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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended September 30, 2004

 

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.)
201 Isabella Street, Pittsburgh, Pennsylvania   15212-5858
(Address of principal executive offices)   (Zip code)

 

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  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

 

As of October 21, 2004, 870,478,696 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 (unaudited)

(in millions)

 

    

September 30

2004


   

December 31

2003


 

ASSETS

                

Current assets:

                

Cash and cash equivalents

   $ 561     $ 576  

Receivables from customers, less allowances of $97 in 2004 and $105 in 2003

     3,013       2,559  

Other receivables

     224       351  

Inventories (G)

     2,995       2,554  

Deferred income taxes

     225       267  

Prepaid expenses and other current assets

     779       502  
    


 


Total current assets

     7,797       6,809  
    


 


Properties, plants, and equipment, at cost

     25,132       24,883  

Less: accumulated depreciation, depletion, and amortization

     12,880       12,342  
    


 


Net properties, plants, and equipment

     12,252       12,541  
    


 


Goodwill

     6,575       6,549  

Other assets

     5,642       5,320  

Assets held for sale (E)

     42       492  
    


 


Total assets

   $ 32,308     $ 31,711  
    


 


LIABILITIES

                

Current liabilities:

                

Short-term borrowings

   $ 44     $ 56  

Accounts payable, trade

     2,416       1,982  

Accrued compensation and retirement costs

     1,042       952  

Taxes, including taxes on income

     956       701  

Other current liabilities

     1,074       881  

Long-term debt due within one year

     497       523  
    


 


Total current liabilities

     6,029       5,095  
    


 


Long-term debt, less amount due within one year (B)

     6,108       6,693  

Accrued postretirement benefits

     2,178       2,220  

Other noncurrent liabilities and deferred credits

     3,274       3,390  

Deferred income taxes

     790       805  

Liabilities of operations held for sale (E)

     12       93  
    


 


Total liabilities

     18,391       18,296  
    


 


MINORITY INTERESTS

     1,362       1,340  
    


 


COMMITMENTS AND CONTINGENCIES (H)

                

SHAREHOLDERS’ EQUITY

                

Preferred stock

     55       55  

Common stock

     925       925  

Additional capital

     5,788       5,831  

Retained earnings

     8,367       7,850  

Treasury stock, at cost

     (1,956 )     (2,017 )

Accumulated other comprehensive loss (I)

     (624 )     (569 )
    


 


Total shareholders’ equity

     12,555       12,075  
    


 


Total liabilities and equity

   $ 32,308     $ 31,711  
    


 


 

The accompanying notes are an integral part of the consolidated financial statements.

 

2


Alcoa and subsidiaries

Condensed Statement of Consolidated Income (unaudited)

(in millions, except per-share amounts)

 

    

Third quarter ended

September 30


   

Nine months ended

September 30


 
     2004

    2003

    2004

    2003

 

Sales (N)

   $ 5,975     $ 5,310     $ 17,718     $ 15,900  

Cost of goods sold

     4,787       4,204       13,992       12,642  

Selling, general administrative, and other expenses

     315       303       974       942  

Research and development expenses

     44       47       132       147  

Provision for depreciation, depletion, and amortization

     300       291       902       878  

Restructuring and other charges (F)

     4       1       (22 )     —    

Interest expense

     67       75       200       243  

Other income, net (K)

     (53 )     (42 )     (200 )     (135 )
    


 


 


 


Total costs and expenses

     5,464       4,879       15,978       14,717  

Income from continuing operations before taxes on income

     511       431       1,740       1,183  

Provision for taxes on income (L)

     142       92       493       300  
    


 


 


 


Income from continuing operations before minority interests’ share

     369       339       1,247       883  

Less: Minority interests’ share

     71       54       194       188  
    


 


 


 


Income from continuing operations

     298       285       1,053       695  

Loss from discontinued operations (E)

     (15 )     (5 )     (11 )     (1 )

Cumulative effect of accounting change (M)

     —         —         —         (47 )
    


 


 


 


NET INCOME

   $ 283     $ 280     $ 1,042     $ 647  
    


 


 


 


EARNINGS (LOSS) PER SHARE (J)

                                

Basic:

                                

Income from continuing operations

   $ .34     $ .33     $ 1.21     $ .82  

Loss from discontinued operations

     (.02 )     —         (.01 )     —    

Cumulative effect of accounting change

     —         —         —         (.06 )
    


 


 


 


Net income

   $ .32     $ .33     $ 1.20     $ .76  
    


 


 


 


Diluted:

                                

Income from continuing operations

   $ .34     $ .33     $ 1.20     $ .82  

Loss from discontinued operations

     (.02 )     —         (.01 )     —    

Cumulative effect of accounting change

     —         —         —         (.06 )
    


 


 


 


Net income

   $ .32     $ .33     $ 1.19     $ .76  
    


 


 


 


Dividends paid per common share

   $ .15     $ .15     $ .45     $ .45  
    


 


 


 


 

The accompanying notes are an integral part of the consolidated financial statements.

 

3


Alcoa and subsidiaries

Condensed Statement of Consolidated Cash Flows (unaudited)

(in millions)

 

    

Nine months ended

September 30


 
     2004

    2003

 

CASH FROM OPERATIONS

                

Net income

   $ 1,042     $ 647  

Adjustments to reconcile net income to cash from operations:

                

Depreciation, depletion, and amortization

     908       889  

Change in deferred income taxes

     (78 )     (2 )

Equity income, net of dividends

     (49 )     (60 )

Noncash restructuring and other charges (F)

     (22 )     —    

Net gain on early retirement of debt and interest rate swap settlements (B)

     (58 )     —    

Gains from investing activities - sale of assets

     (7 )     (16 )

Provision for doubtful accounts

     19       7  

Loss from discontinued operations (E)

     11       1  

Accounting change (M)

     —         47  

Minority interests

     194       188  

Other

     28       84  

Changes in assets and liabilities, excluding effects of acquisitions and divestitures:

                

Increase in receivables

     (358 )     (56 )

(Increase) reduction in inventories

     (458 )     36  

(Increase) reduction in prepaid expenses and other current assets

     (135 )     7  

Increase (reduction) in accounts payable and accrued expenses

     406       (212 )

Increase (reduction) in taxes, including taxes on income

     225       (124 )

