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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2002 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.)
201 Isabella Street, Pittsburgh, Pennsylvania 15212-5858
(Address of principal executive offices) (Zip Code)
Office of Investor Relations 212-836-2674
Office of the Secretary 412-553-4707
(Registrant's telephone number including area code)
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
As of August 5, 2002, 844,198,165 shares of common stock, par value
$1.00 per share, of the Registrant were outstanding.
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements.
Alcoa and subsidiaries
Condensed Consolidated Balance Sheet
(in millions)
(unaudited)
June 30 December 31
ASSETS 2002 2001
----------- -------------
Current assets:
Cash and cash equivalents $ 413 $ 512
Short-term investments 38 15
Receivables from customers, less allowances of
$123 in 2002 and $129 in 2001 2,764 2,577
Other receivables 427 288
Inventories (F) 2,423 2,531
Deferred income taxes 398 410
Prepaid expenses and other current assets 517 459
------- -------
Total current assets 6,980 6,792
------- -------
Properties, plants and equipment, at cost 23,098 22,536
Less: accumulated depreciation, depletion and
amortization 10,900 10,554
------- -------
Net properties, plants and equipment 12,198 11,982
------- -------
Goodwill (C) 5,927 5,733
Other assets(C) 3,792 3,848
------- -------
Total assets $28,897 $28,355
======= =======
LIABILITIES
Current liabilities:
Short-term borrowings $ 54 $ 142
Accounts payable, trade 1,729 1,630
Accrued compensation and retirement costs 821 889
Taxes, including taxes on income 867 903
Other current liabilities 1,065 1,336
Long-term debt due within one year 133 103
------- -------
Total current liabilities 4,669 5,003
------- -------
Long-term debt, less amount due within one year 7,120 6,388
Accrued postretirement benefits 2,443 2,513
Other noncurrent liabilities and deferred credits 1,851 1,968
Deferred income taxes 600 556
------- -------
Total liabilities 16,683 16,428
------- -------
MINORITY INTERESTS 1,331 1,313
------- -------
COMMITMENTS AND CONTINGENCIES (G)
SHAREHOLDERS' EQUITY
Preferred stock 55 56
Common stock 925 925
Additional capital 6,094 6,114
Retained earnings 7,712 7,517
Treasury stock, at cost (2,838) (2,706)
Accumulated other comprehensive loss (H) (1,065) (1,292)
------- -------
Total shareholders' equity 10,883 10,614
------- -------
Total liabilities and equity $28,897 $28,355
======= =======
The accompanying notes are an integral part of the financial statements.
2
Alcoa and subsidiaries
Condensed Statement of Consolidated Income (unaudited)
(in millions, except per share amounts)
Second quarter ended Six months ended
June 30 June 30
------- -------
2002 2001 2002 2001
---- ---- ---- ----
Sales $ 5,245 $ 5,991 $10,228 $12,167
Cost of goods sold 4,196 4,607 8,240 9,320
Selling, general administrative
and other expenses 277 326 555 649
Research and development expenses 52 55 103 104
Provision for depreciation,
depletion and amortization (C) 269 309 530 630
Special items (B) - 212 - 212
Interest expense 83 93 158 208
Other income, net (34) (107) (89) (199)
------- ------- ------- -------
4,843 5,495 9,497 10,924
------- ------- ------- -------
Income before taxes on income 402 496 731 1,243
Provision for taxes on income 123 157 227 404
------- ------- ------- -------
Income from operations 279 339 504 839
Less: Minority interests' share 47 32 88 128
------- ------- ------- -------
Income before accounting change 232 307 416 711
Cumulative effect of accounting change
for goodwill (C) - - 34 -
------- ------- ------- -------
NET INCOME $ 232 $ 307 $ 450 $ 711
======= ======= ======= =======
EARNINGS PER SHARE (I)
Basic (before cumulative effect) $ .27 $ .36 $ .49 $ .82
======= ======= ======= =======
Basic cumulative effect of
accounting change - - .04 -
------- ------- ------- -------
Basic (after cumulative effect) $ .27 $ .36 $ .53 $ .82
======= ======= ======= =======
Diluted (before cumulative effect) $ .27 $ .35 $ .49 $ .81
======= ======= ======= =======
Diluted cumulative effect of
accounting change - - .04 -
------- ------- ------- -------
Diluted (after cumulative effect) $ .27 $ .35 $ .53 $ .81
======= ======= ======= =======
Dividends paid per common share $ .15 $ .15 $ .30 $ .30
======= ======= ======= =======
The accompanying notes are an integral part of the financial statements.
3
Alcoa and subsidiaries
Condensed Statement of Consolidated Cash Flows (unaudited)
(in millions)
Six months ended
June 30
-------
2002 2001
-------- --------
CASH FROM OPERATIONS
Net income $ 450 $ 711
Adjustments to reconcile net income to cash from operations:
Depreciation, depletion and amortization 531 636
Change in deferred income taxes (7) (57)
Equity income, net of dividends (6) (17)
Noncash special items (B) - 208
Gains from investing activities - sale of assets (3) (81)
Minority interests 88 128
Accounting change (C) (34) -
Other 46 77
Changes in assets and liabilities, excluding effects of acquisitions and
divestitures:
(Increase) reduction in receivables (71) 203
Reduction (increase) in inventories 124 (174)
Increase in prepaid expenses and other
current assets (55) (138)
Reduction in accounts payable and accrued expenses (191) (432)
(Reduction) increase in taxes, including taxes on income (91) 32
Net change in noncurrent assets and liabilities (114) (158)
------ -------
CASH PROVIDED FROM OPERATIONS 667 938
------ -------
FINANCING ACTIVITIES
Net changes to short-term borrowings (87) (2,612)
Common stock issued for stock compensation plans 43 587
Repurchase of common stock (212) (1,028)
Dividends paid to shareholders (255) (260)
Dividends paid to minority interests (83) (239)
Net change in commercial paper 639 (392)
Additions to long-term debt 10 1,782
Payments on long-term debt (37) (542)
------ -------
CASH PROVIDED FROM (USED FOR) FINANCING ACTIVITIES 18 (2,704)
------ -------
INVESTING ACTIVITIES
Capital expenditures (571) (496)
Acquisitions, net of cash acquired (E) (139) (87)
Proceeds from the sale of assets 42 2,471
Additions to investments (21) (49)
Changes in short-term investments (23) 43
Changes in minority interests (39) (4)
Other - (10)
------ -------
CASH (USED FOR) PROVIDED FROM INVESTING ACTIVITIES (751) 1,868
------ -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (33) (32)
------ -------
Net change in cash and cash equivalents (99) 70
Cash and cash equivalents at beginning of year 512 315
------ -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 413 $ 385
====== =======
The accompanying notes are an integral part of the financial statements.
4
Notes to Condensed Consolidated Financial Statements
(dollars and shares in millions, except per-share amounts)
A. Basis of Presentation - The Condensed Consolidated Financial Statements are
unaudited. These statements include all adjustments, consisting of normal
recurring accruals, considered necessary by management to fairly present the
results of operations, financial position and cash flows. The results reported
in these Condensed Consolidated Financial Statements are not necessarily
indicative of the results that may be expected for the entire year.
This Form 10-Q report should be read in conjunction with Alcoa's Annual
Report on Form 10-K for the year ended December 31, 2001.
B. Special Items - During 2001, Alcoa recorded charges of $566 ($355 after tax
and minority interests) as a result of a restructuring plan based on a strategic
review of the company's primary products and fabricating businesses aimed at
optimizing and aligning its manufacturing systems with customer needs, while
positioning the company for stronger profitability. The charge of $566 consisted
of a charge of $212 ($114 after tax and minority interests) in the second
quarter of 2001 and a charge of $354 ($241 after tax and minority interests) in
the fourth quarter of 2001. These charges consisted of asset write-downs,
employee termination and severance costs related to workforce reductions of
approximately 10,400 employees, and other exit costs related to the shutdown of
facilities. The second quarter charge was primarily due to actions taken in
Alcoa's primary products businesses because of economic and competitive
conditions. These actions included the shutdown of three facilities in the U.S.
These actions have been substantially completed with the exception of site
remediation work that is ongoing. The fourth quarter charge was primarily due to
actions taken in Alcoa's fabricating businesses. These actions include the
shutdown of 15 facilities in the U.S. and Europe. Alcoa expects to complete
these actions by the end of 2002. The results of operations related to these
facilities were not material. For further details on the restructuring plan, see
Note B to the audited financial statements contained in the Annual Report on
Form 10-K for the year ended December 31, 2001.
