to
Aluminio's 90,000 mt Pocos de Caldas smelter for a 30-month period that
began in October 1996. Aluminio purchased the plant's anticipated full
power requirements for this period through a single payment based on
the price of energy on the date of the agreement. In February 1999,
Aluminio and CEMIG entered into a new power purchase agreement.
Similar to the previous agreement, Aluminio purchased the plant's
anticipated full power requirements for 38 months, beginning April
1999, through a single payment based on the price of energy on the date
of the agreement.
Aluminio participates in a consortium that is building the new
Machadinho hydroelectric power plant in Southern Brazil. In early
1998, after all of the necessary environmental and other approvals had
been obtained, the consortium began construction of the dam and related
facilities. Aluminio will share in the output of the plant beginning
in 2002. Aluminio expects its share to be sufficient to supply
approximately one-half of the power requirements for the Pocos de
Caldas smelter. In addition, Aluminio intends to participate in an
auction process that could result in its purchase of the regional Rio
Pardo hydroelectric utility.
Europe
The Company's aluminum smelters at Portovesme and Fusina, Italy
have a combined annual capacity of 187,000 mt. The owners of the
Eurallumina refinery, located on the island of Sardinia
7
adjacent to the Portovesme smelter, supply alumina to Alcoa Italia
S.p.A. under an evergreen agreement. ENEL, Italy's state-owned
utility, supplies power for these smelters.
The acquisition of Inespal included the purchase of aluminum
smelters at San Ciprian, La Coruna and Aviles, with a combined annual
capacity of 365,000 mt. The San Ciprian refinery supplies alumina, and
the government-controlled power grid currently supplies electric power
at the lowest applicable industrial tariff rate.
North America
The Company generates approximately 35% of the power requirements
for its 11 North American smelters and purchases the remainder under
long-term contracts. Alcoa obtains approximately 12% of the self-
generated power from its entitlement to a fixed percentage of the
output from Chelan County Public Utility District's Rocky Reach
hydroelectric power facility located in the State of Washington.
In addition, Alcoa has a contract with the Bonneville Power
Administration (BPA) that services the Wenatchee, Washington smelter.
Several contractual provisions allow power supply restrictions when
power is in short supply. Beginning in 1995, power purchased from a
local public utility district replaced a portion of the power supplied
under the BPA contract. The Wenatchee facility currently uses no power
from BPA, but instead purchases its additional power needs from the
local public utility district.
The Company has generated substantially all of the power used at
its Warrick, Indiana smelter using nearby coal reserves. A 1996 coal
supply contract satisfies 40% of the smelter's fuel requirement through
2006. Existing low-sulfur coal contracts satisfy an additional 35% of
the requirement through 1999. Short-term contracts of less than two
years satisfy the remainder of the fuel requirements.
The Rockdale, Texas smelter uses lignite to generate power.
Company-owned generating units supply about one-half of the total
requirements. Texas Utilities Company supplies the balance through a
long-term power contract expiring in 2013.
Two subsidiaries of the Company own and operate hydroelectric
facilities under Federal Energy Regulatory Commission licenses. They
provide electric power for the aluminum smelters at Alcoa, Tennessee
and Badin, North Carolina. The Tennessee plant also purchases firm and
interruptible power from the Tennessee Valley Authority under a
contract recently extended to 2010. The Badin plant purchases
additional power from Duke Power under an evergreen contract providing
for specified periods of notice before termination by either party.
The purchased power (primarily hydroelectric) contract for the
Massena, New York smelter expires not earlier than 2003. Alcoa,
however, may terminate this contract with one year's notice.
Through the Alumax acquisition, Alcoa increased its primary
aluminum capacity and added to its primary aluminum operations. Alcoa
acquired ownership interests in the following smelters: Lauralco,
located in Deschambault, Quebec (100.00%); Intalco, located in
Ferndale, Washington (61.00%); Eastalco, located in Frederick, Maryland
(61.00%); Mt. Holly, located in Goose Creek, South Carolina (50.33%);
and Becancour, located in Becancour, Quebec (24.95%). During 1998,
these facilities produced a total of 1,286,000 mt of aluminum, of which
the Company's share was 718,200 mt.
A Japanese consortium, led by a subsidiary of Mitsui & Co. Ltd.,
owns an aggregate 39% interest in each of the Intalco and Eastalco
facilities. Subsidiaries of Century Aluminum Company, a publicly
traded domestic corporation, and Sudelektra Holding, AG, a Swiss
corporation, together own 49.67% of Mt. Holly.
AWA - Australia has been Alumax's principal supplier of alumina
for over 20 years and currently provides substantially all of the
alumina for its smelting operations.
8
Lauralco, Intalco, Eastalco, Mt. Holly and Becancour purchase
electricity under long-term contracts that expire in the years 2014,
2001, 2003, 2005 and 2014, respectively, subject to certain extension
provisions. Except for Intalco, each facility's contract is with a
single supplier. Power rates for all of the electricity supplied to
the Becancour and Lauralco facilities are linked to the prevailing
price of aluminum. In late 1995, Intalco entered into a series of new
long-term power contracts with the BPA and British Columbia Power
Exchange Corporation to provide all of its electricity needs from
September 1996 through 2001. Under these contracts, Intalco's power
costs are no longer linked to the price of aluminum but are set at a
fixed rate. Mt. Holly entered into a new electric power supply
agreement in 1997, while Eastalco amended its existing power supply
agreement during the same year. For the foreseeable future, these
contracts are expected to meet the power requirements of these
facilities.
In February 1998, Alcoa and the government of British Columbia,
Canada signed a memorandum of understanding to proceed with a
feasibility study for the construction of a 250,000 mt per year primary
aluminum smelter. Alumax Primary Aluminum Corporation also entered
into a similar memorandum of understanding with the British Columbia
government. After Alcoa acquired Alumax, the study by the Alumax
subsidiary was not completed. Alcoa completed its study, but the
project is on hold until market conditions change.
In addition, Alcoa produces and markets aluminum paste, particles,
flakes and atomized powder. The Company also produces high-purity
aluminum.
Suriname
Suralco owns and operates a 30,000 mt per year smelter in Paranam,
Suriname. Suralco also operates the Afobaka hydro project, which
supplies power to the smelter.
Norway
The Company reports equity earnings from its interest in two
smelters in Norway. Elkem Aluminium ANS, 50%-owned by an Alcoa
subsidiary, is a partnership that owns and operates the smelters.
III. Flat-Rolled Products
Alcoa's flat-rolled products serve three principal markets:
packaging, transportation and building and construction. Light gauge
sheet products, mainly RCS and foil, serve the packaging market, and
mill products (sheet and plate) serve the other markets.
Alcoa employs its own sales force for most products sold in the
packaging market.
Rigid Container Sheet (RCS)
RCS accounted for most of the 1998 revenues in the packaging
market. Can companies purchase RCS for production of beverage and food
cans and can ends.
The number of RCS customers in the U.S. is relatively small. Use
of aluminum beverage cans continues to increase by approximately 3%
annually worldwide.
Aluminum's diverse characteristics, particularly its light weight,
recyclability and flexibility for package designs, are significant
factors in packaging markets. Aluminum competes with materials such as
steel, plastic and glass in these markets. Alcoa maintains leadership
in the packaging markets by
9
improving processes and facilities. Alcoa also provides marketing,
research and technical support to its customers. Alcoa produces RCS
at the following locations:
- Warrick, Indiana
- Alcoa, Tennessee
- Point Henry and Yennora, Australia (joint venture facilities)
- Moka, Japan (joint venture facility) and
- Swansea, Wales.
Kaal Australia Pty. Ltd., 50%-owned by Alcoa, owns and operates
the former AofA rolling mill at Point Henry and the former Comalco
Limited rolling mill at Yennora. These mills produce RCS for the
Australian and Asian markets. AWA - Australia supplies Kaal Australia
with aluminum ingot.
A subsidiary of Alcoa participates in a 50/50 joint venture with
Kobe Steel, Ltd. that produces RCS for markets in Japan and other Asian
countries. In connection with this venture, Alcoa has a long-term
contract to supply metal to Kobe Steel.
Used aluminum beverage cans are an important source of metal for
RCS. Recycling aluminum conserves raw materials, reduces litter and
saves energy -- about 95% of the energy needed to produce aluminum from
bauxite. In addition, recycling capacity costs much less than new
primary aluminum capacity. The Company has can recycling or remelt
facilities at or near its plants in:
- Warrick, Indiana
- Alcoa, Tennessee and
- Yennora, Australia.
Foil
Alcoa's Lebanon, Pennsylvania facility produces industrial foil,
laminated foil and brazing sheet. The building and construction,
packaging and automotive markets use these products. Continuous
casting facilities in Hawesville, Kentucky and Badin, North Carolina
produce reroll stock in support of the Lebanon facility. With the
acquisition of Alumax, Alcoa acquired an additional casting facility in
St. Louis, Missouri. Foil products from this facility are sold
primarily to commercial users in the flexible packaging, converter,
food service and pharmaceutical industries. The Company now also owns
and operates a facility in Russellville, Arkansas. The Russellville
plant, which is supported by the casting facility in St. Louis,
includes two rolling mills, annealing ovens and ancillary equipment,
all dedicated to the production of foodservice and converter foil
products.