Cash paid on early retirement of debt and interest rate swap settlements (B)

     (52 )     —    

Cash received on long-term aluminum supply contract

     —         440  

Net change in noncurrent assets and liabilities

     (211 )     (110 )

Net change in net assets held for sale

     2       (30 )
    


 


CASH PROVIDED FROM CONTINUING OPERATIONS

     1,407       1,736  

CASH USED FOR DISCONTINUED OPERATIONS

     —         (39 )
    


 


CASH PROVIDED FROM OPERATIONS

     1,407       1,697  
    


 


FINANCING ACTIVITIES

                

Net changes to short-term borrowings

     (12 )     (4 )

Common stock issued for stock compensation plans

     69       34  

Repurchase of common stock

     (68 )     —    

Dividends paid to shareholders

     (392 )     (385 )

Dividends paid to minority interests

     (115 )     (145 )

Net change in commercial paper (B)

     730       (483 )

Additions to long-term debt

     138       288  

Payments on long-term debt (B)

     (1,422 )     (402 )
    


 


CASH USED FOR FINANCING ACTIVITIES

     (1,072 )     (1,097 )
    


 


INVESTING ACTIVITIES

                

Capital expenditures

     (667 )     (570 )

Capital expenditures of discontinued operations

     —         (3 )

Proceeds from the sale of assets (E)

     355       23  

Additions to investments

     (50 )     (5 )

Changes in short-term investments

     20       6  

Other

     (6 )     (14 )
    


 


CASH USED FOR INVESTING ACTIVITIES

     (348 )     (563 )
    


 


EFFECT OF EXCHANGE RATE CHANGES ON CASH

     (2 )     12  
    


 


Net change in cash and cash equivalents

     (15 )     49  

Cash and cash equivalents at beginning of year

     576       344  
    


 


CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 561     $ 393  
    


 


 

The accompanying notes are an integral part of the consolidated financial statements.

 

4


Notes to the Condensed Consolidated Financial Statements (unaudited)

(dollars in millions, except per-share amounts)

 

A. Basis of Presentation - The Condensed Consolidated Financial Statements are unaudited. These statements include all adjustments, consisting of only normal recurring adjustments, 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, 2003, which includes all disclosures required by accounting principles generally accepted in the United States of America.

 

B. Debt – In June 2004, Alcoa recognized a net gain of $58 in other income on the early retirement of long-term debt and the associated settlement of interest rate swaps. Alcoa retired $1,200 of debt securities, consisting of the following: $200 of 6.125% Bonds due in 2005, $500 of 7.25% Notes due in 2005, and $500 of 5.875% Notes due in 2006. These debt securities were retired primarily with proceeds from commercial paper borrowings. The net gain of $58 is comprised of the following:

 

  a premium paid for early retirement of debt and related expenses of $67;

 

  a gain of $48 from previously settled interest rate swaps that hedged the retired debt and was reflected as an increase in its carrying value; and

 

  a gain of $77 from the settlement of interest rate swaps that hedged anticipated borrowings between June 2005 and June 2006.

 

Alcoa previously used interest rate swaps to establish fixed interest rates on anticipated borrowings between June 2005 and June 2006. Due to a change in forecasted borrowing requirements, resulting from the early retirement of debt in June 2004 and a forecasted increase in future operating cash flows resulting from improved market conditions, the anticipated borrowings are no longer probable of occurring in 2005 and 2006. Therefore, Alcoa recognized $33 of gains that had been deferred on previously settled swaps and $44 of cash proceeds which was recorded as a gain to unwind the remaining interest rate swaps.

 

In connection with this transaction, Alcoa terminated $1,000 notional value of interest rate swaps that resulted in a cash payment by Alcoa of $32. These interest rate swaps were hedging debt maturing in 2007 and 2011. The $32 is reflected as a reduction in the carrying value of debt and it will be recognized as an increase in interest expense over the remaining maturity of the related hedged debt.

 

C. Stock-Based Compensation – Stock options under the company’s stock incentive plans have been granted at not less than market prices on the dates of grant. Stock option features based on date of original grant are as follows:

 

Date of original grant


  

Vesting


     Term

  

Reload feature


2002 and prior

  

One year

     10 years   

One reload over option term

2003

  

3 years (1/3 each year)

     10 years   

One reload in 2004 for 1/3 vesting in 2004

2004

  

3 years (1/3 each year)

     6 years   

None

 

Alcoa accounts for stock-based compensation in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations using the intrinsic value method, which resulted in no compensation cost for options granted.

 

Alcoa’s net income and earnings per share would have been reduced to the pro forma amounts shown below if compensation cost had been determined based on the fair value at the grant dates in accordance with Statement of Financial Accounting Standards (SFAS) Nos. 123 and 148, “Accounting for Stock-Based Compensation.”

 

5


    

Third quarter ended

September 30


  

Nine months ended

September 30


     2004

   2003

   2004

   2003

Net income, as reported

   $ 283    $ 280    $ 1,042    $ 647

Less: compensation cost determined under the fair value method, net of tax

     9      5      25      13
    

  

  

  

Pro forma net income

   $ 274    $ 275    $ 1,017    $ 634
    

  

  

  

Basic earnings per share:

                           

As reported

   $ .32    $ .33    $ 1.20    $ .76

Pro forma

     .31      .32      1.17      .74
    

  

  

  

Diluted earnings per share:

                           

As reported

   $ .32    $ .33    $ 1.19    $ .76

Pro forma

     .31      .32      1.16      .74

 

In addition to stock option awards described above, beginning in 2004 the company granted stock awards and performance share awards that vest in three years from the date of grant. Compensation expense of $14 (pre-tax) was recognized on these awards in the first nine months of 2004.

 

D. Pension Plans and Other Postretirement Benefits – Effective December 31, 2003, Alcoa adopted SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” This standard requires the disclosure of the components of net periodic benefit cost recognized during interim periods.