The reserve balances and related cash payments consisted of:
Employee
Asset Termination and
Write-downs Severance Costs Other Total
- ---------------------------------------------------------------------------------------------------
2001:
- ----
Total restructuring charges $ 372 $ 178 $ 16 $ 566
Cash payments (3) (32) (5) (40)
Noncash charges* (288) - - (288)
- ---------------------------------------------------------------------------------------------------
Reserve balance at December 31, 2001 $ 81 $ 146 $ 11 $ 238
- ---------------------------------------------------------------------------------------------------
2002:
- ----
Cash payments (7) (50) (4) (61)
- ---------------------------------------------------------------------------------------------------
Additional restructuring charges - 7 - 7
- ---------------------------------------------------------------------------------------------------
Reversals of restructuring reserves (10) (4) - (14)
- ---------------------------------------------------------------------------------------------------
Reserve balance at June 30, 2002 $ 64 $ 99 $ 7 $ 170
- ---------------------------------------------------------------------------------------------------
* Adjusted
Additional restructuring charges included $7 in employee termination and
severance costs accrued primarily related to changes in prior severance cost
estimates as well as additional layoffs of approximately 250 salaried and hourly
employees-primarily in Europe and Mexico-as a result of the 2001 restructuring
plan. The reversal of reserves of $14 is due to changes in estimates of
liabilities, primarily environmental reserves, resulting from lower than
expected costs associated with certain plant shutdowns and disposals noted
above.
As of June 30, 2002, approximately 7,100 of the 10,650 employees had been
terminated. The workforce reductions under the restructuring plan consisted of
hourly and salaried employees at various manufacturing facilities-primarily
located outside of the U.S.-due to weak market conditions and the shutdowns of
several manufacturing facilities.
5
C. Recently Adopted Accounting Standards - Alcoa adopted Statement of Financial
Accounting Standards (SFAS) No. 141, "Business Combinations" which requires that
the purchase method of accounting be applied to all business combinations after
June 30, 2001. SFAS No. 141 also established criteria for recognition of
intangible assets and goodwill. Effective January 1, 2002, Alcoa adopted SFAS
No. 142 "Goodwill and Other Intangible Assets." Under this standard, goodwill
and intangibles with indefinite useful lives are no longer amortized. This
standard also requires, at a minimum, an annual assessment of the carrying value
of goodwill and intangibles with indefinite useful lives. If the carrying value
of goodwill or an intangible asset exceeds its fair value, an impairment loss
shall be recognized. A discounted cash flow model was used to determine the fair
value of Alcoa's businesses for purposes of testing goodwill for impairment. The
discount rate used was based on a risk-adjusted weighted average cost of capital
for each business.
The effects of adopting the new standards on net income and diluted
earnings per share for the three-month and six-month periods ended June 30, 2002
and 2001, follow.
Second quarter ended June 30: Six months ended June 30:
----------------------------- -------------------------
Net Income Diluted EPS Net Income Diluted EPS
---------- ----------- ---------- -----------
2002 2001 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ---- ---- ----
Net income $ 232 $ 307 $ .27 $ .35 $ 450 $ 711 $ .53 $ .81
Less: cumulative effect
income from accounting
change for goodwill - - - - (34) - (.04) -
----- ----- ----- ----- ----- ----- ----- -----
Income, excluding
cumulative effect 232 307 .27 .35 416 711 .49 .81
Add: goodwill
amortization - 43 - .05 - 87 - .10
----- ----- ----- ----- ----- ----- ----- -----
Income excluding
cumulative effect in
2002 and goodwill
amortization in 2001 $ 232 $ 350 $ .27 $ .40 $ 416 $ 798 $ .49 $ .91
===== ===== ===== ===== ===== ===== ===== =====
The cumulative effect adjustment recognized upon adoption of these new
standards was $34 (after tax), consisting of income from the write-off of
negative goodwill from prior acquisitions of $49, offset by a $15 write-off for
the impairment of goodwill in the automotive business resulting from a change in
the criteria for the measurement of impairments from an undiscounted to a
discounted cash flow method. Net income for the three-month and six-month
periods ended June 30, 2001, would have been $43, or five cents per share, and
$87, or ten cents per share, higher if goodwill amortization had been
discontinued effective January 1, 2001. Net income for the full year of 2001
would have been $171, or 20 cents per share, higher if goodwill amortization had
been discontinued effective January 1, 2001.
Changes to goodwill and intangible assets during the six-month period ended
June 30, 2002, including the effects of adopting these new accounting standards,
follow.
Goodwill Intangible assets
-------- -----------------
Balance at December 31, 2001, net of
accumulated amortization $ 5,733 $ 674
Intangible assets reclassified to goodwill 28 (28)
Write-off of goodwill recognized in
cumulative effect adjustment (15) -
Additions during the period 160 24
Translation and other adjustments 21 (4)
Amortization expense - (33)
-------- ------
Balance at June 30, 2002, net of
accumulated amortization $ 5,927 $ 633
======== ======
In accordance with the provisions of these new standards, on January 1,
2002, Alcoa transferred $28 (after tax) of customer base intangibles, initially
recorded in the Reynolds acquisition, to goodwill (Packaging and Consumer
segment). Goodwill also increased $160 during the period related to seven
immaterial acquisitions (in the Other group, and the Engineered Products and
Packaging and Consumer segments) and adjustments to preliminary purchase price
allocations from prior periods.
Intangible assets, which are included in other assets, totaled $633, net of
accumulated amortization of $334, at June 30, 2002. Of this amount, $169
represents intangibles with indefinite useful lives, consisting of trade names
that are not
6
being amortized under SFAS No. 142. The remaining intangibles relate to customer
relationships, computer software, patents and licenses. Amortization expense for
intangible assets is expected to range from approximately $65 to $40 each year
between 2003 and 2007.
Effective January 1, 2002, Alcoa adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 144 retains the recognition and measurement
criteria of SFAS No. 121 for long-lived assets to be held and used, while
expanding the measurement requirements of long-lived assets to be disposed of by
sale to include discontinued operations. It also broadens the previously
existing reporting requirement for the presentation of discontinued operations
to include a component of an entity rather than a segment of a business. This
new standard did not have a material impact on Alcoa's financial statements.
D. Recently Issued Accounting Standards - In June 2001, the Financial Accounting
Standards Board (FASB) issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement establishes standards for accounting for
obligations associated with the retirement of tangible long-lived assets. Alcoa
must adopt this standard on January 1, 2003. Management is currently assessing
the details of the standard and is preparing a plan of implementation.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity," under which
a liability for an exit cost was recognized at the date of an entity's
commitment to an exit plan. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized at fair value when
the liability is incurred. The provisions of this statement are effective for
exit or disposal activities that are initiated after December 31, 2002.
E. Acquisitions - During the first six months of 2002, Alcoa completed seven
immaterial acquisitions for a total of approximately $139 in cash. Pro-forma
results of the company, assuming the acquisitions had been made at the beginning
of each period presented, would not be materially different from the results
reported.
On July 1, 2002, Alcoa acquired Ivex Packaging Corporation for $21.50 per
share for each outstanding share of Ivex, excluding Ivex's 48.2% interest in the
common stock of Packaging Dynamics Corporation. The total enterprise value of
the acquisition, including the assumption of debt, is approximately $790. Ivex
is a leading manufacturer of specialty plastic packaging for the food,
electronic, medical and retail markets. It will be part of Alcoa's packaging and
consumer business. Pro-forma results of the company, assuming the acquisition of
Ivex had been made at the beginning of each period presented, would not be
materially different from the results reported.
F. Inventories
June 30 December 31
2002 2001
---------- -----------
Finished goods $ 641 $ 691
Work in process 765 734
Bauxite and alumina 394 410
Purchased raw materials 445 531
Operating supplies 178 165
------- -------
$ 2,423 $ 2,531
======= =======
Approximately 48% of total inventories at June 30, 2002, was valued on a
LIFO basis. If valued on an average cost basis, total inventories would have
been $619 and $605 higher at June 30, 2002, and December 31, 2001, respectively.
G. Commitments and Contingencies - Various lawsuits, claims and proceedings have
been or may be instituted or asserted against Alcoa, including those pertaining
to environmental, product liability, and safety and health matters. While the
amounts claimed may be substantial, the ultimate liability cannot now be
determined because of the considerable uncertainties that exist. Therefore, it
is possible that results of operations or liquidity in a particular period could
be materially affected by certain contingencies. However, based on facts
currently available, management
7
believes that the disposition of matters that are pending or asserted will not
have a materially adverse effect on the financial position of the company.
Alcoa Aluminio S.A. (Aluminio) is a participant in several hydroelectric
construction projects in Brazil for purposes of increasing its energy
self-sufficiency and providing a long-term, low-cost source of power for its
facilities. As a participant in Machadinho, one of its hydroelectric
construction projects in Brazil, Aluminio has guaranteed up to 36% of the
project's total debt of approximately $315. Aluminio committed to taking a share
of the output of the completed project for 30 years at cost (including cost of
financing the project), which began in the first quarter of 2002. In the event
that other participants in this project fail to fulfill their financial
responsibilities, Aluminio may be required to fund a portion of the deficiency.