Aluminio, near Recife, Brazil, manufactures light gauge sheet,
foil products and laminated evaporator panels. The Yennora, Australia
plant also produces light gauge sheet. In addition, the facilities at
Alicante and Sabinanigo, Spain produce foil products.
Alcoa and Shanghai Aluminum Fabrication Plant (SAFP) have a joint
venture, owned 60% by Alcoa and 40% by SAFP, that operates the former
SAFP aluminum foil and foil laminate production facility in Shanghai,
China. With the addition of a second caster in April 1998, the annual
output of the joint venture facility is now approximately 14,000 mt.
As part of the Alumax acquisition, the Company acquired a 56%
interest in a foil mill in Kunming, Yunnan, China.
10
Mill Products
Alcoa produces sheet and plate products that are used in the
following markets:
- aerospace
- auto and truck
- lithographic
- railroad
- shipbuilding
- building and construction
- defense and
- other industrial and consumer markets.
The Company maintains its own sales force for most of the sheet and
plate products.
Differentiation of material properties, price and service are
significant competitive factors in these markets. Aluminum's diverse
characteristics are important in markets where competitive materials
include steel and plastics for automotive and building applications;
magnesium, titanium, composites and plastics for aerospace and defense
applications; and wood and vinyl in building and construction
applications. Alcoa continues to develop alloys and products for
aerospace and defense applications, such as those developed for the:
- Boeing 777 aircraft
- Lockheed F-16 aircraft
- Canadair aircraft
- Advanced Amphibious Assault Vehicle and
- Airbus A340-600 aircraft.
Davenport, Iowa is home to Alcoa's largest sheet and plate plant.
The plant produces products requiring special alloying, heat-treating
and other processing, some of which are unique or proprietary. Over
the past two years, the Davenport plant's heat-treating capacity for
sheet and plate was increased to meet aerospace and automotive demand.
Alcoa also commissioned the largest vertical heat-treat furnace in
North America, thus tripling the plant's capacity for wide-width
fuselage sheet. A horizontal plate heat-treating furnace has increased
capacity by 30% since production began in the second quarter of 1997.
Alcoa has a plant in Hutchinson, Kansas for further processing and
just-in-time stocking of aluminum sheet products for the U.S. aerospace
market. Alcoa serves European sheet and plate markets through a
distribution center in Paal, Belgium.
Alcoa has a plant in Danville, Illinois for further processing and
just-in-time stocking of aluminum sheet products for the North American
automotive market. This facility began to operate in 1998 and is
expected to be up to full production in the second half of 1999.
As required by the terms of its agreement with the U.S. Department
of Justice that cleared the way for the Company to acquire Alumax,
Alcoa sold its cast aluminum plate business in Vernon, California to
Century Aluminum Company in December 1998.
Alcoa and Kobe Steel have a joint venture in the U.S. and one in
Japan to serve the transportation industry. The focus of these
ventures is to expand the use of aluminum sheet products in passenger
cars and light trucks.
The Company's Hungarian subsidiary, Alcoa-Kofem Kft (Kofem),
produces common alloy flat and coiled sheet as well as soft alloy
extrusions and end products for the building, construction, food,
transportation and agricultural markets in central and western Europe.
Kofem began delivering
11
aluminum truck bodies to major beverage companies in Russia and Poland
in 1996. Kofem also delivered additional truck bodies to customers in
central and eastern European countries in 1997.
The Company's Alcoa Italia S.p.A. subsidiary produces industrial
plate and common alloy flat and coiled sheet for the building and
construction, transportation and other industrial markets in Europe at
its Fusina, Italy rolling mill.
In the Inespal acquisition, Alcoa acquired rolling mills at
Amorebieta, Alicante and Sabinanigo, Spain. These mills produce
industrial plate and common alloy flat and coiled sheet for the
building and construction and transportation markets, lithographic
sheet and coil and bright products for lighting, cosmetic and
industrial uses, and foil products for food, pharmaceutical and
industrial applications in Europe.
As part of the Alumax acquisition, Alcoa acquired Alumax Mill
Products. Alumax Mill Products produces flat-rolled products, both
sheet and plate, and semi-fabricated products, circles and blanks at
mills in Lancaster, Pennsylvania and Texarkana, Texas. The Lancaster
facility also produces semi-fabricated cast aluminum plate, engineered
to meet highly specialized industrial applications. In November 1997,
Alumax Mill Products entered into a new five-year operating lease,
renewable for up to two additional years, covering the Texarkana mill.
This leasing arrangement enabled Alumax to forego a previously planned
capital investment of $97 million to purchase the Texarkana facility.
Alcoa is in the process of integrating the marketing and sales
functions for Alumax products to maximize efficiencies, meet customer
demands and realize cost savings.
In October 1998, Alcoa and Pechiney announced their letter of
intent for Alcoa to purchase the bright products business of Pechiney's
Rhenalu rolling plant located at Castelsarrasin near Toulouse, France.
IV. Engineered Products
Engineered products include aluminum extrusions, forgings,
castings and wire, rod and bar.
Extrusions
As part of the Alumax acquisition, Alcoa acquired Alumax
Extrusions, Inc. (the name has subsequently been changed to Alcoa
Extrusions, Inc.), a manufacturer of a broad line of soft alloy
extruded products and secondary billet. Alcoa Extrusions has 12 plants
located in Arkansas, Florida, Georgia, Illinois, Mississippi, North
Carolina, Pennsylvania, South Dakota, Tennessee, Utah and an
international operation in Monterrey, Mexico. Its shower and bath
enclosures are distributed through nine service centers in California,
Florida, Georgia, Iowa, North Carolina, Pennsylvania, Texas and
Washington. The Monterrey, Mexico operation consists of a three-press
extrusion plant with distribution facilities in Mexico City,
Guadalajara, and Hermosillo. Except for the plants located in North
Carolina and Monterrey, the service centers and the distribution
facilities in Guadalajara and Hermosillo, which are leased, Alcoa
Extrusions owns all of these plants and facilities.
The North American operations of Alcoa Extrusions have been
integrated into the Alcoa Engineered Products business unit and the
recently created Alcoa Extruded Construction Products business unit.
12
Alcoa Engineered Products has nine operating locations, five of
which are Alumax Extrusion locations.
- Chandler, Arizona - hard alloy extrusions, tube and forge stock
- Morris, Illinois - industrial and distribution common alloy
extrusions
- Lafayette, Indiana - hard alloy extrusions and tube
- Baltimore, Maryland - large press extrusions
- Massena, New York - cast rod, mechanical-grade redraw rod, wire
and cold-finished rod and bar extrusions
- Catawba, North Carolina - specialized extrusions
- Cressona, Pennsylvania - industrial and distribution common alloy
extrusions
- Elizabethton, Tennessee - industrial and distribution common alloy
extrusions
- Spanish Fork, Utah - industrial and distribution common alloy
extrusions
These facilities are supported by sales and administration centers
in Illinois, Indiana and Pennsylvania. These operations market and
sell extrusions to the service center and transportation and aerospace
customers. They also service key original equipment manufacturers'
accounts in the machinery and equipment, electrical switchgear and
transmission, recreation, medical and consumer durables markets.
Alcoa Extruded Construction Products has nine operating locations:
Arkansas, Florida, Georgia (2), Illinois, Louisiana, Mississippi, South
Dakota and Mexico. These facilities manufacture and sell soft alloy
extruded products. They are supported by eight distribution centers
that manufacture, fabricate and sell bath and shower enclosures.
Representative products include window and door frames, bath and shower
enclosures, patio and pool enclosures, stadium seating, light poles and
flag poles, bridges, rail and decking, and colored architectural
shapes. Alcoa announced the closure of the Illinois facility in
February 1999.
Aluminio and a subsidiary in Argentina manufacture aluminum
extruded products. Aluminio operates the former Alcan extrusion assets
in Brazil, which include four plants and eight extrusion presses.
Alcoa Extrusions Hannover GmbH & Co. KG produces and markets high-
strength aluminum extrusions and rod and bar to serve European
transportation and defense markets.
The subsidiaries of Alcoa Nederland Holding B.V. produce
extrusions, common alloy sheet products and a variety of finished
products for the building industry, such as aluminum windows, doors and
aluminum ceiling systems. These companies also manufacture products
for agricultural applications, such as automated greenhouse systems.
Aluminum East ZAO, through its Building Systems International
branch, assembled and sold aluminum windows and doors in Russia.
Alcoa, however, has discontinued this business.
Alcoa Italia S.p.A. produces and markets industrial extrusions
through plants in Bolzano, Fossanova, Feltre and Iglesias, Italy. Also
part of Alcoa Italia S.p.A. is an extrusion die shop located in Mori,
Italy.
In addition to the Company's existing extrusion plant in Spain,
the Inespal acquisition also included the purchase of extrusion plants
at Noblejas and La Coruna, Spain.