 

    

Third quarter ended

September 30


   

Nine months ended

September 30


 

Pension benefits


   2004

    2003

    2004

    2003

 

Service cost

   $ 48     $ 46     $ 151     $ 146  

Interest cost

     155       151       464       459  

Expected return on plan assets

     (180 )     (180 )     (540 )     (546 )

Amortization of prior service cost

     9       10       27       29  

Recognized actuarial loss

     15       1       45       9  
    


 


 


 


Net periodic benefit cost

   $ 47     $ 28     $ 147     $ 97  
    


 


 


 


    

Third quarter ended

September 30


   

Nine months ended

September 30


 

Postretirement benefits


   2004

    2003

    2004

    2003

 

Service cost

   $ 8     $ 8     $ 24     $ 24  

Interest cost

     55       59       165       177  

Expected return on plan assets

     (3 )     (3 )     (9 )     (9 )

Amortization of prior service cost (benefit)

     (2 )     (8 )     (6 )     (24 )

Recognized actuarial loss

     12       10       36       30  
    


 


 


 


Net periodic benefit cost

   $ 70     $ 66     $ 210     $ 198  
    


 


 


 


 

The net periodic benefit cost for postretirement benefits for the three-month and nine-month periods ended September 30, 2004 reflects a reduction of approximately $6 and $18, respectively, related to the recognition of the federal subsidy under Medicare Part D. For further details on the Medicare Part D subsidy, see Note V to the audited financial statements contained in the Annual Report on Form 10-K for the year ended December 31, 2003.

 

E. Discontinued Operations and Assets Held for SaleIn September of 2004, Alcoa reclassified the protective packaging business of Ivex Packaging Corporation (Ivex) to discontinued operations based on the decision to sell the business. Therefore, the financial statements for all periods presented have been reclassified to reflect this business in discontinued operations. The Packaging and Consumer segment results do not include the results of operations of the protective packaging business. In September of 2004, a $16 after-tax charge was recorded to reflect the current fair market value of the business. The sale is expected to be completed by the end of 2004.

 

In the fourth quarter of 2002, Alcoa performed a portfolio review of its businesses and the markets they serve. As a result of this review, Alcoa committed to a plan to divest certain noncore businesses that

 

6


did not meet internal growth and return measures. A detailed discussion of Alcoa’s 2002 divestiture plan and changes to the plan in 2003 can be found in Note B to the audited financial statements contained in Alcoa’s Annual Report on Form 10-K for the year ended December 31, 2003. Information on divestiture activities that occurred during 2004 is provided below.

 

For the periods presented in the Condensed Consolidated Financial Statements, businesses classified as discontinued operations included the protective packaging business of Ivex, Alcoa’s commodity automotive fasteners business, a packaging business in South America, and Alcoa’s packaging equipment business. In January of 2004, Alcoa sold its packaging equipment business to American Industrial Partners for $44 in cash and recognized an after-tax gain of $10. In February of 2004, Alcoa sold its automotive fasteners business to the Kaminski Holdings group for $17 in cash and notes receivable and recognized an additional after-tax loss of $5. In July of 2004, Alcoa sold its flexible packaging business in South America and recognized no material gain or loss. The gain and loss from these transactions are recorded in discontinued operations in the income statement.

 

The following table details selected financial information for the businesses included within discontinued operations.

 

    

Third quarter ended

September 30


   

Nine months ended

September 30


 
     2004

    2003

    2004

    2003

 

Sales

   $ 19     $ 87     $ 76     $ 252  

Loss from operations

     —       $ (6 )     —       $ (1 )

Loss on sale of businesses

     (24 )     —         (17 )     —    
    


 


 


 


Total pretax loss

     (24 )   $ (6 )   $ (17 )   $ (1 )

Provision for taxes

     9       1       6       —    
    


 


 


 


Loss from discontinued operations

   $ (15 )   $ (5 )   $ (11 )   $ (1 )
    


 


 


 


 

For the periods presented in the Condensed Consolidated Financial Statements, businesses classified as assets held for sale included Alcoa’s specialty chemicals business, an extrusion facility in Europe, certain extrusion facilities in Latin America, foil facilities in St. Louis, MO and Russellville, AR, as well as the protective packaging business of Ivex, Alcoa’s commodity automotive fasteners business, a packaging business in South America, and Alcoa’s packaging equipment business as described above. In February of 2004, the specialty chemicals business of Alcoa was sold to two private equity firms led by Rhone Capital LLC for an enterprise value of $342, which included the assumption of debt and other unfunded obligations. Alcoa received cash of $248 and recognized a pre-tax, pre-minority interest gain of approximately $53 ($61 after-tax, after-minority interest). The gain is included in Restructuring and Other Charges in the income statement. In April of 2004, Alcoa sold its St. Louis, MO and Russellville, AR foil facilities, as well as an extrusion facility in Europe. Alcoa received $37 in cash and no material gain or loss was recorded on these transactions.

 

In the second quarter of 2004, certain architectural products businesses in North America were reclassified from assets held for sale to assets held and used as management discontinued the plan of sale due to market conditions. The financial statements for all periods presented have been reclassified to reflect this change. The reclassification did not impact the Condensed Statement of Consolidated Income. The results of the North American architectural products businesses continue to be reflected in the Engineered Products segment.

 

7


The major classes of assets and liabilities of operations held for sale in the balance sheet are as follows:

 

     September 30, 2004

   December 31, 2003

Assets:

             

Receivables

   $ 12    $ 114

Inventories

     6      112

Properties, plants, and equipment, net

     20      224

Other assets

     4      42
    

  

Total assets held for sale

   $ 42    $ 492
    

  

Liabilities:

             

Accounts payable and accrued expenses

     9      18

Other liabilities

     3      75
    

  

Total liabilities of operations held for sale

   $ 12    $ 93
    

  

 

The changes in assets and liabilities of operations held for sale at September 30, 2004 compared with December 31, 2003 are due to the divestitures of Alcoa’s packaging equipment, automotive fasteners, and specialty chemicals businesses, as well as the sale of the St. Louis and Russellville foil facilities, an extrusion plant in Europe, and a packaging business in South America in 2004. The divestiture program is essentially complete, with the exception of certain Latin American extrusion facilities that remain in assets held for sale and the September 2004 decision to move the protective packaging business of Ivex into discontinued operations.