In accordance with the agreement, if Aluminio funds any such deficiency, its
participation and share of the output from the project will increase
proportionately.
Aluminio also entered into agreements in 2001 to participate in four
additional hydroelectric construction projects in Brazil that are scheduled to
be completed at various dates ranging from 2005 to 2008. These projects are
Barra Grande, Santa Isabel, Pai-Quere and Serra Do Facao. Aluminio's share of
the output from these hydroelectric facilities, when completed, ranges from 20%
to 39.5%. Total costs for all four projects are estimated at $1,400, with
Aluminio's share of total project costs totaling approximately 30%. The plans
for financing these projects have not yet been finalized. Aluminio may be
required to provide guarantees of project financing or commit to additional
investments as these projects progress. At June 30, 2002, Aluminio had provided
$36 of guarantees on these hydroelectric construction projects in the form of
performance bonds.
In July 2002, Aluminio was the successful bidder in a public auction to
participate in Estreito, an additional hydroelectric construction project in
Brazil. This project is scheduled to be completed in 2007. Aluminio's share of
the output from this hydroelectric facility, when completed, will be 19% and
total costs for this project are estimated at $555, of which Aluminio's share is
$105. The plans for financing this project have not yet been finalized. Aluminio
may be required to provide guarantees of project financing or commit to
additional investments as this project progresses.
Aluminio accounts for its investments in these hydroelectric projects on
the equity method. Aluminio's investment in these projects was $109 and $108 at
June 30, 2002, and December 31, 2001, respectively.
In January 2002, Alcoa raised its equity stake in Elkem ASA, a Norwegian
metals producer, above 40%, which, under Norwegian law, required Alcoa to
initiate an unconditional cash tender offer for the remaining outstanding shares
of Elkem. Under the tender offer that expired in February 2002, Alcoa acquired
additional shares, raising its total equity stake in Elkem to 40.2%.
In April 2002, Alcoa refinanced its $2,000 revolving-credit agreement that
was to expire in April 2002 into a revolving-credit agreement that expires in
April 2003.
H. Comprehensive Income
Second quarter Six months
ended ended
June 30 June 30
------- -------
2002 2001 2002 2001
----- ----- ------ -----
Net income $ 232 $ 307 $450 $ 711
Other comprehensive income (loss):
Changes in:
Unrealized losses on available-for-sale
securities (22) - (3) -
Minimum pension liability - - (31) -
Unrealized translation adjustments 225 21 194 (217)
Unrecognized gains/losses on derivatives 22 (4) 67 (127)
----- ----- ----- -----
Comprehensive income $ 457 $ 324 $ 677 $ 367
===== ===== ===== =====
8
I. Earnings Per Share - The details of basic and diluted EPS follow.
Second quarter ended Six months ended
June 30 June 30
------- -------
2002 2001 2002 2001
---- ---- ---- ----
Income before cumulative effect $ 232 $ 307 $ 416 $ 711
Less: Preferred stock dividends - - 1 1
----- ----- ----- -----
Income available to common stockholders
before cumulative effect $ 232 $ 307 $ 415 $ 710
Cumulative effect of accounting change - - 34 -
----- ----- ----- -----
Income available to common stockholders
after cumulative effect $ 232 $ 307 $ 449 $ 710
Average shares outstanding - basic 846 862 846 863
Effect of dilutive securities:
Shares issuable upon exercise of
dilutive outstanding stock options 6 10 7 10
----- ----- ----- -----
Average shares outstanding - diluted 852 872 853 873
Basic EPS (before cumulative effect) $ .27 $ .36 $ .49 $ .82
===== ===== ===== =====
Basic EPS (after cumulative effect) $ .27 $ .36 $ .53 $ .82
===== ===== ===== =====
Diluted EPS (before cumulative effect) $ .27 $ .35 $ .49 $ .81
===== ===== ===== =====
Diluted EPS (after cumulative effect) $ .27 $ .35 $ .53 $ .81
===== ===== ===== =====
Options to purchase 48 shares of common stock at an average exercise
price of $38.00 were outstanding as of June 30, 2002, but were not included in
the computation of diluted EPS because the option exercise price was greater
than the average market price of the common shares.
J. Segment Information - The following details sales and after-tax operating
income (ATOI) for each reportable segment for the three-month and six-month
periods ended June 30, 2002 and 2001. Also included below are the balances of
goodwill at June 30, 2002, as well as goodwill amortization expense for the
three-month and six-month periods ended June 30, 2001 for each reportable
segment. For more information on segments, see Management's Discussion and
Analysis and the segment disclosures included in Alcoa's Form 10-K for the year
ended December 31, 2001.
Segment Information: Alumina Flat- Engi- Pack-
& Chem- Primary Rolled neered aging &
Second quarter ended June 30, 2002 icals Metals Products Products Consumer Other Total
Sales:
Third-party sales $ 419 $ 788 $ 1,192 $ 1,411 $ 678 $ 757 $ 5,245
Intersegment sales 233 1,001 18 10 - - 1,262
------- ------- ------- ------- ------- ------- -------
Total sales $ 652 $ 1,789 $ 1,210 $ 1,421 $ 678 $ 757 $ 6,507
======= ======= ======= ======= ======= ======= =======
After-tax operating income $ 73 $ 175 $ 66 $ 45 $ 55 $ 19 $ 433
======= ======= ======= ======= ======= ======= =======
Second quarter ended June 30, 2001
Sales:
Third-party sales $ 490 $ 972 $ 1,255 $ 1,582 $ 701 $ 991 $ 5,991
Intersegment sales 275 887 15 8 - - 1,185
------- ------- ------- ------- ------- ------- -------
Total sales $ 765 $ 1,859 $ 1,270 $ 1,590 $ 701 $ 991 $ 7,176
======= ======= ======= ======= ======= ======= =======
After-tax operating income $ 130 $ 264 $ 74 $ 60 $ 47 $ 45 $ 620
======= ======= ======= ======= ======= ======= =======
Goodwill amortization
included in ATOI (2) $ - $ (6) $ 1 $ (15) $ (4) $ (8) $ (32)
======= ======= ======= ======= ======= ======= =======
9
Segment Information: Alumina Flat- Engi- Pack-
& Chem- Primary Rolled neered aging &
Six months ended icals Metals Products Products Consumer Other Total
June 30, 2002
Sales:
Third-party sales $ 844 $ 1,552 $ 2,348 $ 2,807 $ 1,302 $ 1,375 $ 10,228
Intersegment sales 462 1,879 33 18 - - 2,392
-------- -------- -------- -------- -------- -------- --------
Total sales $ 1,306 $ 3,431 $ 2,381 $ 2,825 $ 1,302 $ 1,375 $ 12,620
======== ======== ======== ======== ======== ======== ========
After-tax operating income $ 138 $ 318 $ 127 $ 96 $ 83 $ 26 $ 788
======== ======== ======== ======== ======== ======== ========
Goodwill (1) $ 26 $ 933 $ 150 $ 2,353 $ 398 $ 375 $ 4,235
======== ======== ======== ======== ======== ======== ========
Six months ended
June 30, 2001
Sales:
Third-party sales $ 1,037 $ 1,939 $ 2,598 $ 3,175 $ 1,347 $ 2,071 $ 12,167
Intersegment sales 558 1,754 31 17 - - 2,360
-------- -------- -------- -------- -------- -------- --------
Total sales $ 1,595 $ 3,693 $ 2,629 $ 3,192 $ 1,347 $ 2,071 $ 14,527
======== ======== ======== ======== ======== ======== ========
After-tax operating income $ 296 $ 558 $ 139 $ 100 $ 90 $ 95 $ 1,278
======== ======== ======== ======== ======== ======== ========
Goodwill amortization
included in ATOI (2) $ - $ (11) $ 2 $ (30) $ (8) $ (18) $ (65)
======== ======== ======== ======== ======== ======== ========
(1) Goodwill balances by segment at December 31, 2001, are as follows: Alumina &
Chemicals $35, Primary Metals $929, Flat-Rolled Products $145, Engineered
Products $2,312, Packaging & Consumer $331 and Other $271. Goodwill of $1,692
and $1,710 at June 30, 2002, and December 31, 2001, respectively, is included in
corporate.
(2) Goodwill amortization of $11 and $22 is included in corporate for the
three-month and six-month periods ended June 30, 2001, respectively.
The following table reconciles segment information to consolidated totals.