Alcoa also has extrusion plants in Hungary and the United Kingdom.
In December 1998, Alcoa and Reynolds Metals Company announced a
definitive agreement for Alcoa to purchase Reynolds' aluminum extrusion
plant in Irurzun, Spain. This transaction is expected to close in the
first half of 1999.
13
In November 1998, Alcoa sold the assets and certain liabilities of
Alcotec Wire Company, a partnership owned 70% by Alcoa and 30% by
Aluminum Technology Corporation, to ESAB Group Limited, a subsidiary of
the British company, Charter Group.
Alcoa also acquired Kawneer Company, Inc. (Kawneer) and Alumax
Europe N.V. (Alumax Europe) in the Alumax acquisition. Kawneer
designs, manufactures and markets architectural aluminum products and
is a leading producer of these products in the U.S. and Canada. These
products include entrances, windows, framing and curtain wall systems
for the commercial building markets. Kawneer products are also
engineered for use on construction projects throughout the world.
Kawneer operates five integrated architectural plants, 17 service
centers and one additional manufacturing location in the U.S.
Distribution is principally through dealers, most of whom are glazing
contractors.
Kawneer also operates two integrated architectural plants in
Canada that provide most of the product that is sold for large overseas
projects, as well as two service centers.
Alumax Europe was organized in 1997 to manage Alumax's operations
in the United Kingdom, France, Germany, Poland and the Netherlands. It
also participates in a joint venture in Morocco. Two manufacturing
plants located in France and one each in England and Germany, three of
which are owned and one of which is leased, provide architectural
aluminum products very similar to those produced by Kawneer operations
in the U.S. These products are marketed under the Kawneer name
throughout Europe. Alumax Europe's Kawneer subsidiaries also operate
service centers in France, Poland and Morocco. Other operations of
Alumax Europe include custom extrusion plants in the United Kingdom and
the Netherlands, and an aluminum recycling facility in the Netherlands
that produces soft alloy extrusion billet.
Forgings and Castings
The plant in Cleveland, Ohio produces aluminum forgings, sold
principally in the aerospace, automotive, commercial transportation and
defense markets. It also produces aluminum forged wheels for passenger
automobiles, sport utility vehicles and light trucks and wheels for the
Class 8 heavy-duty truck industry. Alcoa's plant in Szekesfehervar,
Hungary manufactures forged aluminum truck wheels for the European
market. The plant also manufactures wheels for export to Asian, South
American and other geographic markets that use European-style wheels.
Alcoa has a 50% interest in a partnership, A-CMI, with a
subsidiary of CMI International, Inc. to produce cast and forged
aluminum automotive parts. A-CMI's plants are located in Fruitport,
Michigan, Hawesville, Kentucky and Lista, Norway. The Lista plant is
located near the 50%-owned Elkem Aluminium ANS smelter, which delivers
molten aluminum to the plant.
Alcoa also designs and builds specialized die-casting machines
through a subsidiary in Montreal, Canada.
Alumax Engineered Metal Processes, Inc. (AEMP) produces automotive
components with operations in Jackson, Tennessee and Bentonville,
Arkansas using a semi-solid forging process. In December 1998, Alcoa
announced a binding letter of intent to sell the Jackson, Tennessee
facility to the management of AEMP. Alcoa has closed the Bentonville,
Arkansas plant.
14
V. Other
This category includes the production and sale of high performance
body structures for cars, electrical, plastic and composite materials
products, manufacturing and packaging equipment, gold, magnesium
products and steel and titanium forgings.
High Performance Automotive Body Structures
Alcoa Automotive Structures GmbH produces aluminum components and
sub-assemblies for aluminum automotive spaceframes. Aluminum
spaceframes represent a significant departure from the traditional
method and material used to manufacture primary auto body structures.
In 1993, Alcoa began operating a unique multi-million dollar plant
in Soest, Germany to supply aluminum components and subassemblies to
its first customer, Audi AG. The Audi A8 luxury sedan was the first
production automobile to utilize a complete aluminum spaceframe body
structure. Audi began marketing the A8 in Europe in 1994 and in the
U.S. in late 1996. The aluminum spaceframe of the A8 is a result of a
cooperative effort between Alcoa and Audi that began in 1981. Alcoa
produces the components and sub-assemblies for the spaceframe. The
Soest plant also produces the front end module for the new Mercedes-
Benz A Class car.
Alcoa has worked closely with Ferrari on the development of the
all-aluminum body structure for its 360 Modena model that was
unveiled at the 1999 Geneva International Motor Show. This body
structure, build on-site inside Ferrari's Scaglietti Works, uses
extruded and die-cast components from the Soest plant and sheet
components from Alcoa Mill Products in Danville, Illinois.
Alcoa also operates design and engineering offices in Esslingen
(Stuttgart), Germany, Detroit, Michigan, and Alcoa Technical Center,
near Pittsburgh, Pennsylvania. The Company designs aluminum auto body
structures for a variety of European car manufacturers at these
locations.
Alcoa is working with several other automobile manufacturers in
North America and Japan to develop new automotive applications for
aluminum products. For example, DaimlerChrysler's Plymouth Prowler, a
roadster, entered initial, low-volume production in 1997. Carrying
900 pounds of aluminum (or approximately one-third of its weight), the
Prowler has an all-aluminum frame and body as well as aluminum for
brake rotors and suspension components. Alcoa and Chrysler designed
the car's spaceframe, and Alcoa provides aluminum sheet stock for
stamping into body panels and bumper assemblies. Alcoa's plant in
Northwood, Ohio manufactures the Prowler frame and a variety of
aluminum structural assemblies for the U.S. automotive industry,
including the Corvette windshield surround.
Alcoa Fujikura Ltd. (AFL)
AFL produces and markets electronic and electrical distribution
systems (EDS) for the automotive industry, as well as fiber optic
products and systems for selected electric utilities,
telecommunications, cable television and datacom markets. AFL supplies
EDS to:
- Ford
- Subaru
- PACCAR
- Audi
- Volkswagen and
- DaimlerChrysler.
15
AFL owns Michels GmbH & Co. K.G. (Michels), a European
manufacturer of EDS for automobiles. AFL also owns the Stribel group
of companies, European manufacturers of electromechanical and
electronic components for the European automotive market. The European
facilities are located in Germany, Hungary, Ireland and the United
Kingdom.
AFL and Aluminio have a joint venture, AFL do Brasil Ltda., that
manufactures and sells EDS in Brazil. AFL also has an EDS
manufacturing facility in Venezuela.
Significant competitive factors in the EDS markets include price,
quality and full service supplier capability, as automakers
increasingly require support from selected suppliers on a global basis.
In mid-1997, AFL's telecommunications division acquired the assets
of Six "R" Communications Inc., a Monroe, North Carolina-based provider
of EF&I services (engineer, furnish and install) to the telecom, CATV
and electric utility industries. Six "R" Communications, L.L.C., a
majority-owned entity, now operates this business.
In March 1998, Six "R" Communications, L.L.C. acquired T.I.C.S.
Corporation, a leading provider of network solutions for voice and data
applications. In the fourth quarter of 1998, AFL also acquired an
80.1% ownership interest in two companies that provide EF&I services,
MinTel Communications, L.L.C. and Quality Control Services, L.L.C.
Packaging and Closures
Alcoa Closure Systems International, Inc. (ACSI), the world's
largest producer of plastic closures, manages all of Alcoa's worldwide
closures businesses other than in South America. ACSI coordinates its
business from Indianapolis, Indiana. The Company's South American
closures business and PET (polyethylene terephthalate) plastic bottles
manufacturing facilities are managed independently by Aluminio from Sao
Paulo, Brazil.
The use of plastic closures has surpassed that of aluminum
closures for beverage containers in the U.S. and in many other
countries. Alcoa has plastic closure, PET plastic bottles, closure
molding equipment and packaging equipment design and assembly
facilities at the following locations:
Packaging and Closures Facilities
Crawfordsville, Indiana Santiago, Chile Nogi, Japan
Olive Branch, Mississippi Tianjin, China Saltillo, Mexico
Buenos Aires, Argentina Bogota, Colombia Lima, Peru
Manama, Bahrain Szekesfehervar, Hungary Lyubuchany, Russia
Barueri, Itapissuma, Lages and Ensenada, Mexico Barcelona, Spain
Queimados, Brazil San Jose, Costa Rica Worms, Germany
The Alcoa Packaging Equipment business unit designs, manufactures
and services:
- bodymakers
- decoration equipment
- registered embossers
- end conversion presses
- a variety of testing equipment for the can making industry and
- plastic and aluminum closure handling, orientation, inspection
and capping equipment for the food and beverage industry.
16
The Alcoa Advanced Technologies division of this business unit supplies
advanced material products to the semiconductor equipment industry.
Other Aluminum Products
In March 1998, Aluminio sold the assets of its aluminum truck body
division.