 

F. Restructuring and Other Charges – In the first nine months of 2004, Alcoa recorded income of $22 for restructuring and other charges, consisting of income of $31 in the first quarter, and expenses of $5 and $4 in the second and third quarters, respectively. Alcoa recorded restructuring and other charges of $4 ($4 after tax and minority interests) in the third quarter, consisting of charges of $7 for employee termination and severance costs associated with 400 salaried and hourly employees (primarily in the U.S. and Mexico), and $4 for asset impairments, partially offset by adjustments of $5 to prior year employee termination and severance cost reserves, and $2 net gains on divested businesses. As of September 30, 2004, approximately 150 of the 400 employees had been terminated.

 

In the second quarter of 2004, Alcoa recorded restructuring and other charges of $5 ($4 after tax and minority interests), consisting of charges of $14 for employee termination and severance costs associated with 2,700 salaried and hourly employees (primarily in Mexico and the U.S.), as the company continued to focus on reducing costs, partially offset by income of $6 associated with net gains on divested businesses and asset sales, and income of $3 resulting from adjustments to prior year employee termination and severance cost reserves. As of September 30, 2004, 2,400 of the 2,700 employees had been terminated.

 

In the first quarter of 2004, Alcoa recorded income of $31 ($50 after tax and minority interests) for restructurings, consisting of a $44 gain on the sale of the specialty chemicals business and charges of $13 for employee termination and severance costs associated with 380 salaried and hourly employees (primarily in the U.S. and U.K.). As of September 30, 2004, 280 of the 380 employees had been terminated.

 

Approximately $17 of cash payments were made against the reserves in the first nine months of 2004. All layoffs recorded in 2004 are expected to be completed in 2004. Restructuring and other charges are not reflected in the segment results.

 

During 2003, Alcoa recorded income of $26 ($25 after tax and minority interests) for restructuring and other charges. The income recognized was comprised of the following components: $45 of charges for employee termination and severance costs associated with approximately 1,600 hourly and salaried employees (located primarily in Europe, the U.S., and Brazil), as the company continued to focus on cost reductions in businesses that continued to be impacted by market declines; $20 of charges related to a reduction in the estimated fair values of businesses included in assets held for sale; and $91 of income comprised of $53 primarily associated with the sale of the Latin America PET business, and $38 resulting from adjustments to prior year employee termination and severance cost reserves (in conjunction with the $38 reserve adjustment, there was a change in the number of employees to be terminated under the 2002 restructuring program from 8,500 to 6,700 employees). The 2003 restructuring program is essentially complete.

 

8


During 2002, Alcoa recorded charges of $425 ($280 after tax and minority interests) for restructurings associated with the curtailment of aluminum production at three smelters, as well as restructuring operations for those businesses experiencing negligible growth due to continued market declines and the decision to divest certain businesses that have failed to meet internal growth and return measures. The 2002 charges were comprised of $296 for asset write-downs, consisting of $113 of goodwill on businesses to be divested, as well as $183 for structures, machinery, and equipment; $105 for employee termination and severance costs related to approximately 6,700 hourly and salaried employees at over 70 locations, primarily in Mexico, Europe, and the U.S.; and charges of $31 for exit costs, principally for remediation and demolition costs, as well as lease termination costs. The 2002 restructuring program is essentially complete.

 

Activity and reserve balances for restructuring charges are as follows:

 

    

Asset

write-downs


    Employee
termination and
severance costs


    Other

    Total

 

Reserve balances at December 31, 2002

   $ 63     $ 166     $ 27     $ 256  
    


 


 


 


2003:

                                

Cash payments

     (16 )     (120 )     (17 )     (153 )

2003 restructuring charges

     —         45       —         45  

Additions to 2002 restructuring charges

     20       —         —         20  

Reversals of 2002 restructuring charges

     (53 )     (38 )     —         (91 )

Noncash additions/reversals to the reserves in 2003

     24       —         —         24  
    


 


 


 


Reserve balances at December 31, 2003

   $ 38     $ 53     $ 10     $ 101  
    


 


 


 


2004:

                                

Cash payments

     (1 )     (43 )     (3 )     (47 )

2004 restructuring charges

     4       34       (52 )     (14 )

Reversals of 2003 restructuring charges

     —         (8 )     —         (8 )

Net gains on sales of assets not impacting reserve balances

     —         —         52       52  

Noncash charges

     (4 )     —         —         (4 )
    


 


 


 


Reserve balances at September 30, 2004

   $ 37     $ 36     $ 7     $ 80  
    


 


 


 


 

For further details on the restructurings, see Note D to the audited financial statements contained in the Annual Report on Form 10-K for the year ended December 31, 2003.

 

G. Inventories

 

    

September 30

2004


  

December 31

2003


Finished goods

   $ 956    $ 760

Work in process

     913      791

Bauxite and alumina

     433      337

Purchased raw materials

     483      456

Operating supplies

     210      210
    

  

     $ 2,995    $ 2,554
    

  

 

Approximately 43% of total inventories at September 30, 2004, was valued on a LIFO basis. If valued on an average cost basis, total inventories would have been $616 and $558 higher at September 30, 2004 and December 31, 2003, respectively. The increase in inventories is a result of improved market conditions.

 

9


H. 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 believes that the disposition of matters that are pending or asserted will not have a materially adverse effect on the financial position or liquidity of the company.

 

Alcoa Aluminio S.A. (Aluminio) is a participant in several hydroelectric power 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.

 

The completed and committed hydroelectric construction projects that Aluminio participates in are outlined in the following tables.

 

Completed projects


   Date
completed


   Investment
participation


   

Share of

output


   

Debt

guarantee


    Debt guarantee
through 2013


Machadinho

   2002    27.23 %   22.62 %   35.53 %   $ 106

 

Aluminio committed to taking a share of the output of the completed Machadinho project for 30 years at cost (including cost of financing the project). 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.

 

Committed projects


   Scheduled
completion
date


   Share of
output


    Investment
participation


    Total
estimated
project costs


   Aluminio’s
share of
project costs


   Performance
bond
guarantee


Barra Grande

   2006    42.20 %   42.20 %   $ 471    $ 199    $ 5

Serra do Facao

   2008    39.50 %   39.50 %   $ 223    $ 88    $ 4

Pai-Quere

   2008    35.00 %   35.00 %   $ 273    $ 96    $ 2

Estreito

   2009    19.08 %   19.08 %   $ 589    $ 112    $ 10

 

These projects were committed to during 2001 and 2002, and the Barra Grande project commenced construction in 2002. As of the third quarter of 2004, approximately 50% of the long-term financing for the Barra Grande project was obtained, of which Aluminio guaranteed 42.20% based on its investment participation. The plans for financing the other projects have not yet been finalized. It is anticipated that a portion of the project costs will be financed with third parties. Aluminio may be required to provide guarantees of project financing or commit to additional investments as these projects progress.