Second quarter Six months
ended ended
June 30 June 30
------- -------
2002 2001 2002 2001
------- ------- ------- -------
Total after-tax operating income $ 433 $ 620 $ 788 $ 1,278
Impact of intersegment profit eliminations (1) (8) (4) (4)
Unallocated amounts (net of tax):
Interest income 9 12 19 20
Interest expense (54) (61) (103) (136)
Minority interests (47) (32) (88) (128)
Corporate expense (53) (66) (111) (132)
Special items (B) - (148) - (148)
Accounting change (C) - - 34 -
Other (55) (10) (85) (39)
------- ------- ------- -------
Consolidated net income $ 232 $ 307 $ 450 $ 711
======= ======= ======= =======
10
The following table represents segment assets.
Segment assets: June 30 December 31
2002 2001
------- -----------
Alumina and Chemicals $ 2,930 $ 2,797
Primary Metals 7,266 7,122
Flat-Rolled Products 3,581 3,453
Engineered Products 6,343 6,231
Packaging and Consumer 2,497 2,498
Other 2,019 1,883
------- -------
Total segment assets $24,636 $23,984
======= =======
The change in segment assets within the Alumina and Chemicals segment is
primarily due to the effect of translation changes in Australia. The increase in
segment assets in the Other group is primarily due to Alcoa Fujikura Ltd.'s
(AFL) acquisition of the remaining 50% interest in Engineered Plastic
Components, Inc. as well as several smaller acquisitions in the AFL
telecommunications business.
K. Subsequent Events - On July 17, 2002, Alcoa agreed to acquire the assets of
Fairchild Fasteners from The Fairchild Corporation for $657 in cash. Fairchild
Fasteners, a leading supplier of aerospace fasteners, will become part of
Alcoa's Engineered Products segment. The transaction is expected to close in the
fourth quarter of 2002, subject to the completion of customary regulatory
approvals and approval by The Fairchild Corporation shareholders.
On July 19, 2002, Alcoa signed a Memorandum of Understanding (MOU) with
the Government of Iceland and Landsvirkjun, Iceland's national power company,
formalizing their cooperation in the evaluation and potential development of a
295,000-mt per year (mtpy) aluminum smelter in eastern Iceland. The MOU
encompasses the development of a 500-megawatt hydropower facility by
Landsvirkjun in eastern Iceland, environmental and engineering studies of the
smelter by Alcoa, construction of harbor and port facilities, as well as related
infrastructure improvements in eastern Iceland.
On July 31, 2002, Alcoa announced that it will temporarily curtail
aluminum production at its 120,000 mtpy primary aluminum facility at Badin,
North Carolina, which has been operating at 90,000 mtpy since September 2000.
Additionally, Alcoa announced the permanent closure of capacity currently idle
at its Troutdale, Oregon and Rockdale, Texas facilities. Troutdale's entire
capacity of 121,000 mtpy has been curtailed since June 2000, while 76,000 mtpy
of Rockdale's total 320,000 mtpy capacity has been idle for the past several
years. These actions, the result of continuing implementation of Alcoa's
long-term, low-cost production strategy, are expected to result in a special
charge of $15 to $20 (after tax) in the third quarter of 2002.
11
Report of Independent Accountants
To the Shareholders and Board of Directors
Alcoa Inc. (Alcoa)
We have reviewed the accompanying unaudited condensed consolidated
balance sheet of Alcoa and subsidiaries as of June 30, 2002, the related
unaudited condensed statements of consolidated income for the three-month
and six-month periods ended June 30, 2002 and 2001, and the unaudited
condensed statement of consolidated cash flows for the six-month periods
ended June 30, 2002 and 2001. These financial statements are the
responsibility of Alcoa's management.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the condensed consolidated financial statements
referred to above for them to be in conformity with accounting principles
generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards
generally accepted in the United States of America, the consolidated
balance sheet of Alcoa and subsidiaries as of December 31, 2001, and the
related statements of consolidated income, shareholders' equity, and cash
flows for the year then ended (not presented herein). In our report dated
January 9, 2002, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 2001,
is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
As discussed in Note C to the unaudited condensed consolidated
financial statements, Alcoa changed its method of accounting for goodwill
and other intangible assets effective January 1, 2002.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
July 8, 2002, except for Note K,
for which the date is July 31, 2002
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(dollars in millions, except per share amounts and ingot prices; shipments in
thousands of metric tons (mt))
Certain statements in this report under this caption and elsewhere relate to
future events and expectations and, as such, constitute forward-looking
statements. Forward-looking statements include those containing such words as
"anticipates," "believes," "estimates," "expects," "hopes," "targets," "should,"
"will," "will likely result," "forecast," "outlook," "projects" or similar
expressions. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements of Alcoa to be different from those expressed or implied in the
forward-looking statements. For a discussion of some of the specific factors
that may cause such a difference, see Note G to the financial statements; the
disclosures included below under Segment Information, Market Risks and
Environmental Matters; and the Business section in Alcoa's Form 10-K for the
year ended December 31, 2001.
Results of Operations
Second quarter ended Six months ended
June 30 June 30
------- -------
2002 2001 2002 2001
--------- --------- ---------- ---------
Sales $ 5,245 $ 5,991 $10,228 $12,167
Net income $ 232 $ 307 $ 450 $ 711
Income (excluding cumulative effect
adjustment in 2002 and goodwill
amortization in 2001) $ 232 $ 350 $ 416 $ 798
Basic earnings per common share
(after cumulative effect) $ .27 $ .36 $ .53 $ .82
Diluted earnings per common share
(after cumulative effect) $ .27 $ .35 $ .53 $ .81
Shipments of aluminum products (mt) 1,333 1,292 2,592 2,612
Shipments of alumina (mt) 1,796 1,730 3,621 3,761
Alcoa's average realized ingot price $ .67 $ .73 $ .66 $ .75
Average 3-month LME price $ .63 $ .69 $ .63 $ .70
Earnings Summary
Net income in the 2002 second quarter and 2002 six-month period was $232,
or 27 cents per diluted share, and $450, or 53 cents per share, respectively.
The decline in earnings of 24% in the 2002 second quarter and 37% in the 2002
six-month period, when compared to the corresponding 2001 periods, is primarily
due to lower realized prices for alumina and aluminum, and lower volumes in
certain segments, as well as the absence of power sales and gains on the sales
of businesses that were recognized in the 2001 periods. Lower volumes, primarily
in the Engineered Products and Other segments due to continued weakness in the
aerospace, industrial gas turbine and telecommunications markets, contributed to
the decline in earnings in the 2002 second quarter compared with the
corresponding 2001 period, and lower volumes across all business segments except
Primary Metals contributed to the volume decline in the 2002 six-month period
compared with the corresponding 2001 period. Partly offsetting these declines
were continued cost reduction efforts; the absence of special charges of $114
(after tax and minority interests) which were recognized in the second quarter
of 2001; as well as the fact that goodwill is no longer amortized in 2002,
resulting in positive impacts of $43 and $87 in the 2002 second quarter and
six-month period, respectively. Additionally, net income in the 2002 six-month
period included income of $34 from the cumulative effect of the change in
accounting for goodwill under SFAS No. 142. This income is primarily the result
of the write-off of negative goodwill from prior acquisitions.
Second quarter 2002 sales decreased 12% from the 2001 second quarter and
sales for the 2002 six-month period decreased 16% from the corresponding 2001
period. Lower prices, primarily for alumina and aluminum, and lower volumes, as
noted previously, contributed to over half of the revenue decline in both the
2002 second quarter and six-month period compared to the corresponding 2001
periods. The dispositions of Thiokol and Reynolds' metal distribution business
(RASCO) accounted for approximately one-third of the decline in sales. The lack
of power sales in 2002 also contributed to the decrease in sales when compared
to the 2001 period.
13
Annualized return on shareholders' equity was 8.0% for the 2002 six-month
period, compared with 13.1% for the 2001 six-month period. The decrease was
primarily due to lower earnings in the 2002 period.
Cost of goods sold (COGS) as a percentage of sales in the 2002 second
quarter and six-month period was 80.0% and 80.6%, respectively, versus 76.9% and
76.6% in the corresponding 2001 periods. The higher percentages in 2002 were due
to lower realized prices and lower volumes, offset somewhat by ongoing cost
reductions generated by productivity and purchasing cost savings.
Selling and general administrative expenses (S&GA) were down $49, or 15%,
from the 2001 second quarter and $94, or 15%, from the 2001 six-month period.
The decreases were due to lower spending and employee costs, lower bad debt
expense and bad debt recoveries, and the dispositions of Thiokol and RASCO. S&GA
as a percentage of sales was 5.3% and 5.4% for the 2002 second quarter and
six-month period, respectively, compared to 5.4% and 5.3% in the corresponding
2001 periods.