Aluminio and Phelps Dodge Corporation have a joint venture that
produces aluminum electric cable and copper wiring and cables in
Brazil. The venture, Phelps Dodge & Alcoa Fios e Cabos Eletricos S.A.,
is owned 60% by Phelps Dodge and 40% by Aluminio. Production takes
place at the venture's plant in Pocos de Caldas.
Alcoa Building Products, Inc. (ABP) manufactures and markets
residential aluminum siding and other aluminum building products. ABP
sells these products principally to wholesale distributors.
ACSI produces aluminum closures for bottles at Worms, Germany,
Nogi and Ichikawa, Japan, and Barcelona, Spain. In October 1998, the
Company signed a letter of intent to sell substantially all of the
assets and certain liabilities of Capsulas Metalicas, S.A., its metal
beverage closures business in Spain, to Alucapvit, SPA.
Alcoa also owns a 36% interest in American Trim, L.L.C., a joint
venture that manufactures primarily auto parts and appliance control
panels.
Other Nonaluminum Products
ABP produces vinyl siding and accessories and other nonaluminum
building products for the building and construction markets.
Northwest Alloys, Inc., in Addy, Washington, produces magnesium
from minerals in the area owned by the Company. Alcoa uses the
magnesium for certain aluminum alloys and also sells it to third
parties.
Aluminio owns 40% and affiliates of Alcatel of France own 60% of a
joint venture, called Alcatel Cabos Brazil. The venture manufactures,
in Brazil, and sells telecommunication cables and related accessories
in South America.
In November 1998, Hedges Gold Pty. Ltd., a subsidiary, completed
the sale of the Hedges gold mine in Western Australia and the
corresponding mining leases to Boddington Gold Mine joint venturers.
The gold processing plant was not included in the sale.
The Alcoa facility at Cleveland, Ohio produces large press steel,
titanium and special super alloy forgings. Aerospace and commercial
customers are the principal purchasers of these products.
Competition
The markets for most aluminum products are highly competitive.
Price, quality and service are the principal competitive factors in
most of these markets. Where aluminum products compete with other
materials, the diverse characteristics of aluminum are also a
significant factor, particularly its light weight and recyclability.
17
The aluminum industry is highly cyclical, and the LME-based prices
of primary aluminum influence the Company's results of operations.
This price sensitivity impacts a portion of the Company's alumina sales
and many of the Company's aluminum products. There is, however, less
impact on the more specialized and value-added products.
The Company continues to examine all aspects of its operations and
activities and redesign them where necessary to enhance effectiveness
and achieve cost reductions. Alcoa believes that it enhances its
competitive position through its improved processes, extensive
facilities and willingness and ability to commit capital where
necessary to meet growth in important markets, and by the capability of
its employees. This includes implementation of Alcoa Business System
(ABS) and the Alcoa Production System (APS). Research and development
has led to improved product quality and production techniques, new
product development and cost control.
ABS is based upon the integration of the Company's mission, vision
and values with its business processes and measures in order to create
maximum value. APS is the manufacturing component of ABS. APS's basic
tenets are (1) produce for use, not for inventory, (2) eliminate waste
and (3) recognize that people are the linchpin of the system.
Alcoa has made significant achievements to date through the
implementation of APS at several of its businesses, including:
- reduction of inventory and flow-time and
- increase in output
Alcoa believes that ABS and APS will in time substantially improve
its profitability relative to its peers. In July 1998, Alcoa announced
a $1.1 billion cost reduction initiative to be achieved by January 1,
2001. The Company intends to realize a significant portion of this
reduction through ABS and APS.
Risk Factors
In addition to the risks inherent in its operations, Alcoa is
exposed to financial, market, political and economic risks. The
following discussion, which provides additional detail regarding
Alcoa's exposure to the risks of changing commodity prices, foreign
exchange rates and interest rates, includes forward-looking statements
that involve risk and uncertainties. Actual results could differ
materially from those projected in these forward-looking statements.
Commodity Price Risks
Alcoa is a leading global producer of aluminum ingot and aluminum
fabricated products. As a condition of sale, customers often require
Alcoa to commit to fixed-price contracts that sometimes extend a number
of years into the future. Customers will likely require Alcoa to enter
into similar arrangements in the future. These contracts expose Alcoa
to the risk of fluctuating aluminum prices between the time the order
is accepted and the time that the order ships.
In the U.S., Alcoa is net metal short and is subject to the risk
of higher aluminum prices for the anticipated metal purchases required
to fulfill the long-term customer contracts noted above. To hedge this
risk, Alcoa enters into long positions, principally using futures and
options. Alcoa follows a stable pattern of purchasing metal;
therefore, it is highly likely that anticipated metal requirements will
be met. At December 31, 1998 and 1997, these contracts totaled
approximately 933,000 mt and 1,084,000 mt, respectively. These
contracts act to fix the purchase price for these metal purchase
requirements, thereby reducing Alcoa's risk to rising metal prices.
18
A hypothetical 10% change from the 1998 year-end, three-month LME
aluminum ingot price of $1,244 per mt would result in a pre-tax gain or
loss to future earnings of $110 million related to all of the futures
and options contracts noted above. However, it should be noted that
any change in the value of these contracts, real or hypothetical, would
be significantly offset by an inverse change in the value of the
underlying metal purchase transactions.
Earnings were selected as the measure of sensitivity due to the
historical relationship between aluminum ingot prices and Alcoa's
earnings. The hypothetical change of 10% was calculated using a
parallel shift in the existing December 31, 1998 forward price curve
for aluminum ingot. The price curve takes into account the time value
of money, as well as future expectations regarding the price of
aluminum ingot. The model also assumes there will be no aluminum
smelter capacity restarted by Alcoa.
The futures and options contracts noted above are with
creditworthy counterparties and are further supported by cash, treasury
bills or irrevocable letters of credit issued by carefully chosen
banks.
The expiration dates of the options and the delivery dates of the
futures contracts noted above do not always coincide exactly with the
dates on which Alcoa is required to purchase metal to meet its
contractual commitments with customers. Accordingly, some of the
futures and options positions will be rolled forward. This may result
in significant cash inflows if the hedging contracts are "in-the-money"
at the time they are rolled forward. Conversely, there could be
significant cash outflows if metal prices fall below the price of
contracts being rolled forward.
In addition to the above noted aluminum positions, Alcoa had
29,000 mt and 259,000 mt of futures and options contracts outstanding
at year-end 1998 and 1997, respectively, that cover long-term, fixed-
price commitments to supply customers with metal from internal sources.
Accounting convention requires that these contracts be marked-to-
market, which resulted in after-tax charges to earnings of $45 million
in 1998, $13 million in 1997 and $57 million in 1996. A hypothetical
10% change in aluminum ingot prices from the year-end 1998 level of
$1,244 per mt would result in a pre-tax gain or loss of $3 million
related to these positions. The hypothetical gain or loss was
calculated using the same model and assumptions noted earlier.
Alcoa also purchases certain other commodities, such as gas and
copper, for its operations and enters into futures contracts to
eliminate volatility in the prices of such products. None of these
contracts are material. For additional information on financial
instruments, see Notes A and T to the Financial Statements.
Foreign Exchange Risks
Alcoa is subject to significant exposure from fluctuations in
foreign currencies. As a matter of company policy, foreign currency
exchange contracts, including forwards and options, are sometimes used
to limit the risk of fluctuating exchange rates. A hypothetical 10%
change in applicable 1998 year-end forward rates would result in a pre-
tax gain or loss of approximately $135 million related to these
positions. However, it should be noted that any change in the value of
these contracts, real or hypothetical, would be significantly offset by
an inverse change in value of the underlying hedged item. The model
assumes a parallel shift in the forward curve for the applicable
currencies and includes the foreign currency impact of Alcoa's cross-
currency interest rate swaps. See Notes A and T to the Financial
Statements for information related to the accounting policies and fair
market values of Alcoa's foreign exchange contracts at December 31,
1998 and 1997.
In early 1999, Brazil experienced a devaluation of its currency,
the real. Based on information currently available, Alcoa does not
believe that the devaluation will have a material impact on its 1999
results of operations.
19
Interest Rate Risks
Alcoa attempts to maintain a reasonable balance between fixed-
and floating-rate debt and uses interest rate swaps and caps to keep
financing costs as low as possible. At December 31, 1998 and 1997,
Alcoa had $3,489 million and $1,952 million of debt outstanding at
effective interest rates of 6% and 7%, respectively, after the impact
of interest rate swaps and caps is taken into account. A hypothetical
change of 10% in Alcoa's effective interest rate from year-end 1998
levels would increase or decrease interest expense by $21 million. The
interest rate effect of Alcoa's cross-currency interest rate swaps has
been included in this analysis. For more information related to
Alcoa's use of interest rate instruments, see Notes A and T to the
Financial Statements.
Risk Management
All of the aluminum and other commodity contracts, as well as the
various types of financial instruments, are straightforward and are
held for purposes other than trading. They are used primarily to
mitigate uncertainty and volatility, and principally cover underlying
exposures.