 

During 2003, the participants in the Santa Isabel project formally requested the return of the performance bond related to the license to construct the hydroelectric project. This project has been terminated.

 

Aluminio accounts for the Machadinho and Barra Grande hydroelectric projects on the equity method. Its total investment in these projects was $125 and $136 at September 30, 2004 and December 31, 2003, respectively. There have been no significant investments made in any of the other projects.

 

In September 2003, Alcoa signed a memorandum of understanding (MOU) with the government of the Kingdom of Bahrain to acquire up to a 26 percent equity stake in Alba, a Bahrain company that owns and operates a 512,000 metric ton per year (mtpy), four-potline aluminum smelter. Alcoa and the government were unable to reach mutually acceptable terms to finalize the terms of the MOU, and it is no longer in force. Alcoa and the government are continuing to explore other ways for Alcoa to invest in Alba.

 

10


I. Comprehensive Income

 

     Third quarter ended
September 30


    Nine months ended
September 30


 
     2004

    2003

    2004

    2003

 

Net income

   $ 283     $ 280     $ 1,042     $ 647  

Changes in other comprehensive income (loss), net of tax:

                                

Unrealized gains (losses) on available-for-sale securities

     65       59       (61 )     105  

Minimum pension liability

     —         1       —         (1 )

Unrealized translation adjustments

     160       110       (8 )     483  

Unrecognized gains (losses) on derivatives

                                

Net change from periodic revaluations

     38       4       81       75  

Net amount reclassified to income (1)

     (15 )     (20 )     (67 )     (54 )
    


 


 


 


Net unrecognized gains (losses) on derivatives

     23       (16 )     14       21  
    


 


 


 


Comprehensive income

   $ 531     $ 434     $ 987     $ 1,255  
    


 


 


 



(1) 2004 nine-month period includes $77 associated with interest rate swap settlements that occurred in June 2004. See Note B.

 

J. Earnings Per Share – The information used to compute basic and diluted EPS on income from continuing operations follows: (shares in millions)

 

     Third quarter ended
September 30


   Nine months ended
September 30


     2004

   2003

   2004

   2003

Income from continuing operations

   $ 298    $ 285    $ 1,053    $ 695

Less: preferred stock dividends

     1      1      2      2
    

  

  

  

Income from continuing operations available to common shareholders

   $ 297    $ 284    $ 1,051    $ 693
    

  

  

  

Average shares outstanding – basic

     870      855      870      849

Effect of dilutive securities:

                           

Shares issuable upon exercise of dilutive stock options

     7      4      7      3
    

  

  

  

Average shares outstanding – diluted

     877      859      877      852
    

  

  

  

 

Options to purchase 58 million and 64 million shares of common stock at average exercise prices of $38.00 and $36.00 were outstanding as of September 30, 2004 and 2003, respectively, 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.

 

K. Other Income, Net

 

     Third quarter ended
September 30


    Nine months ended
September 30


 
     2004

    2003

    2004

    2003

 

Equity income

   $ 39     $ 28     $ 110     $ 112  

Interest income

     12       11       31       29  

Foreign exchange losses

     (17 )     (7 )     (19 )     (44 )

(Losses) gains on sales of assets

     (7 )     3       1       16  

Net gain on early retirement of debt and interest rate swap settlements (B)

     —         —         58       —    

Other income

     26       7       19       22  
    


 


 


 


     $ 53     $ 42     $ 200     $ 135  
    


 


 


 


 

Other income for the third quarter and nine-month periods of 2004 included a gain of $35 for the termination of an alumina tolling arrangement. In addition, the 2004 nine-month period included a charge of $20 recognized in the first quarter of 2004 related to settlements reached in the El Campo litigation matter.

 

11


L. Income Taxes – The effective tax rate of 28.3% for the 2004 nine-month period differs from the statutory rate of 35% and the 2003 nine-month rate of 25.3% principally due to the sale of the specialty chemicals business in 2004 and lower taxes on foreign income.

 

M. Cumulative Effect of Accounting Change – Effective January 1, 2003, Alcoa adopted SFAS No. 143, “Accounting for Asset Retirement Obligations.” Under this standard, Alcoa recognized additional liabilities for asset retirement obligations (AROs), consisting primarily of costs associated with spent pot lining disposal, bauxite residue disposal, mine reclamation, and landfills. These costs reflect the legal obligations associated with the normal operation of Alcoa’s bauxite mining, alumina refining, and aluminum smelting facilities. There were no material changes to the ARO balances during the third quarter of 2004. Additionally, Alcoa capitalized asset retirement costs by increasing the carrying amount of related long-lived assets, principally machinery and equipment, and recorded associated accumulated depreciation from the time the original assets were placed into service. The cumulative effect adjustment recognized upon adoption of this standard was $47, consisting principally of costs to establish assets and liabilities related to spent pot lining for pots currently in operation.

 

N. Segment Information - The following details sales and after-tax operating income (ATOI) for each reportable segment for the three-month and nine-month periods ended September 30, 2004 and 2003. For more information on segments, see Note P to the audited financial statements contained in the Annual Report on Form 10-K for the year ended December 31, 2003.