The provision for depreciation, depletion and amortization decreased by
$40, or 13%, from the 2001 second quarter and $100, or 16%, from the 2001
six-month period. These decreases were primarily the result of ceasing
amortization of goodwill in 2002 under the provisions of SFAS No. 142.
In the second quarter of 2001, Alcoa recorded a charge of $212 ($114 after
tax and minority interests) as part of its ongoing segment review to optimize
assets and lower costs. This charge consisted of asset write-downs ($172
pre-tax), employee termination and severance costs ($32 pre-tax) and exit costs
($8 pre-tax). The charge was primarily due to actions taken in Alcoa's Primary
Products businesses (within the Alumina and Chemicals segment and the Primary
Metals segment) because of economic and competitive conditions. These actions
included the shutdown of the company's magnesium plant in Addy, Washington and
closing the company's alumina refinery on St. Croix, U.S. Virgin Islands, its
smelter in Suriname, and a chemical plant located in Louisiana. These actions
were substantially completed in 2001, with the exception of site remediation
work that is ongoing.
Interest expense decreased $10, or 11%, and $50, or 24%, from the 2001
second quarter and six-month period, respectively. The decreases in interest
expense were due to lower average effective interest rates.
Other income declined $73, or 68%, from the 2001 second quarter and $110,
or 55%, from the 2001 six-month period. The decrease in the 2002 second quarter
compared with the 2001 second quarter is primarily due to a $38 gain on the sale
of Thiokol recognized in the 2001 second quarter and unfavorable currency
translation adjustments of $25 quarter-over-quarter. The decrease in the 2002
six-month period compared with the corresponding 2001 period was due to $78
higher net gains on asset sales recognized in 2001, primarily attributable to
the sales of Thiokol, Alcoa Proppants, Inc. and Alcoa's interest in a Latin
American cable business; a decrease of $34 in equity earnings, driven by a
restructuring at Elkem; as well as unfavorable currency translation adjustments
of $20 year-over-year, somewhat offset by $28 related to several favorable
nonoperating gains.
The effective tax rate of 31.0% in 2002 differs from the 2001 rate of
32.5% and the statutory rate of 35.0% due to taxes on foreign income and the
impact of ceasing goodwill amortization.
Minority interests' share of income from operations increased $15, or 47%,
from the 2001 second quarter primarily due to the impact of $34 of special
charges recognized in the 2001 second quarter, partially offset by lower
earnings at Alcoa World Alumina and Chemicals (AWAC). Minority interests' share
of income decreased $40, or 31%, from the 2001 six-month period primarily due to
the impact of special charges noted above, as well as lower income in 2002 at
AWAC, Alcoa Fujikura Ltd. (AFL) and Aluminio.
14
Segment Information
I. Alumina and Chemicals
Second quarter ended Six months ended
June 30 June 30
------- -------
2002 2001 2002 2001
------------ ----------- ----------- -----------
Alumina production 3,201 3,258 6,313 6,588
Third-party alumina shipments 1,796 1,730 3,621 3,761
Third-party sales $ 419 $ 490 $ 844 $ 1,037
Intersegment sales 233 275 462 558
-------- --------- --------- ----------
Total sales $ 652 $ 765 $ 1,306 $ 1,595
======== ========= ========== ==========
After-tax operating income $ 73 $ 130 $ 138 $ 296
======== ========== ========== ==========
Third-party sales for this segment decreased 15% from the 2001 second
quarter primarily as a result of a 12% decline in realized prices for alumina
from the corresponding 2001 period. Third-party sales decreased 19% from the
2001 six-month period, primarily due to lower realized prices and lower
shipments. Realized prices declined 17% and shipments declined 4% from the 2001
six-month period. Intersegment sales for the 2002 second quarter and six-month
period decreased 15% and 17%, respectively, due to lower prices and the
curtailments of alumina production at Point Comfort and aluminum production
capacity at smelters in the northwestern U.S.
ATOI for this segment decreased 44% and 53% from the 2001 second quarter
and six-month period, respectively. The declines in both periods were primarily
due to lower realized prices for alumina, with lower volumes contributing to the
decline in ATOI in the 2002 six-month period compared with the corresponding
2001 period.
Demand is expected to increase slightly due to continuing global economic
recovery and smelter restarts.
II. Primary Metals
Second quarter ended Six months ended
June 30 June 30
------- -------
2002 2001 2002 2001
----------- ---------- ----------- -----------
Aluminum production 878 891 1,719 1,808
Third-party aluminum shipments 507 494 1,010 970
Third-party sales $ 788 $ 972 $ 1,552 $ 1,939
Intersegment sales 1,001 887 1,879 1,754
---------- ----------- ---------- ---------
Total sales $ 1,789 $ 1,859 $ 3,431 $ 3,693
========== =========== ========== =========
After-tax operating income $ 175 $ 264 $ 318 $ 558
========== =========== ========== =========
Third-party sales for the Primary Metals segment decreased 19% in the 2002
second quarter and 20% in the 2002 six-month period compared to the
corresponding 2001 periods. The decreases were primarily due to lower realized
prices as well as the absence of power sales resulting from production
curtailments in plants located in the northwestern U.S. in 2001. Alcoa's average
realized third-party price for ingot declined 8% and 12% from the 2001 second
quarter and six-month period, respectively.
ATOI for this segment decreased 34% from the 2001 second quarter and 43%
from the 2001 six-month period. The decreases were driven by lower realized
prices and the absence of power sales, net of power and other contractually
required costs and the impact of lost aluminum sales, which contributed
approximately $35 and $70 in the 2001 second quarter and 2001 six-month period,
respectively. These decreases were partially offset by the positive impact of
the Warrick insurance claim settlement related to a power outage at the smelter
(which is offset in corporate), as well as cost savings recognized in 2002.
In July 2002, as a result of recently announced temporary capacity
curtailments and permanent closures of certain capacity currently idle, Alcoa
has approximately 438,000 mt per year (mtpy) of idle capacity on a base capacity
of 3,948,000 mtpy.
15
III. Flat-Rolled Products
Second quarter ended Six months ended
June 30 June 30
------- -------
2002 2001 2002 2001
--------- --------- --------- ---------
Third-party aluminum shipments 456 450 895 920
Third-party sales $ 1,192 $ 1,255 $ 2,348 $ 2,598
Intersegment sales 18 15 33 31
------- --------- --------- ---------
Total sales $ 1,210 $ 1,270 $ 2,381 $ 2,629
======= ========= ========= =========
After-tax operating income $ 66 $ 74 $ 127 $ 139
======= ========= ========= =========
Third-party flat-rolled product sales decreased 5% in the 2002 second
quarter and 10% in the 2002 six-month period compared with the comparable 2001
periods. The decrease in third-party sales in the 2002 second quarter compared
with the 2001 second quarter was driven by lower prices and a weaker product mix
in the U.S. and Europe, and lower shipments in the aerospace market in Europe,
somewhat offset by an increase in volumes in rigid container sheet and sheet and
plate in the U.S. The decrease in third-party sales in the 2002 six-month period
compared with the 2001 six-month period was driven by overall 3% lower volumes,
lower prices and a weaker product mix in both the U.S. and Europe.
ATOI for the Flat-Rolled Products segment fell 11% and 9% compared with
the 2001 second quarter and six-month period, respectively. The decreases in
both periods were primarily due to lower volumes, lower prices and a weaker
product mix in Europe, as well as a weaker mix for sheet and plate in the U.S.,
partially offset by lower metal and conversion costs and cost savings in rigid
container sheet.
Overall shipments are expected to remain flat, while demand for rigid
container sheet remains relatively strong and shipment declines are expected in
the automotive market due to seasonal factors.
IV. Engineered Products
Second quarter ended Six months ended
June 30 June 30
------- -------
2002 2001 2002 2001
--------- --------- --------- ----------
Third-party aluminum shipments 252 242 480 496
Third-party sales $ 1,411 $ 1,582 $ 2,807 $ 3,175
Intersegment Sales 10 8 18 17
-------- --------- --------- ---------
Total sales $ 1,421 $ 1,590 $ 2,825 $ 3,192
======== ========= ========= =========
After-tax operating income $ 45 $ 60 $ 96 $ 100
======== ========= ========= =========
Engineered Products' third-party sales declined 11% and 12% compared with
the 2001 second quarter and six-month period, respectively, primarily due to
lower volumes attributed to continued weak market conditions in the building and
construction market in Europe and the aerospace and industrial gas turbine
markets in the U.S. These negatives were somewhat offset by higher volumes due
to continued improvement in the commercial transportation market.