Alcoa's commodity and derivative activities are subject to the
management, direction and control of the Strategic Risk Management
Committee (SRMC). SMRC is composed of the chief executive officer, the
president, the chief financial officer and other officers and employees
that the chief executive officer may select from time to time. SRMC
reports to the board of directors at each of its scheduled meetings on
the scope of its derivative activities.
Material Limitations
The disclosures, with respect to aluminum prices and foreign
exchange risk, do not take into account the underlying anticipated
purchase obligations and the underlying transactional foreign exchange
exposures. If the underlying items were included in the analysis, the
gains or losses on the futures and options contracts may be offset.
Actual results will be determined by a number of factors that are not
under Alcoa's control and could vary significantly from those
disclosed.
Year 2000 Issue
Alcoa, like other businesses, is facing the Year 2000 issue. The
Year 2000 issue arises from the past practice of utilizing two digits
(as opposed to four) to represent the year in some computer programs
and software. If uncorrected, this could result in computational
errors as dates are compared across the century boundary.
As a basic materials supplier, the vast majority of the products
produced and sold by Alcoa are unaffected by Year 2000 issues in use or
operation since they contain no microprocessors.
Alcoa is addressing the Year 2000 issue through a formal program
that reports to the Company's chief information officer. Alcoa's
methodology encompasses four phases: Awareness/Inventory; Assessment;
Remediation and Compliance Testing. Ongoing leadership is provided by
a Global Program Office, which is directly linked into Alcoa's business
units and resource units, including the newly-acquired Alumax
facilities. The Global Program Office provides processes and tools to
the business units and monitors progress through systematic reporting
and on-site verification reviews in cooperation with the Company's
internal auditors. Progress is reported regularly to the Company's
senior executives and to the Audit Committee of Alcoa's board of
directors.
20
Internally, computer- and microprocessor-based systems such as
mainframe, minicomputer and personal computer systems and the software
they utilize have been assessed. Operational support, process control,
facilities, infrastructure and mechanical systems are being addressed
as well. These systems assist in the control of Alcoa's operations by
performing such functions as maintaining manufacturing parameters,
monitoring environmental conditions and assisting with facilities
management and security. Many of these systems rely on software or
contain embedded electronic components that could be affected by Year
2000 compliance issues. Since many of these systems are common across
operating locations, information sharing and efficiencies have been
realized in the Year 2000 efforts. Priority for any required
remediation efforts has been assigned based on the criticality of the
system or business process affected.
As of December 31, 1998, the remediation phase had been completed
for 90% of Alcoa's critical components with 86% of all critical
components having completed compliance testing. Individual exceptions
providing for completion during 1999 have been approved by business
unit and resource unit management and reviewed by the Year 2000 Global
Program Office and the chief information officer. These, along with
all other critical systems, will be specifically addressed within
Alcoa's contingency planning process. Alcoa does not believe that this
limited rescheduling will adversely affect its overall Year 2000
readiness. It is presently expected that compliance testing will be
completed for 99% of critical systems by the third quarter.
Alcoa relies on numerous third-party vendors and suppliers for a
wide variety of goods and services, including raw materials,
telecommunications and utilities such as water and electricity. Many
of the Company's operating locations would be adversely affected if
these supplies and services were curtailed as a result of a supplier's
Year 2000 noncompliance. Alcoa has surveyed its vendors and suppliers
using questionnaires and, based on the response and significance to the
Company's operations, may initiate follow up meetings. If Alcoa
concludes that a third party trading partner presents a substantial
risk of a Year 2000 based business disruption, an effort will be made
to resolve the issue. If necessary, a new provider of the affected
goods or services will be qualified and secured. Communication with
suppliers and other third parties regarding Year 2000 issues is a
continuing process.
Alcoa and certain of its trading partners utilize electronic data
interchange (EDI) to effect business communications. The Company's EDI
system software has been upgraded to support transactions in a Year
2000 compliant format. Migration of EDI transactions to this new
format will occur as existing EDI transaction formats are modified by
Alcoa and its EDI trading partners on a case-by-case basis. Some Alcoa
customers have indicated that they will not modify EDI transaction sets
but will rely on other techniques to achieve Year 2000 capability
Alcoa's Year 2000 program utilizes on-site verification of Year
2000 efforts at its various operating locations. Using audit-like
techniques, the Year 2000 Global Program Office and the Company's
internal auditors verify that business and resource units have followed
the prescribed processes and methodologies and also samples local Year
2000 readiness. Each of Alcoa's business units will receive at least
one verification audit during 1999 with more than sixty reviews
planned.
Based on current information, Alcoa believes that the most likely
worst case scenario to result from a Year 2000 failure by Alcoa, its
suppliers or customers would be a short term reduction in manufacturing
capability at one or more of Alcoa's operations and a temporary
limitation on Alcoa's ability to deliver products to customers. Based
on internal efforts and formal communications with third parties, Alcoa
does not believe that Year 2000 issues are likely to result in
significant operational problems or have a material adverse impact on
its consolidated financial position, operations or cash flow.
Nonetheless, failures of suppliers, third party vendors or customers
resulting from Year 2000 issues could result in a short term material
adverse effect.
21
In 1998, Alcoa incurred $38 million of direct costs in connection
with its Year 2000 program. These costs include external consulting
costs and cost of hardware and software replaced as a result of Year
2000 issues. Direct costs for 1999 are estimated to be between $35
million and $60 million.
Employees
Alcoa had 103,500 employees worldwide at year-end 1998.
Approximately 38% of the employees are in the U.S.
Alcoa and its unions ratified new six-year labor agreements
covering the majority of Alcoa's U.S. production workers in mid-1996.
As part of the agreements, Alcoa and the unions agreed to an
unprecedented partnership mandating that they work cooperatively on
customer requirements, business objectives and shareholder and union
interests. The agreements set broad, new goals for employee safety,
job security, and influence, control, and accountability for the work
environment. Other major provisions include wage increases over the
first five years, enhanced pension benefits, increases in sickness and
accident insurance, life insurance and dental benefits and the amount
of income a spouse may earn before sharing medical benefit costs.
The new agreements have five years of defined provisions. At the
end of the fifth year, Alcoa and the unions will reopen the entire
contract. If the parties cannot reach agreement, they will submit the
economic provisions to arbitration.
Agreements negotiated under guidelines established by a national
industrial relations authority cover wages for AWA - Australia
employees.
Aluminio negotiates wages for both hourly and salaried employees
annually in compliance with government guidelines. Each Aluminio
location, however, has a separate compensation package for its
employees.
Research and Development
Alcoa, a technology leader in the aluminum industry, engages in
research and development programs that include process and product
development, and basic and applied research. Alcoa conducts these
activities within its business units, and at Alcoa Technical Center.
Expenditures for R&D activities were $128 million in 1998, $143 million
in 1997 and $166 million in 1996. The Company funds substantially all
R&D expenses.
Environmental
Alcoa's Environment, Health and Safety Policy confirms its
commitment to operate worldwide in a manner that protects the
environment and the health and safety of employees and of the citizens
of the communities where the Company operates.
Alcoa continues its efforts to develop and implement modern
technology, and standards and procedures, to meet its Environment,
Health and Safety goals. The Company spent approximately $105 million
during 1998 for new or expanded facilities for environmental control.
Capital expenditures for such facilities will approximate $115 million
in 1999. These figures do not include the costs of operating
22
these facilities. Remediation expenses are continuing at many of the
Company's facilities. See Environmental Matters on pages 34 through 35
in the Annual Report to Shareholders and "Item 3 -- Legal Proceedings"
below.
Alcoa's operations worldwide, like those of others in
manufacturing industries, have in recent years become subject to
increasingly stringent legislation and regulations intended to protect
human health and safety, and the environment. The Company expects this
trend to continue. Compliance with new laws, regulations or policies
could require substantial expenditures by the Company in addition to
those mentioned above.
Alcoa supports the use of sound scientific research and realistic
risk criteria to analyze environmental and human health and safety
effects and to develop effective laws and regulations in all countries
where it operates. The Company also relies on internal standards that
it applies worldwide to ensure that its facilities operate with minimal
adverse environmental, health and safety impacts, even where no
regulatory requirements exist. Alcoa recognizes that recycling and
pollution prevention offer real solutions to many environmental
problems, and it continues vigorously to pursue efforts in these areas.
Item 2. Properties.
See "Item 1 - Business." Alcoa believes that its facilities are
suitable and adequate for its operations.
Item 3. Legal Proceedings.
In the ordinary course of its business, Alcoa is involved in a
number of lawsuits and claims, both actual and potential, including
some which it has asserted against others. While the amounts claimed
may be substantial, the ultimate liability cannot now be determined
because of the considerable uncertainties that exist. It is possible
that results of operations or liquidity in a particular period could be
materially affected by certain contingencies. Management believes,
however, that the disposition of matters that are pending or asserted
will not have a material adverse effect on the financial position of
the Company.
Environmental Matters
Alcoa is involved in proceedings under the Superfund or analogous
state provisions regarding the usage, disposal, storage or treatment of
hazardous substances at a number of sites in the U.S. The Company has
committed to participate, or is engaged in negotiations with Federal or
state authorities relative to its alleged liability for participation,
in clean-up efforts at several such sites.