 

Third quarter ended

September 30, 2004


   Alumina
and
Chemicals


   Primary
Metals


   Flat-Rolled
Products


   Engineered
Products


   Packaging
and
Consumer


   Other

   Total

Sales:

                                                

Third-party sales

   $ 490    $ 930    $ 1,520    $ 1,583    $ 797    $ 655    $ 5,975

Intersegment sales

     341      1,039      25      4      —        —        1,409
    

  

  

  

  

  

  

Total sales

   $ 831    $ 1,969    $ 1,545    $ 1,587    $ 797    $ 655    $ 7,384
    

  

  

  

  

  

  

ATOI

   $ 169    $ 188    $ 62    $ 60    $ 41    $ 12    $ 532

Third quarter ended

September 30, 2003


                                  

Sales:

                                                

Third-party sales

   $ 526    $ 816    $ 1,176    $ 1,369    $ 787    $ 636    $ 5,310

Intersegment sales

     258      740      17      5      —        —        1,020
    

  

  

  

  

  

  

Total sales

   $ 784    $ 1,556    $ 1,193    $ 1,374    $ 787    $ 636    $ 6,330
    

  

  

  

  

  

  

ATOI

   $ 113    $ 163    $ 59    $ 47    $ 56    $ 8    $ 446

 

Nine months ended

September 30, 2004


   Alumina
and
Chemicals


   Primary
Metals


   Flat-Rolled
Products


   Engineered
Products


   Packaging
and
Consumer


   Other

   Total

Sales:

                                                

Third-party sales

   $ 1,439    $ 2,767    $ 4,460    $ 4,704    $ 2,339    $ 2,009    $ 17,718

Intersegment sales

     1,028      3,206      71      13      —        —        4,318
    

  

  

  

  

  

  

Total sales

   $ 2,467    $ 5,973    $ 4,531    $ 4,717    $ 2,339    $ 2,009    $ 22,036
    

  

  

  

  

  

  

ATOI

   $ 455    $ 610    $ 187    $ 200    $ 130    $ 60    $ 1,642

Nine months ended

September 30, 2003


                                  

Sales:

                                                

Third-party sales

   $ 1,466    $ 2,353    $ 3,528    $ 4,214    $ 2,325    $ 2,014    $ 15,900

Intersegment sales

     746      2,270      52      19      —        —        3,087
    

  

  

  

  

  

  

Total sales

   $ 2,212    $ 4,623    $ 3,580    $ 4,233    $ 2,325    $ 2,014    $ 18,987
    

  

  

  

  

  

  

ATOI

   $ 293    $ 491    $ 168    $ 122    $ 163    $ 34    $ 1,271

 

12


The following reconciles segment information to consolidated totals.

 

     Third quarter ended
September 30


    Nine months ended
September 30


 
     2004

    2003

    2004

    2003

 

Total ATOI

   $ 532     $ 446     $ 1,642     $ 1,271  

Impact of intersegment profit adjustments

     3       2       34       5  

Unallocated amounts (net of tax):

                                

Interest income

     8       7       20       18  

Interest expense

     (44 )     (49 )     (130 )     (158 )

Minority interests

     (71 )     (54 )     (194 )     (188 )

Corporate expense

     (68 )     (65 )     (205 )     (203 )

Restructuring and other charges (F)

     (3 )     (1 )     24       1  

Discontinued operations (E)

     (15 )     (5 )     (11 )     (1 )

Accounting change (M)

     —         —         —         (47 )

Other

     (59 )     (1 )     (138 )     (51 )
    


 


 


 


Consolidated net income

   $ 283     $ 280     $ 1,042     $ 647  
    


 


 


 


 

The significant changes in the reconciling items between ATOI and consolidated net income for the 2004 third quarter and nine-month period compared with the corresponding 2003 periods consisted of:

 

  a decrease in interest expense due to lower average debt levels and lower average effective interest rates,

 

  an increase in the loss from discontinued operations due to the movement of the protective packaging business into discontinued operations and the recording of an impairment loss to reflect the current fair market value of the business, and

 

  an increase in other, principally caused by the tax benefit for international tax legislation enacted in 2003 and an increase in LIFO inventory adjustments due to the increase in the price of aluminum.

 

The 2004 nine-month period was also negatively impacted by a $42 increase of the environmental reserve primarily for the Grasse River project and the absence of the sale of assets (primarily office space) that occurred in the first half of 2003. These were partially offset by the $58 gain recognized on the debt restructuring in the second quarter of 2004. See Note B for additional details surrounding the restructuring of debt.

 

The following table represents segment assets.

 

    

September 30

2004


  

December 31

2003


     

Alumina and Chemicals

   $ 3,258    $ 3,077

Primary Metals

     7,819      7,398

Flat-Rolled Products

     3,626      3,380

Engineered Products

     6,773      6,362

Packaging and Consumer

     3,054      3,038

Other

     1,861      1,752
    

  

Total segment assets

   $ 26,391    $ 25,007
    

  

 

The increase in segment assets across all segments is due to higher customer receivables and increased inventories from stronger volumes and prices in 2004.

 

O. Reclassifications - Certain amounts have been reclassified to conform to current period presentation.

 

P. Subsequent Event - On October 26, 2004, Alcoa agreed to acquire approximately a 20% interest in a consortium formed to acquire the Dampier to Bunbury Natural Gas Pipeline in exchange for an initial cash investment of $17 million and a future funding commitment of an additional $72 million which will be paid as expansions of the pipeline occur through 2008. Alcoa’s investment was made to secure a supply of natural gas to its refineries in Western Australia. In addition to its ownership interest, Alcoa maintains an on-going natural gas supply contract with the joint venture which provides for the purchase of approximately 40% of the pipeline’s production. Alcoa will account for its investment in accordance with the equity method of accounting for investments in common stock.

 

13


Report of Independent Registered Public Accounting Firm *

 

To the Shareholders and Board of Directors of

Alcoa Inc.

 

We have reviewed the accompanying unaudited condensed consolidated balance sheet of Alcoa Inc. and its subsidiaries (Alcoa) as of September 30, 2004, and the related unaudited condensed statements of consolidated income for each of the three-month and nine-month periods ended September 30, 2004 and 2003 and the unaudited condensed statement of consolidated cash flows for the nine-month periods ended September 30, 2004 and 2003. These interim financial statements are the responsibility of Alcoa’s management.

 

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

 

Based on our review, we are not aware of any material modifications that should be made to the accompanying unaudited condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

 

We previously audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2003, and the related statements of consolidated income, shareholders’ equity and of cash flows for the year then ended (not presented herein), and in our report dated January 8, 2004 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, 2003, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

 

As discussed in Note M to the unaudited condensed consolidated financial statements, Alcoa changed its method of accounting for asset retirement obligations effective January 1, 2003.

 

/s/ PricewaterhouseCoopers LLP

 

Pittsburgh, Pennsylvania

October 7, 2004, except for Note P,

as to which the date is October 26, 2004

 


* This report should not be considered a “report” within the meaning of Sections 7 and 11 of the 1933 Act and the independent accountant’s liability under Section 11 does not extend to it.