ATOI for the segment decreased 25% in the 2002 second quarter and 4% in
the 2002 six-month period versus the corresponding 2001 periods. These decreases
resulted from a decline in volumes due to continued weak market conditions for
aerospace and industrial gas turbines. These declines were partially offset by
higher volumes in the commercial transportation market, productivity and
purchasing cost savings, as well as the absence of goodwill amortization of $15
and $30 in the 2002 second quarter and six-month period, respectively.
Overall revenues are expected to decline due to seasonal factors in the
automotive market along with declining build rates in both the aerospace and
industrial gas turbine markets.
16
V. Packaging and Consumer
Second quarter ended Six months ended
June 30 June 30
------- -------
2002 2001 2002 2001
------ ------ ------ ------
Third-party aluminum shipments 31 41 62 83
Third-party sales $ 678 $ 701 $1,302 $1,347
After-tax operating income $ 55 $ 47 $ 83 $ 90
Third-party sales for this segment for the 2002 second quarter and
six-month period decreased 3% compared with both the 2001 second quarter and
six-month periods. These decreases were primarily due to lower volumes, lower
prices and currency devaluation in Latin America and lower volumes in the
foodservice and flexible packaging businesses. Partly offsetting these decreases
were higher volumes in the closures and consumer foil businesses.
For this segment, ATOI rose 17% in the 2002 second quarter, while falling
8% in the 2002 six-month period compared with the comparable 2001 periods. The
increase in ATOI in the 2002 second quarter compared with the 2001 second
quarter was due primarily to lower material costs in the closures, foodservice,
and flexible packaging businesses and the absence of goodwill amortization for
this segment of $4, somewhat offset by lower volumes, lower prices, currency
devaluation and lower equity income in Latin America. The decrease of 8% in ATOI
in the 2002 six-month period compared with the corresponding 2001 period was
primarily due to the decreases in Latin America as mentioned above, partially
offset by lower material costs in the closures, consumer foil and foodservice
businesses and the absence of goodwill amortization for this segment of $8.
Overall demand is expected to increase slightly due to an increase in the
consumer packaging market, offsetting a slight seasonal decline in the closures
business.
VI. Other
Second quarter ended Six months ended
June 30 June 30
------- -------
2002 2001 2002 2001
------ ------ ------ ------
Third-party aluminum shipments 87 65 145 143
Third-party sales $ 757 $ 991 $1,375 $2,071
After-tax operating income $ 19 $ 45 $ 26 $ 95
For this group, third-party sales decreased 24% in the 2002 second quarter
and 34% in the 2002 six-month period compared with the corresponding 2001
periods. These decreases were the result of the divestitures of Thiokol and
RASCO in 2001, as well as lower volumes and lower prices in the AFL
telecommunications business as continued depressed business conditions
prevailed. These decreases were partly offset by increased third-party sales at
AFL automotive due to the acquisition of the remaining 50% interest in
Engineered Plastic Components, Inc. (EPC) as well as slightly higher third-party
sales for both the automotive and building and construction businesses.
ATOI for this group declined $26 compared with the 2001 second quarter and
$69 compared with the 2001 six-month period. The decreases in ATOI in both
periods were primarily due to the divestitures noted above and volume losses in
the telecommunications business, somewhat offset by volume and cost improvements
in the automotive and building and construction businesses, the acquisition of
the remaining 50% interest in EPC at AFL automotive, as well as the absence of
goodwill amortization of $8 and $18 in the 2002 second quarter and six-month
period, respectively.
The residential building and construction market is expected to remain
seasonally strong, while a slight decrease is expected in the automotive
business due to seasonal factors in the market. We expect continued depressed
business conditions within the telecommunications market.
17
Reconciliation of ATOI to Consolidated Net Income
Items required to reconcile ATOI to consolidated net income include: corporate
adjustments to eliminate any remaining profit or loss between segments; the
after-tax impact of interest income and expense at the statutory rate; minority
interests; corporate expense, comprised of the general administrative and
selling expenses of operating the corporate headquarters and other global
administrative facilities along with depreciation on corporate-owned assets;
special items; accounting change; and other, which includes the impact of LIFO,
differences between estimated tax rates used in the segments and the corporate
effective tax rate, and other nonoperating items such as foreign exchange.
The significant changes in the reconciling items between ATOI and
consolidated net income for the 2002 second quarter and six-month period
compared with the corresponding 2001 periods consisted of: a decrease in
interest expense of $7 for the quarter and $33 for the six-month period due to
lower interest rates; a decrease of $148 in both periods for special items which
were recognized in 2001; an increase in other of $45 for the quarter and $46 for
the six-month period primarily due to currency translation adjustments and the
changes in cash surrender value on corporate-owned life insurance; and an
increase in accounting change of $34 in the six-month period as a result of the
cumulative effect of the accounting change for goodwill.
Market Risks
In addition to the risks inherent in its operations, Alcoa is exposed to
financial, market, political and economic risks. The following discussion
provides additional detail regarding Alcoa's exposure to the risks of changing
commodity prices, foreign exchange rates and interest rates.
Derivatives
Alcoa's commodity and derivative activities are subject to the management,
direction and control of the Strategic Risk Management Committee (SRMC). SRMC is
composed of the chief executive officer, the chief financial officer and other
officers and employees that the chief executive officer selects. SRMC reports to
the Board of Directors on the scope of its derivative activities.
All of the aluminum and other commodity contracts, as well as various types
of derivatives, are held for purposes other than trading. They are used
primarily to mitigate uncertainty and volatility, and cover underlying
exposures. The company is not involved in energy trading activities or weather
derivatives or to any material extent in other nonexchange commodity trading
activities.
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 enter into long-term fixed-price commitments. These commitments expose
Alcoa to the risk of fluctuating aluminum prices between the time the order is
committed and the time the order is shipped.
Alcoa's aluminum commodity risk management policy is to manage, through the
use of futures and options contracts, the aluminum price risk associated with a
portion of its fixed price firm commitments. At June 30, 2002, these contracts
totaled approximately 570,000 mt with a fair value loss of approximately $9
(pre-tax).
Alcoa sells products to various third parties at prices that are influenced
by changes in LME aluminum prices. From time to time, the company may elect to
sell forward a portion of its anticipated primary aluminum and alumina
production to reduce the risk of fluctuating market prices on these sales.
Toward this end, Alcoa may enter into short positions using futures and options
contracts. At June 30, 2002, these contracts totaled 18,000 mt. The fair value
of these contracts at June 30, 2002 was not material. These contracts act to fix
a portion of the sales price related to these sales contracts.
Alcoa purchases natural gas and fuel oil to meet its production
requirements. These purchases expose the company to the risk of higher natural
gas and fuel oil prices. To hedge this risk, Alcoa enters into long positions,
principally futures and options. Alcoa follows a stable pattern of purchasing
natural gas and fuel oil; therefore, it is highly likely that anticipated
purchases will occur. At June 30,
18
2002, the fair value of the contracts for natural gas and fuel oil was a gain of
approximately $14 (pre-tax).
Alcoa also purchases certain other commodities, such as electricity, for
its operations and may enter into futures and options contracts to eliminate
volatility in the price of these commodities. None of these contracts were
material at June 30, 2002.
Financial Risk
Currencies - Alcoa is subject to significant exposure from fluctuations in
foreign currencies. Foreign currency exchange contracts are used to hedge the
variability in cash flows from the forecasted payment or receipt of currencies
other than the functional currency. These contracts cover periods commensurate
with known or expected exposures, generally within three years. The fair value
of these contracts was a loss of approximately $7 (pre-tax) at June 30, 2002.
In addition, certain contracts are used to offset a portion of the impact
of exchange and interest rate changes on foreign currency denominated debt.
These contracts are marked to market and offset a portion of the impact of the
exchange differences on the debt. The mark to market gains on these contracts
were $48 (pre-tax) at June 30, 2002.
Interest Rates - Alcoa uses interest rate swaps to help maintain a reasonable
balance between fixed- and floating-rate debt and to keep financing costs as low
as possible. The company has entered into pay floating, receive fixed interest
rate swaps to change the interest rate risk exposure of a portion of its
outstanding fixed-rate debt. The fair value of these swaps was a gain of
approximately $93 (pre-tax) at June 30, 2002.
Material Limitations - The disclosures with respect to commodity prices,
interest rates, 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 factors disclosed.
Alcoa is exposed to credit loss in the event of nonperformance by
counterparties on the above instruments, as well as credit or performance risk
with respect to its hedged customers' commitments. Although nonperformance is
possible, Alcoa does not anticipate nonperformance by any of these parties.
Futures and options contracts are with creditworthy counterparties and are
further supported by cash, treasury bills or irrevocable letters of credit
issued by carefully chosen banks. In addition, various master netting
arrangements are in place with counterparties to facilitate settlement of gains
and losses on these contracts.