In response to a unilateral order issued under Section 106 of the
Comprehensive Environmental Compensation and Liability Act of 1980
(CERCLA) by the U.S. Environmental Protection Agency (EPA) Region II
regarding releases of hazardous substances, including polychlorinated
biphenyls (PCBs), into the Grasse River near its Massena, New York
facility, Alcoa has been conducting investigations and studies of the
river under order from the EPA issued under CERCLA. The Company is
continuing to gather additional information through further studies and
tests and expects to provide EPA with additional information as it
becomes available.
23
Representatives of various Federal and state agencies and a Native
American tribe, acting in their capacities as trustees for natural
resources, have asserted that Alcoa may be liable for loss or damage to
such resources under Federal and state law based on Alcoa's operations
at its Massena facility. While formal proceedings have not been
instituted, the Company continues to actively investigate these claims.
In March 1994, Alcoa and Region VI of the EPA entered into an
administrative order on consent, EPA Docket No. 6-11-94, concerning the
Alcoa (Pt. Comfort)/Lavaca Bay National Priorities List site that
includes portions of Alcoa's Pt. Comfort, Texas bauxite refining
operations and portions of Lavaca Bay, Texas, adjacent to the Company's
plant. The administrative order requires the Company to conduct a
remedial investigation and feasibility study under EPA oversight. Work
under the administrative order is proceeding, including actions to
fortify an offshore dredge disposal island that may include the removal
of certain mercury-contaminated sediments adjacent to Alcoa's plant in
and near routinely dredged navigation channels. The Company and
certain Federal and state natural resource trustees, who previously
served Alcoa with notice of their intent to file suit to recover
damages for alleged loss or injury of natural resources in Lavaca Bay,
have entered into several agreements to cooperatively identify
restoration alternatives and approaches for Lavaca Bay. Efforts under
those agreements are ongoing.
In March 1997, Alcoa Italia received an order from Italian
governmental authorities relating to several environmental deficiencies
at its Fusina Plant. Alcoa Italia and the governmental authorities
commenced discussions that resulted in a plan for sampling certain
emission points. During 1998, Alcoa Italia sampled air emissions at
the Fusina Plant. The results of the samples, which indicated that the
emissions are within the authorized limits, have been sent to the
Italian governmental authorities. Alcoa Italia is awaiting official
confirmation of compliance.
On May 13, 1998, an action was filed in the Superior Court of
Riverside County, California allegedly on behalf of more than 500
plaintiffs who currently live, or formerly lived, in the Glen Avon,
California area, who claim to have suffered personal injuries, both
physical and emotional, as well as property damage, as a result of air
and water contamination due to the escape of toxic wastes from the
Stringfellow disposal site. The complaint, which names Alcoa, Alumax
Inc. and more than 130 other companies as defendants, was served on
Alcoa and Alumax in October 1998. The Company is preparing its
response.
In October 1998, Region V of the EPA referred various alleged
environmental violations at Alcoa's Warrick Operations to the civil
division of the U.S. Department of Justice (DOJ). The alleged
violations stem from an April 1997 multi-media environmental inspection
of Warrick Operations by the EPA. The alleged violations relate to
water permit exceedances as reported on monthly discharge monitoring
reports, wastewater toxicity issues and alleged opacity violations.
Alcoa and the DOJ have entered into a series of tolling agreements to
suspend the statute of limitations related to the alleged violations in
this matter. The current agreement expires on March 19, 1999 and the
parties are actively engaged in settlement discussions.
On October 5, 1998, the West Chicago facility of Alumax
Extrusions, Inc. received an order for compliance and an administrative
complaint and proposed assessment of a Class II administrative penalty
from Region V of the EPA. The complaint, which alleges discharges in
excess of the limits imposed by the facility's wastewater permit and
the pretreatment standards for chromium, hexavalent chromium, zinc, oil
and grease, seeks civil penalties and compliance with discharge
requirements. In November 1998, Alcoa filed its response to the
complaint and requested an informal settlement conference. Settlement
discussions between the parties are ongoing.
In 1998, Region V of the EPA has referred various alleged
environmental violations at Alcoa's Lafayette Operations to the civil
division of the DOJ. The alleged violations relate to water permit
exceedances as reported on monthly discharge monitoring reports. Alcoa
and the DOJ entered into a
24
tolling agreement to suspend the statute of limitations related to the
alleged violations in order to facilitate settlement discussions with
the DOJ and EPA that are ongoing at this time.
Other Matters
Alcoa initiated a lawsuit in King County, Washington in December
1992 against nearly 100 insurance companies that provided insurance
coverage for environmental property damage at Alcoa plant sites between
the years 1956 and 1985. The trial for the first three sites concluded
in October 1996 with a jury verdict partially in Alcoa's favor and an
award of damages to Alcoa. In its post-trial decisions, the trial
court substantially reduced the amount that Alcoa will be able to
recover from its insurers on the three test sites. Alcoa appealed
these rulings to the Washington Court of Appeals, which, upon
completion of briefing, certified the appeal to the Washington Supreme
Court. Oral argument is expected in 1999.
In March 1996, Alcoa received a subpoena from the U.S. Department
of Commerce in connection with the export of potassium fluoride by a
subsidiary for use at its alumina refineries in Jamaica and Suriname.
Following a review of records provided by the Company, the Department
of Commerce has charged that the Company made shipments between 1991
and 1995 without export licenses, which had been required since 1991 as
a result of a regulatory change. Following an administrative hearing
in December 1998, the Under Secretary of Commerce, on February 19,
1999, imposed an administrative penalty of $750,000.
On August 17, 1995, Alumax filed suit in the United States
District Court for the Eastern District of Arkansas against Hot Metal
Molding, Inc. alleging infringement of a process patent held by Alumax
that is used in semi-solid forming applications. The litigation was
expanded by order of the Court to include Ormet Primary Aluminum
Corporation (Ormet), the exclusive North American licensee of Pechiney
Corporation's technology for casting thixotropic billet, and by
Alumax's motion to add certain subsidiaries and affiliates of Buhler
AG, a Swiss manufacturer of die casting machines, as defendants in the
action. Ormet filed counterclaims alleging that the patent is invalid,
void and unenforceable and seeking a declaratory judgment that the
patent would not be infringed by the use of Ormet's billet in any die
casting application. On October 3, 1997, certain defendants filed
counterclaims against Alumax, alleging violations of the Sherman and
Clayton Acts for which they seek injunctive relief and treble damages
in an unspecified amount. The Court granted all parties leave to amend
their pleadings in January 1998, and trial was scheduled to begin in
early July 1998. On May 14, 1998, Alumax and Hot Metal Molding entered
into a settlement agreement whereby Hot Metal Molding was granted a
nonexclusive license, retroactively to January 1, 1992, in respect of
the patent and certain other Alumax patents. On June 14, 1998, Alumax
entered into a similar agreement with Buhler AG. Hot Metal Molding and
Buhler AG dismissed all claims and counterclaims. Alumax voluntarily
dismissed its contributory infringement claim against Ormet and moved
to challenge Ormet's standing to pursue antitrust counterclaims against
Alumax, which was denied at a hearing on June 26, 1998. A trial date
had been set for August 1999; however, in late 1998, the parties
settled the matter on mutually agreeable terms.
In April 1997, German customs authorities conducted a search of
the offices of Alcoa VAW Hannover Presswerk GmbH & Co. KG (Alcoa VAW)
in Hannover, Germany, seeking materials relating to export transactions
dating from 1992. In November 1997, German customs authorities
reported 53 documentary customs violations, and in January 1998, the
local district attorney opened legal proceedings on the matter.
Discussions between Alcoa VAW and German customs authorities continue.
Alcoa, along with various asbestos manufacturers, distributors and
other businesses, is a defendant in numerous individual lawsuits filed
in the State of Texas on behalf of persons claiming injury as a result
of occupational exposure to asbestos at various Alcoa facilities. In
two of these cases, jury verdicts were returned against the Company,
and they will be appealed.
25
Following the March 9, 1998 announcement of the proposed
acquisition of Alumax by Alcoa and AMX Acquisition Corporation, five
putative class actions on behalf of stockholders of Alumax were filed
in the Delaware Court of Chancery against Alumax and certain of
Alumax's directors. Four of these actions also named Alcoa as a
defendant. The plaintiffs in those actions alleged, among other
things, that the director defendants agreed to a buyout of Alumax at an
inadequate price, that they failed to provide Alumax's stockholders
with all necessary information about the value of Alumax, that they
failed to make an informed decision as no market check of Alumax's
value was obtained and the acquisition is structured to ensure that
stockholders will tender their shares and is coercive. In addition,
the plaintiffs alleged that the Schedules 14D-1 and 14D-9 filed by
Alcoa, AMX Acquisition Corporation and Alumax, respectively, failed to
disclose certain information necessary for Alumax's stockholders to
make an informed decision regarding the offer and the other
transactions contemplated by the merger agreement. Plaintiffs seek to
enjoin the acquisition or to rescind it in the event that it is
consummated and to cause Alumax to implement a "full and fair" auction
for Alumax. Plaintiffs also seek compensatory damages in an
unspecified amount, costs and disbursements, including attorneys' fees,
and such other relief as the Delaware Court of Chancery may deem
appropriate. The matter is still pending, but there have been no
developments since the close of the tender offer and merger in mid-
1998.