 

14


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 H to the Condensed Consolidated Financial Statements; the disclosures included below under Segment Information, Environmental Matters, and Quantitative and Qualitative Disclosures about Market Risks; and Alcoa’s Form 10-K, Part I, Item 1, for the year ended December 31, 2003.

 

Results of Operations

 

Selected Financial Data:

 

     Third quarter ended
September 30


   Nine months ended
September 30


 
     2004

   2003

   2004

   2003

 

Sales

   $ 5,975    $ 5,310    $ 17,718    $ 15,900  

Income from continuing operations

     298      285      1,053      695  

Cumulative effect of accounting change

     —        —        —        (47 )

Net income

   $ 283    $ 280    $ 1,042    $ 647  
    

  

  

  


Earnings per common share:

                             

Diluted – Income from continuing operations

   $ .34    $ .33    $ 1.20    $ .82  

Diluted – Net income

   $ .32    $ .33    $ 1.19    $ .76  
    

  

  

  


Shipments of aluminum products (mt)

     1,274      1,225      3,833      3,624  

Shipments of alumina (mt)

     1,833      1,982      5,347      5,715  
    

  

  

  


Alcoa’s average realized ingot price

   $ .85    $ .71    $ .84    $ .69  

Average 3-month LME price

   $ .78    $ .64    $ .77    $ .63  
    

  

  

  


 

Alcoa’s income from continuing operations for the 2004 third quarter and nine-month period was $298, or 34 cents per diluted share, and $1,053, or $1.20 per share, respectively. Income from continuing operations increased 5% in the 2004 third quarter and 52% in the nine-month period, as compared to the corresponding 2003 periods. Results in 2004 were favorably impacted by higher realized prices, as alumina prices rose 23% and 26% and aluminum prices climbed 20% in the 2004 third quarter and nine-month period, respectively, compared with the corresponding 2003 periods. Volume increases in the Engineered Products, Packaging and Consumer, and Flat-Rolled Products segments and the termination of an alumina tolling arrangement favorably contributed to 2004 results. The 2004 nine-month period was also favorably impacted by the gain on the specialty chemicals business that was sold in the first quarter of 2004 and the debt restructuring that occurred in the second quarter of 2004. However, the impact of a weaker U.S. dollar against other currencies, increased raw material and energy costs, the strike at the Becancour, Quebec smelter, and the effects of Hurricane Ivan in Jamaica partially offset the increase in income during 2004. The 2004 nine-month period was unfavorably impacted by litigation settlements in the first quarter of 2004.

 

Net income for the 2004 third quarter and nine-month period was $283, or 32 cents per share, and $1,042, or $1.19 per share, respectively, as compared to $280, or 33 cents per share, and $647, or 76 cents per share, for corresponding periods in 2003. In September of 2004, a $16 after-tax charge was recorded to reflect the current fair market value of the protective packaging business, which was reclassified into discontinued operations. The 2003 results included a cumulative effect charge of $47, or 6 cents per share, for the accounting change for asset retirement obligations under Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations.”

 

Sales for the 2004 third quarter and nine-month period increased $665, or 13%, and $1,818, or 11%, respectively compared with corresponding 2003 periods. The increase in realized prices for alumina and aluminum as well as higher volumes in businesses serving the commercial transportation, distribution, aerospace, telecommunications, packaging, and residential building and construction markets drove the

 

15


increase in sales. The favorable impact of foreign currency exchange movements and the consolidation of KAAL Australia (Alcoa acquired the remaining 50% interest from Kobe Steel Ltd. in October 2003.) also contributed to the sales increase. Partially offsetting these increases were the impact of divestitures, principally the specialty chemicals and Latin American PET businesses, and lower volumes in the Primary Metals segment due to the strike at the Becancour smelter as well as lower volumes in the automotive business.

 

Cost of goods sold (COGS) as a percentage of sales was 80.1% for the 2004 third quarter and 79.0% for the 2004 nine-month period, compared with 79.2% and 79.5% in the 2003 corresponding periods. In the 2004 third quarter, higher realized prices were more than offset by unfavorable foreign currency exchange movements and higher costs associated with energy and raw materials, the Becancour strike, the impact of Hurricane Ivan in Jamaica, and throughput issues in Australia. The decrease in the 2004 nine-month period is attributed to higher realized prices and cost savings, which more than offset the unfavorable items noted previously as well as an increase of $42 in environmental reserves that occurred in the second quarter of 2004.

 

Selling, general administrative, and other expenses (SG&A) for the 2004 third quarter and 2004 nine-month period increased $12, or 4%, and $32 or 3%, compared with the corresponding periods in 2003. These increases resulted from expenses associated with stock awards granted in 2004 and unfavorable foreign currency movements, which were partially offset by a reduction in deferred compensation costs. The 2004 nine-month period was also negatively impacted by the bankruptcy of an alumina customer.

 

The provision for depreciation, depletion, and amortization increased by 3% in both the 2004 third quarter and 2004 nine-month period, as compared to the corresponding periods of 2003. The increase is primarily due to unfavorable foreign currency exchange movements.

 

Restructuring and other charges resulted in expense of $4 in the 2004 third quarter and income of $22 in the 2004 nine-month period. In the third quarter of 2004, Alcoa recorded restructuring and other charges of $4 ($4 after taxes and minority interests) in the third quarter, consisting of charges of $7 for employee termination and severance costs associated with 400 salaried and hourly employees (primarily in the U.S. and Mexico), and $4 for asset impairments, partially offset by adjustments of $5 to prior year employee termination and severance cost reserves, and $2 net gains on divested businesses. As of September 30, 2004, approximately 150 of the 400 employees had been terminated. In the second quarter of 2004, a charge of $14 was recorded for employee termination and severance costs associated with 2,700 salaried and hourly employees (primarily in Mexico and the U.S.). Partially offsetting this charge were income of $6 associated with net gains on divested businesses and asset sales, and income of $3 resulting from adjustments to prior year employee termination and severance cost reserves. As of September 30, 2004, 2,400 of the 2,700 employees had been terminated. In the first quarter of 2004, income of $31 was recorded for restructuring and other charges, consisting of a gain of $44 on the sale of the specialty chemicals business, which was somewhat offset by charges of $13 for employee termination and severance costs associated with 380 salaried and hourly employees (primarily in the U.S. and U.K.). As of September 30, 2004, 280 of the 380 employees had been terminated. Approximately $17 of cash payments were made against the reserves in the first nine months of 2004. All layoffs recorded in 2004 are expected to be completed in 2004. Restructuring and other charges are not included in the segment results.