Environmental Matters
Alcoa continues to participate in environmental assessments and cleanups at a
number of locations. These include approximately 28 owned or operating
facilities and adjoining properties, approximately 34 previously owned or
operating facilities and adjoining properties and approximately 71 Superfund and
other waste sites. A liability is recorded for environmental remediation costs
or damages when a cleanup program becomes probable and the costs or damages can
be reasonably estimated.
As assessments and cleanups proceed, the liability is adjusted based on
progress made in determining the extent of remedial actions and related costs
and damages. The liability can change substantially due to factors such as the
nature and extent of contamination, changes in remedial requirements and
technological changes. Therefore, it is not possible to determine the outcomes
or to estimate with any degree of accuracy the potential costs for certain of
these matters. For example, there are issues related to Alcoa's Massena, New
York sites where investigations are ongoing and where natural resource damage or
off-site contaminated sediments have been alleged. The following discussion
provides additional details regarding the current status of certain sites.
MASSENA. Alcoa has been conducting investigations and studies of the Grasse
River, adjacent to Alcoa's Massena, New York plant site, under order from the
U.S.
19
Environmental Protection Agency (EPA) issued under the Comprehensive
Environmental Response, Compensation and Liability Act, also known as Superfund.
Sediments and fish in the river contain varying levels of polychlorinated
biphenyl (PCB).
In the fourth quarter of 1999, Alcoa submitted an Analysis of Alternatives
Report to the EPA. This report identified potential courses of remedial action
related to the PCB contamination of the river. The EPA indicated to Alcoa that
it believed additional remedial alternatives needed to be included in the
Analysis of Alternatives Report. During 2000 and 2001, Alcoa completed certain
studies and investigations on the river, including pilot tests of
sediment-capping techniques and other remediation technologies. In February
2002, Alcoa submitted a revised draft Analysis of Alternatives Report to the EPA
based on these additional evaluations and included additional remedial
alternatives required by the EPA. The additional alternatives required by the
EPA involve removal of more sediment than was included in the 1999 Analysis of
Alternatives Report. The range of costs associated with the remedial
alternatives evaluated in the 2002 report is between $2 and $525. Alcoa believes
that several of those alternatives, involving the largest amounts of sediment
removal, should not be selected for the Grasse River remedy. Alcoa believes the
alternatives that should be selected are those ranging from monitored natural
recovery ($2) to a combination of moderate dredging and capping ($90). A reserve
of $2 has been recorded for any probable losses, as no one of the alternatives
is more likely to be selected than any other.
Portions of the St. Lawrence River system adjacent to a former Reynolds
plant are also contaminated with PCB, and during 2001, Alcoa substantially
completed a dredging remedy for the St. Lawrence River. Further analysis of the
condition of the sediment is being performed. Any required additional dredging
or capping of residual contamination is likely to be completed during the 2003
construction season. The most probable cost of any such additional remediation
is fully reserved and Alcoa does not believe that any additional liability for
this site is reasonably possible.
POINT COMFORT/LAVACA BAY. Since 1990, Alcoa has undertaken investigations
and evaluations concerning alleged releases of mercury from its Point Comfort,
Texas facility into the adjacent Lavaca Bay pursuant to a Superfund order from
the EPA. In March 1994, the EPA listed the "Alcoa (Point Comfort)/Lavaca Bay
Site" on the National Priorities List. In December 2001, the EPA issued its
Record of Decision (ROD) selecting the final remedial approach for the site,
which is fully reserved. The company is negotiating a Consent Order with the EPA
under which it will undertake to implement the remedy. 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 cooperatively identified
restoration alternatives and approaches for Lavaca Bay. The cost of such
restoration is reserved and Alcoa anticipates negotiating a Consent Decree with
the trustees under which it will implement the restoration. Alcoa does not
believe that any additional liability for this site is reasonably possible.
TROUTDALE, OREGON. In 1994, the EPA added Reynolds' Troutdale, Oregon
primary aluminum production plant to the National Priorities List of Superfund
sites. Alcoa is cooperating with the EPA and, under a September 1995 consent
order, is working with the EPA to identify cleanup solutions for the site.
Following curtailment of active production operations and based on further
evaluation of remedial options, the company has determined the most probable
cost of cleanup. This amount has been fully reserved and Alcoa does not believe
that any additional liability for this site is reasonably possible. The company
anticipates a final ROD to be issued by the EPA in 2002.
SHERWIN, TEXAS. In connection with the sale of the Sherwin alumina refinery
in Texas, which was required to be divested as part of the Reynolds merger in
2000, Alcoa has agreed to retain responsibility for the remediation of then
existing environmental conditions, as well as a pro rata share of the final
closure of the active waste disposal areas, which remain in use. Alcoa's share
of the closure costs is proportional to the total period of operation of the
active waste disposal areas. Alcoa estimated its liability for the active
disposal areas by making certain assumptions about the period of operation, the
amount of material placed in the area prior to closure, and the appropriate
technology, engineering and regulatory status applicable to final closure. The
most probable cost for remediation has been reserved. It is reasonably possible
that an additional liability, not expected to exceed $75, may be incurred if
actual experience varies from the original assumptions used.
20
Based on the above, it is possible that Alcoa's results of operations, in a
particular period, could be materially affected by matters relating to these
sites. However, based on facts currently available, management believes that
adequate reserves have been provided and that the disposition of these matters
will not have a materially adverse effect on the financial position or liquidity
of the company.
Alcoa's remediation reserve balance at June 30, 2002 was $422 (of which $73
was classified as a current liability) and reflects the most probable costs to
remediate identified environmental conditions for which costs can be reasonably
estimated. Remediation costs charged to the reserve in the 2002 second quarter
were $10. They include expenditures currently mandated, as well as those not
required by any regulatory authority or third party.
Included in annual operating expenses are the recurring costs of managing
hazardous substances and environmental programs. These costs are estimated to be
about 2% of cost of goods sold.
Liquidity and Capital Resources
Cash from Operations
Cash from operations for the 2002 six-month period totaled $667, compared with
$938 in the corresponding 2001 period. The decrease of $271, or 29%, resulted
primarily from a decrease of $540 in net income after adjustments for non-cash
items, partially offset by $269 lower working capital requirements. The decrease
in net income and adjustments for non-cash items was primarily due to lower
volumes; lower realized prices; lower depreciation and amortization expense,
primarily due to the change in accounting for goodwill under SFAS No. 142; and
the special items charges recognized in 2001. The decrease in working capital
requirements is due to weak market conditions during the 2002 six-month period
compared with the 2001 six-month period.
Financing Activities
Financing activities provided $18 of cash in the 2002 six-month period, compared
with $2,704 used in the corresponding 2001 period. The change in cash provided
from financing activities in the 2002 six-month period compared with the 2001
six-month period is primarily due to the following: a change of $2,525 in
short-term borrowings due to repayments of short-term debt in the 2001 six-month
period that were funded by the proceeds from the sales of operations required to
be divested from the Reynolds merger, the sale of Thiokol and issuing additional
debt; a decrease of $544 related to common stock issued for stock plans; a
decrease in share repurchases of the company's common stock, using $212 to
repurchase 5,958,100 shares in the 2002 six-month period versus $1,028 used to
repurchase 26,467,872 shares in the 2001 six-month period; an increase of $156
in cash due to a decrease in dividend payments to minority interests; an
increase of $1,031 in cash due to commercial paper borrowings; a decrease of
$1,772 related to long-term debt additions, as Alcoa issued $1,500 of long-term
notes in May 2001, the proceeds of which were used to refinance debt and for
general corporate purposes; and an increase of $505 in cash due to lower
long-term debt payments.
In April 2002, Alcoa refinanced its $2,000 revolving-credit agreement that
was to expire in April 2002 into a revolving-credit agreement that expires in
April 2003.
In August 2002, Moody's Investors Service downgraded the long-term debt
ratings of Alcoa from A1 to A2 and its rated subsidiaries principally from A2 to
A3. Alcoa's Prime-2 short term rating was not included in the review. The impact
of the downgrade is not expected to be material to the company. In July 2002,
Standard and Poor's Rating Services reaffirmed Alcoa's A-1 credit rating.
In July 2002, Alcoa completed the acquisition of Ivex Packaging Corporation
which was funded with commercial paper borrowings. Currently, Alcoa is
considering refinancing a portion of its commercial paper borrowings into
long-term debt.
Investing Activities
Investing activities used $751 of cash during the 2002 six-month period,
compared with cash provided of $1,868 in the 2001 six-month period. The change
in cash of $2,619 in the 2002 six-month period compared with the 2001 six-month
period is primarily due to dispositions of assets required to be divested from
the Reynolds merger as well as proceeds from the sale of Thiokol, which returned
$2,471 in the 2001 period.