The Internal Revenue Service (IRS) asserted that Alumax and certain
of its subsidiaries were improperly included in the 1984, 1985, and 1986
consolidated income tax returns of AMAX Inc. and on that basis assessed a
Federal income tax deficiency against Alumax of $129 million. Alumax
filed a petition in the United States Tax Court seeking a redetermination
of the purported deficiency. On September 30, 1997, the Tax Court
decided in favor of the IRS, stating that AMAX Inc. did not have the 80%
control necessary to consolidate. On October 27, 1997, Alumax paid an
aggregate of $411 million to the IRS, representing the deficiency and
accrued interest. On December 24, 1997, Alumax filed a notice of appeal
of the Tax Court's decision to the United States Court of Appeals for the
Eleventh Circuit. A decision affirming the Tax Court's decision was
handed down by the Court of Appeals on January 21, 1999. The Company is
requesting rehearing of the issue. Under the terms of a Tax
Disaffiliation Agreement executed by Alumax and AMAX in connection with
the merger of AMAX into Cyprus Minerals Company and the public
distribution of all of Alumax's shares in November 1993, Alumax assumed
responsibility for all proceedings relating to the above-described
deficiency and payment of any additional taxes, along with interest that
may ultimately be due; and Cyprus Amax Minerals Company will share
certain tax benefits that will become available to it in the event of a
final adverse determination.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the Company's security
holders during the fourth quarter of 1998.
Item 4A. Executive Officers of the Registrant.
The names, ages, positions and areas of responsibility of the
executive officers of the Registrant as of March 1, 1999 are listed
below.
Paul H. O'Neill, 63, Chairman of the Board and Chief Executive
Officer. Mr. O'Neill was elected a director of Alcoa in 1986 and
became Chairman of the Board and Chief Executive Officer in June 1987.
Before joining Alcoa, Mr. O'Neill had been an officer since 1977 and
President and a director since 1985 of International Paper Company.
Alain J. P. Belda, 55, Director, President and Chief Operating
Officer. Mr. Belda was elected to Alcoa's Board of Directors in
September 1998 and President and Chief Operating Officer in January
1997. Mr. Belda was elected Executive Vice President in 1994 and Vice
Chairman in 1995. He was
26
President of Alcoa Aluminio S.A. in Brazil from 1979 to March 1994.
Mr. Belda was elected Vice President of Alcoa in 1982 and, in 1989,
was given responsibility for all of Alcoa's interests in Latin America
(other than Suriname). In August 1991 he was named President - Latin
America for the Company.
George E. Bergeron, 57, Executive Vice President - Allied
Products. Mr. Bergeron was named President - Alcoa Closure Systems
International in 1982 and was elected Vice President and General
Manager - Rigid Packaging Division in July 1990. He was appointed
President - Rigid Packaging Division in 1991. Mr. Bergeron was elected
Executive Vice President of Alcoa in January 1998.
Michael Coleman, 48, Vice President and President - Alcoa Rigid
Packaging Division. Mr. Coleman joined Alcoa in January 1998. He had
been Vice President - Operations of North Star Steel from 1993 to 1994,
Executive Vice President - Operations from 1994 to 1996 and President
from 1996 through 1997. Mr. Coleman joined North Star Steel in 1982.
Richard L. Fischer, 62, Executive Vice President - Chairman's
Counsel. Mr. Fischer was elected Vice President and General Counsel in
1983 and became Senior Vice President in 1984. He was given the
additional responsibility for Corporate Development in 1986 and in 1991
named to his present position. In his current assignment, Mr. Fischer
is responsible for Corporate Development and the expansion and
integration of Alcoa's international business activities.
L. Patrick Hassey, 53, Vice President and President - Alcoa
Europe. Mr. Hassey joined Alcoa in 1967 and was named Davenport Works
Manager in 1985. In 1991, he was elected a Vice President of Alcoa and
appointed President - Aerospace/Commercial Rolled Products Division.
He was appointed President - Alcoa Europe in November 1997.
Patricia L. Higgins, 49, Vice President and Chief Information
Officer. Ms. Higgins joined Alcoa in January 1997 and is responsible
for the integration and implementation of the Company's computer
initiatives. She began her career at American Telephone & Telegraph
Co. in 1977 and was Vice President of International Sales Operations in
Network Systems before joining Nynex Corporation in 1991 as Group Vice
President, Manhattan Market Area. In 1995, Ms. Higgins joined Unisys
Corporation where she was President, Communications Market Sector
Group.
Richard B. Kelson, 52, Executive Vice President and Chief
Financial Officer. Mr. Kelson was elected Assistant General Counsel in
1989, Senior Vice President - Environment, Health and Safety in 1991
and Executive Vice President and General Counsel in May 1994. He was
named to his current position in May 1997.
Frank L. Lederman, 49, Vice President and Chief Technical Officer.
Mr. Lederman was Senior Vice President and Chief Technical Officer of
Noranda, Inc., a Canadian-based, diversified natural resource company,
from 1988-1995. He joined Alcoa as a Vice President in May 1995 and
became Chief Technical Officer in December 1995. In his current
position Mr. Lederman directs operations of the Alcoa Technical Center.
G. John Pizzey, 53, Vice President and President, Alcoa World
Alumina. Mr. Pizzey joined Alcoa of Australia Limited in 1970 and was
appointed to the board of Alcoa of Australia as Executive Director -
Victoria Operations and Managing Director of Portland Smelter Services
in 1986. He was named President - Bauxite and Alumina Division of
Alcoa in 1994 and President - Primary Metals Division of Alcoa in 1995.
Mr. Pizzey was elected a Vice President of Alcoa in 1996 and was
appointed President - Alcoa World Alumina in November 1997.
Lawrence R. Purtell, 51, Executive Vice President - Environment,
Health and Safety and General Counsel. Mr. Purtell joined Alcoa in
November 1997. He had been Corporate Secretary and Associate General
Counsel of United Technologies Corporation from 1989 to 1992. Mr.
Purtell was
27
Vice President and General Counsel of Carrier Corporation, a unit of
United Technologies Corporation and international designer, manufacturer
and marketer of heating, ventilating and air conditioning equipment and
services, from 1992 to 1993. He was Senior Vice President and General
Counsel and Corporate Secretary of McDermott International, Inc. from
1993 to 1996. In 1996, Mr. Purtell joined Koch Industries, Inc. as
Senior Vice President, General Counsel and Corporate Secretary.
Robert F. Slagle, 58, Executive Vice President, Human Resources
and Communications. Mr. Slagle was elected Treasurer in 1982 and Vice
President in 1984. In 1986, he was named Vice President - Industrial
Chemicals and, in 1987, Vice President - Industrial Chemicals and U.S.
Alumina Operations. Mr. Slagle served as Vice President - Raw
Materials, Alumina and Industrial Chemicals in 1989, and Vice President
of Alcoa and Managing Director - Alcoa of Australia Limited in 1991.
He was named President - Alcoa World Alumina in 1996 and was elected to
his current position in November 1997.
G. Keith Turnbull, 63, Executive Vice President - Alcoa Business
System. Dr. Turnbull was appointed Assistant Director of Alcoa
Laboratories in 1980. He was named Director - Technology Planning in
1982, Vice President - Technology Planning in 1986 and Executive Vice
President - Strategic Analysis/Planning and Information in 1991. In
January 1997 he was named to his current position, with responsibility
for company-wide implementation of the Alcoa Business System.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.
Dividend per share data, high and low prices per share and the
principal exchanges on which the Company's common stock is traded are
set forth on pages 63 through 64 of the 1998 Annual Report to
Shareholders (Annual Report) and are incorporated herein by reference.
On January 8, 1999, the Board of Directors declared a two-for-one
common stock split, distributed on February 25, 1999 to shareholders of
record at the close of business on February 8, 1999. In this report,
all per-share amounts and number of shares have been restated to
reflect the stock split.
At February 8, 1999 (the record date for the Company's 1999 annual
shareholders meeting), there were approximately 119,000 Alcoa
shareholders, including both record holders and an estimate of the
number of individual participants in security position listings.
Item 6. Selected Financial Data.
The comparative table showing selected financial data for the
Company is on page 28 of the Annual Report and is incorporated herein
by reference.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation.
Management's review and comments on the consolidated financial
statements are on pages 29 through 37 of the Annual Report and are
incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information regarding quantitative and qualitative disclosures
about market risk is on pages 33 through 34 of the Annual Report and is
incorporated herein by reference.
28
Item 8. Financial Statements and Supplementary Data.
The Company's consolidated financial statements, the notes thereto
and the report of the independent public accountants are on pages 38
through 53 of the Annual Report and are incorporated herein by
reference.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information regarding Directors is contained under the caption
"Board of Directors" on pages 5 through 11 of the Registrant's
definitive Proxy Statement dated March 8, 1999 (Proxy Statement) and is
incorporated herein by reference.
The information regarding executive officers is set forth in
Part I, Item 4A under "Executive Officers of the Registrant."
The information required by Item 405 of Regulation S-K contained
under the caption "Compliance With Section 16(a) Reporting" on page 12
of the Proxy Statement is incorporated herein by reference.
Item 11. Executive Compensation.
This information is contained under the caption "Executive
Compensation" on pages 14 through 20 of the Proxy Statement and is
incorporated herein by reference. The performance graph and Report of
the Compensation Committee shall not be deemed to be "filed."
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
This information is contained under the caption "Alcoa Stock
Ownership and Performance" on pages 12 through 13 of the Proxy
Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
This information is contained under the caption "Transactions with
Directors' Companies" on page 5 of the Proxy Statement and is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.
(a) The consolidated financial statements, financial statement
schedule and exhibits listed below are filed as part of this report.
29
(1) The Company's consolidated financial statements, the notes
thereto and the report of the independent public accountants are on
pages 38 through 53 of the Annual Report and are incorporated herein by
reference.
(2) The following report and schedule should be read with the
Company's consolidated financial statements in the Annual Report:
Independent Accountant's Report of PricewaterhouseCoopers LLP
dated January 8, 1999 on the Company's financial statement
schedule filed as a part hereof for the fiscal years ended
December 31, 1998, 1997 and 1996.
Schedule II - Valuation and Qualifying Accounts - for the fiscal
years ended December 31, 1998, 1997 and 1996.
(3) Exhibits
Exhibit
Number Description *
2. Agreement and Plan of Merger among the Company, AMX Acquisition
Corp. and Alumax Inc. dated as of March 8, 1998, incorporated
by reference to exhibit 2 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
3(a). Articles of the Registrant as amended.
3(b). By-Laws of the Registrant as amended.
10(a). Long Term Stock Incentive Plan (restated) effective January 1,
1997, as amended January 1, 1998, incorporated by reference to
exhibit 10(a) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
10(b). Employees' Excess Benefit Plan, Plan A, incorporated by
reference to exhibit 10(b) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1980.
10(c). Incentive Compensation Plan, as amended effective January 1,
1993, incorporated by reference to exhibit 10(c) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1992.
10(d). Employees' Excess Benefit Plan, Plan C, as amended and restated
in 1994, effective January 1, 1989, incorporated by reference
to exhibit 10(d) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994.
10(e). Employees' Excess Benefit Plan, Plan D, as amended effective
October 30, 1992, incorporated by reference to exhibit 10(e) to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1992 and exhibit 10(e)(1) the Company's Annual
Report on Form 10-K for the year ended December 31, 1994.
10(f). Employment Agreement of Paul H. O'Neill, as amended through
February 25, 1993, incorporated by reference to exhibit 10(h)
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1987, exhibit 10(g) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1990 and exhibit
10(f)(2) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992.
30
10(g). Deferred Fee Plan for Directors, as amended effective
November 10, 1995, incorporated by reference to exhibit 10(g)
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
10(h). Restricted Stock Plan for Non-Employee Directors, as amended
effective March 10, 1995, incorporated by reference to
exhibit 10(h) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.
10(h)(1). Amendment to Restricted Stock Plan for Non-Employee
Directors, effective November 10, 1995, incorporated by
reference to exhibit 10(h)(1) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
10(i). Fee Continuation Plan for Non-Employee Directors, incorporated
by reference to exhibit 10(k) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1989.
10(i)(1). Amendment to Fee Continuation Plan for Non-Employee
Directors, effective November 10, 1995, incorporated by
reference to exhibit 10(i)(1) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
10(j). Deferred Compensation Plan, as amended effective October 30,
1992, incorporated by reference to exhibit 10(k) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1992.
10(j)(1). Amendments to Deferred Compensation Plan, effective
January 1, 1993, February 1, 1994 and January 1, 1995,
incorporated by reference to exhibit 10(j)(1) to the Company's
Annual Report on Form 10-K for the year ended December 31,
1994.
10(j)(2). Amendment to Deferred Compensation Plan, effective June 1,
1995, incorporated by reference to exhibit 10(j)(2) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
10(k). Summary of the Executive Split Dollar Life Insurance Plan,
dated November 1990, incorporated by reference to exhibit 10(m)
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1990.
10(l). Dividend Equivalent Compensation Plan, effective February 3,
1997, incorporated by reference to exhibit 10(l) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
10(m). Form of Indemnity Agreement between the Company and individual
directors or officers, incorporated by reference to exhibit
10(j) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1987.
10(n). Revolving Credit Agreement (364-Day), dated as of August 14,
1998, incorporated by reference to Exhibit 10(n) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.
10(o). Revolving Credit Agreement (Five-Year), dated as of August 14,
1998, incorporated by reference to Exhibit 10(o) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.
10(p). Alcoa Stock Incentive Plan, effective June 1, 1999 (subject to
shareholder approval).
10(q). Alcoa Supplemental Pension Plan for Senior Executives,
effective January 1, 1999.
31
10(r). Deferred Fee Estate Enhancement Plan for Directors, effective
July 10, 1998.
10(s). Alcoa Deferred Compensation Estate Enhancement Plan, effective
July 10, 1998.
12. Computation of Ratio of Earnings to Fixed Charges.
13. Portions of Alcoa's 1998 Annual Report to Shareholders.
21. Subsidiaries and Equity Entities of the Registrant.
23. Consent of Independent Certified Public Accountants.
24. Power of Attorney for certain directors.
27. Financial data schedule.
*Exhibit Nos. 10(a) through 10(l) and 10(p) through 10(s) are
management contracts or compensatory plans required to be filed as
Exhibits to this Form 10-K.
Amendments and modifications to other Exhibits previously filed
have been omitted when in the opinion of the Registrant such Exhibits
as amended or modified are no longer material or, in certain instances,
are no longer required to be filed as Exhibits.
No other instruments defining the rights of holders of long-term
debt of the Registrant or its subsidiaries have been filed as Exhibits
because no such instruments met the threshold materiality requirements
under Regulation S-K. The Registrant agrees, however, to furnish a
copy of any such instruments to the Commission upon request.
(b) Reports on Form 8-K. None was filed in the fourth quarter of
1998.
32
Independent Accountant's Report
To the Shareholders and Board of Directors
Alcoa Inc. (Alcoa)
Our report on the consolidated financial statements of Alcoa has
been incorporated by reference in this Form 10-K from page 38 of the
1998 Annual Report to Shareholders of Alcoa. In connection with our
audits of such financial statements, we have also audited the related
financial statement schedule listed under Item 14 of this Form 10-K.
In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
600 Grant Street
Pittsburgh, Pennsylvania
January 8, 1999
33
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31
(in millions)
Col. A Col. B Col. C Col. D Col. E
- ------ ------ ------ ------ ------
Additions
---------
Balance at Charged to Charged to
beginning of costs and other Balance at
Description period expenses accounts (A) Deductions (B) end of period
----------- ------ -------- ------------ -------------- -------------
Allowance for doubtful accounts:
1998 $ 36.6 $11.5 $23.2(A) $ 9.9(B) $ 61.4
1997 $ 48.4 $ 5.8 $(4.0)(A) $13.6(B) $ 36.6
1996 $ 45.8 $24.0 $ 1.5(A) $22.9(B) $ 48.4
Income tax valuation allowance:
1998 $103.5 $16.3 $ 20.7(A) $ 5.8(C) $134.7
1997 $110.0 $11.9 $(13.2)(A) $ 5.2(C) $103.5
1996 $112.1 $23.9 - $26.0(C) $110.0
Notes: (A) Collections on accounts previously written off, acquisition/divestiture of subsidiaries and foreign
currency translation adjustments.
(B) Uncollectible accounts written off.
(C) Related primarily to reductions in the valuation reserve based on a change in circumstances.
34
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ALCOA INC.
March 12, 1999 By /s/Earnest J. Edwards
Earnest J. Edwards
Senior Vice President and Controller
(Also signing as Principal Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
Signature Title Date
/s/Paul H. O'Neill Chairman of the Board March 12, 1999
Paul H. O'Neill and Chief Executive Officer
(Principal Executive Officer
and Director)
/s/Richard B. Kelson Executive Vice President and March 12, 1999
Richard B. Kelson Chief Financial Officer
(Principal Financial Officer)
Alain J. P. Belda, Kenneth W. Dam, Joseph T. Gorman, Judith M. Gueron,
Sir Ronald Hampel, Hugh M. Morgan, John P. Mulroney, Henry B. Schacht,
Franklin A. Thomas and Marina v.N. Whitman, each as a Director, on
March 12, 1999, by Denis A. Demblowski, their Attorney-in-Fact.*
*By /s/Denis A. Demblowski
Denis A. Demblowski
Attorney-in-Fact
35