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Critical Accounting Policies
A summary of the company's significant accounting policies is included in Note A
to the audited consolidated financial statements contained in the Annual Report
on Form 10-K for the year ended December 31, 2001. Management believes that the
application of these policies on a consistent basis enables the company to
provide the users of the financial statements with useful and reliable
information about the company's operating results and financial condition.
The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make judgments, estimates
and assumptions regarding uncertainties that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities and the
reported amounts of revenues and expenses. Areas of uncertainty that require
judgments, estimates and assumptions include the accounting for derivatives,
environmental and tax matters as well as the annual testing of goodwill for
impairment. Management uses historical experience and all available information
to make these judgments and estimates and actual results will inevitably differ
from those estimates and assumptions that are used to prepare the company's
financial statements at any given time. Despite these inherent limitations,
management believes that Management's Discussion and Analysis and the financial
statements and footnotes provide a meaningful and fair perspective of the
company. A discussion of the judgments and uncertainties associated with
accounting for derivatives and environmental matters can be found in the Market
Risks and Environmental Matters sections of Management's Discussion and
Analysis.
Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
143, "Accounting for Asset Retirement Obligations." This statement establishes
standards for accounting for obligations associated with the retirement of
tangible long-lived assets. Alcoa must adopt this standard on January 1, 2003.
Management is currently assessing the details of the standard and is preparing a
plan of implementation.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity," under which
a liability for an exit cost was recognized at the date of an entity's
commitment to an exit plan. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized at fair value when
the liability is incurred. The provisions of this statement are effective for
exit or disposal activities that are initiated after December 31, 2002.
22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
As previously reported, on December 26, 2001, three citizens groups filed an
action in the U.S. District Court for the Western District of Texas against
Alcoa. The groups alleged that activities conducted in the mid-1980s at the
Alcoa power plant in Rockdale, Texas triggered various requirements under the
federal Clean Air Act and the Texas Clean Air Act and that the plant did not
comply with those requirements. The groups also alleged that the plant violated
opacity limits. On January 29, 2002, the company filed its answer to the
complaint denying the allegations. In addition, on January 9, 2002, the Texas
Natural Resource Conservation Commission (TNRCC) issued a Notice of Enforcement
and the Environmental Protection Agency (EPA), Region VI, issued a Notice of
Violation against Alcoa. Both notices allege that activities conducted in the
mid-1980s at the Alcoa power plant in Rockdale, Texas triggered requirements
under the Clean Air Act and the Texas Clean Air Act and the plant did not comply
with those requirements. On June 24, 2002, the Department of Justice, the EPA,
the TNRCC and Alcoa agreed to resolve the Texas and federal allegations with the
permitting of reduced emission limits for the power plant and the payment of a
civil penalty of $1.5 million, as well as supplemental environmental capital
projects of $2.5 million.
In June 2002, the EPA, Region III, informed Howmet Corporation that as a result
of negotiations between the EPA and Howmet, the EPA would propose a Consent
Agreement and Final Order ("CAFO") to resolve its determination that Howmet's
Hampton Casting plant in Hampton, VA, violated the Resource Conservation and
Recovery Act and applicable federal and state hazardous waste management
regulations. The CAFO will also require Howmet to certify its compliance with
the Resource Conservation and Recovery Act, and the regulations relevant to the
alleged violations and to pay a civil penalty. Howmet has undertaken the steps
to be in compliance since the incidents occurred and has agreed to enter into
the CAFO with the EPA and pay a civil penalty of $193,006.
In May and June of 2002, seven lawsuits were filed against Reynolds and Alcoa in
the District Court of Wharton County, Texas. (Two were later dismissed by the
plaintiffs.) The lawsuits seek to recover damages relating to the presence of
trichloroethylene in the groundwater near a former Reynolds extrusion facility
in El Campo, Texas. The current operator, Bon L. Campo Limited Partnership (Bon
L. Campo), and Tredegar Corporation also have been listed as defendants in some
of the lawsuits. Three of the lawsuits request certification of class status for
other allegedly affected individuals. Bon L. Campo filed to remove five of the
lawsuits to the United States District Court, Southern District of Texas,
Houston Division. Alcoa and Reynolds filed to remove two of the lawsuits to the
same court. Alcoa and Reynolds have filed answers and counterclaims in all the
lawsuits. The counterclaims seek a declaration that Alcoa and Reynolds can
continue their mitigation, investigation and remediation efforts at and around
the former Reynolds facility. In addition, they seek stays of the lawsuits until
the TNRCC has exercised its jurisdiction over the matter to determine the source
or sources and the nature and extent of contamination as well as the appropriate
overall remediation that may be needed. Reynolds owned and operated the facility
from 1971 to 1997 and sold the facility to Bon L. Campo prior to Alcoa's
acquisition of Reynolds. Currently, the amount of any possible loss cannot be
estimated.
In the first half of 2002, Alcoa discovered that a former Reynolds' distribution
entity, RASCO, may have sold upwards of 800,000 pounds of aluminum plate made by
an unrelated company for use in the Northwest maritime industry that may not be
suitable for that use. Reynolds and the current owner of the business and the
manufacturer of the metal are working jointly to identify the issues and find
resolutions. All customers have been notified of the issue, inspection protocols
have been put into place and the United States Coast Guard has been notified and
is involved in the resolution process. Three lawsuits have been filed by ship
owners or operators and the parties have been working cooperatively toward
satisfactory resolutions. Currently, the amount of any possible loss cannot be
estimated.
23
Item 4. Submission of Matters to a Vote of Security Holders.
Information called for by this item with respect to the annual meeting of Alcoa
shareholders held on April 19, 2002, is contained in Part II - Item 4 of Alcoa's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.
Item 5. Other Information
The date of Alcoa's 2003 annual meeting of shareholders has been changed to
April 11, 2003 to avoid a conflict with the Good Friday holiday. The deadlines
for submission of shareholder proposals remain unchanged as follows: For
shareholder proposals to be considered for the 2003 proxy statement, they must
be submitted in writing by October 18, 2002. No proposals received after January
19, 2003 may be raised at the annual meeting. Address all shareholder proposals
to: Secretary's Office, Alcoa Inc., 201 Isabella Street, Pittsburgh,
Pennsylvania 15212-5858, Attention: Janet Duderstadt, Assistant Secretary.
During 2002, the company has continued work on new developments in inert anode
technology and the pursuit of patent protection in jurisdictions throughout the
world related to these advanced technologies. After 223 days of cell testing in
Italy, the company, on June 3, 2002, started inert anode assembly testing in a
full pot at its Massena, New York commercial smelting facility. Progress has
been successful in many respects as a result of the testing in Italy. However,
there are remaining issues to overcome, including mitigation of in-use anode
cracking, improvement of long-term current efficiency and anode life, and
reduction in operating voltage. Based upon the results of tests in Massena, the
company plans expanded full pot testing with anode assemblies incorporating
further improvements in structural design and manufacturing costs. The number of
full pots operating with inert anodes may be expanded to four during the first
quarter of 2003. If the technology proves to be commercially feasible, the
company believes that it will be able to convert its existing potlines to this
new technology, resulting in significant operating cost savings. The new
technology would also generate environmental benefits by reducing and
eliminating certain emissions. No timetable has been established for commercial
use.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3. By-Laws as amended
10. Amended and Extended Revolving Credit Agreement (364-Day), dated as of
April 26, 2002
12. Computation of Ratio of Earnings to Fixed Charges
15. Letter regarding unaudited interim financial information
(b) Reports on Form 8-K. None were filed in the second quarter of 2002. During
the third quarter of 2002 (to date), Alcoa has filed two reports on Form 8-K
with the Securities and Exchange Commission, reporting matters under Item 5:
(1) a Form 8-K dated July 1, 2002, reporting that Alcoa had completed its
previously announced agreement to acquire Chicago-based Ivex Packaging
Corporation; and
(2) a Form 8-K dated July 17, 2002, reporting that Alcoa has agreed to
acquire the assets of Fairchild Fasteners, a leading supplier of
aerospace fasteners, from The Fairchild Corporation for $657 million
in cash.
24
SIGNATURES
Pursuant to the requirements 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.
August 6, 2002 By /s/ RICHARD B. KELSON
- ----------------------- ----------------------------
Date Richard B. Kelson
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
August 6, 2002 By /s/ TIMOTHY S. MOCK
- ------------------------- ----------------------------
Date Timothy S. Mock
Vice President - Alcoa Business
Support Services and Controller
(Chief Accounting Officer)
25
EXHIBITS
3. By-Laws as amended
10. Amended and Extended Revolving Credit Agreement (364-Day), dated as of
April 26, 2002
12. Computation of Ratio of Earnings to Fixed Charges
15. Letter regarding unaudited interim financial information
26