 

16


The pre-tax income (expense) of allocating these amounts to the segment results would have been as follows:

 

     Third quarter ended
September 30


    Nine months ended
September 30


 
     2004

    2003

    2004

    2003

 

Alumina and Chemicals

   $ 1     $ 1     $ 51     $ 1  

Primary Metals

     —         (1 )     (5 )     (7 )

Flat-Rolled Products

     (1 )     (1 )     (2 )     (11 )

Engineered Products

     (2 )     1       (10 )     (26 )

Packaging and Consumer

     (3 )     (5 )     (10 )     38  

Other

     (1 )     4       (2 )     5  
    


 


 


 


Segment total

     (6 )     (1 )     22       —    

Corporate

     2       —         —         —    
    


 


 


 


Total restructuring and other charges

   $ (4 )   $ (1 )   $ 22     $ —    
    


 


 


 


 

Interest expense for the 2004 third quarter and nine-month period decreased $8, or 11%, and $43, or 18%, from the corresponding 2003 periods, primarily due to lower average debt levels. The decrease in the 2004 nine-month period was also caused by lower average effective interest rates.

 

Other income for the 2004 third quarter and nine-month period increased $11, or 26%, and $65, or 48%, over the corresponding 2003 periods. The increase in the 2004 third quarter is due to the gain of $35 related to the termination of an alumina tolling arrangement and $11 of higher equity income. These were largely offset by $10 unfavorable foreign currency exchange movements, a $6 impairment of a cost basis investment, a $5 increase in expenses related to employee life insurance, as well as declines in dividend and interest income. The 2004 nine-month increase resulted from the $58 gain recognized on the restructuring of debt, the $35 gain on the termination of an alumina tolling arrangement, and $25 favorable foreign currency exchange movements, partially offset by $20 associated with litigation settlements in 2004, $15 of higher net gains on asset sales (principally office space) recognized in 2003, and an $11 increase in expenses related to employee life insurance.

 

The effective tax rate of 28.3% for the 2004 nine-month period differs from the statutory rate of 35% and the 2003 nine-month rate of 25.3% principally due to the sale of the specialty chemicals business in 2004 and lower taxes on foreign income.

 

Minority interests’ share of income from operations increased $17, or 31%, and $6, or 3%, in the 2004 third quarter and nine-month period, respectively, as compared to the same periods in 2003. The increases were partly due to higher earnings at Alcoa World Alumina and Chemicals due to higher realized prices and the gain associated with the termination of an alumina tolling arrangement. This was partially offset by Alcoa’s acquisition of the minority interest in Alcoa Aluminio in August 2003. The increase in the 2004 nine-month period was also favorably impacted by the sale of the specialty chemicals business.

 

Segment Information

 

I. Alumina and Chemicals

 

     Third quarter ended
September 30


   Nine months ended
September 30


     2004

   2003

   2004

   2003

Alumina production (mt)

     3,546      3,493      10,721      10,291

Third-party alumina shipments (mt)

     1,833      1,982      5,347      5,715

Third-party sales

   $ 490    $ 526    $ 1,439    $ 1,466

Intersegment sales

     341      258      1,028      746
    

  

  

  

Total sales

   $ 831    $ 784    $ 2,467    $ 2,212
    

  

  

  

After-tax operating income (ATOI)

   $ 169    $ 113    $ 455    $ 293
    

  

  

  

 

Third-party sales for the Alumina and Chemicals segment decreased 7% and 2% in the 2004 third quarter and nine-month period, compared with the corresponding 2003 periods. An increase in realized

 

17


prices of 23% in the 2004 third quarter and 26% in the 2004 nine-month period, as compared to corresponding 2003 periods, was more than offset by lower third-party volumes due to higher internal demand. The increase in realized prices was also offset by the loss of revenue resulting from the sale of the specialty chemicals business in February of 2004.

 

Intersegment sales increased 32% in the 2004 third quarter and 38% in the 2004 nine-month period, as compared to corresponding periods in 2003, as a result of higher realized prices and increased internal demand as a result of the expiration of contracts on required third-party purchases. In the 2004 nine-month period, production increased principally at the Point Comfort, TX refinery, after startup of additional capacity during 2003.

 

ATOI for this segment rose 50% in the 2004 third quarter and 55% in the 2004 nine-month period, as compared to corresponding 2003 periods, due primarily to higher realized prices and the termination of an alumina tolling arrangement. Results were negatively impacted by reduced volumes, unfavorable foreign currency exchange movements, clean-up costs and lost production in Jamaica resulting from Hurricane Ivan, and throughput issues in Australia. The loss of profit associated with the sale of the chemicals business produced a negative impact on both the 2004 third quarter and nine-month periods.

 

Alumina prices in the fourth quarter of 2004 are expected to be flat with third quarter realizations. The third quarter benefit associated with the termination of an alumina tolling agreement will not recur in the fourth quarter.

 

II. Primary Metals

 

     Third quarter ended
September 30


   Nine months ended
September 30


     2004

   2003

   2004

   2003

Aluminum production (mt)

     821      869      2,551      2,633

Third-party aluminum shipments (mt)

     459      488      1,400      1,436

Alcoa’s average realized price per pound for aluminum ingot

   $ .85    $ .71    $ .84    $ .69

Third-party sales

   $ 930    $ 816    $ 2,767    $ 2,353

Intersegment sales

     1,039      740      3,206      2,270
    

  

  

  

Total sales

   $ 1,969    $ 1,556    $ 5,973    $ 4,623
    

  

  

  

ATOI

   $ 188    $ 163    $ 610    $ 491

 

Third-party sales for the Primary Metals segment increased 14% in the third quarter of 2004 and 18% in the 2004 nine-month period, compared with the corresponding periods of 2003. The increases are due to 20% higher realized prices in both the third quarter of 2004 and the 2004 nine-month periods, partially offset by lower third-party volumes resulting from the curtailment of two potlines due to the strike at the Becancour smelter. Intersegment sales increased 40% in the third quarter of 2004 and 41% in the 2004 nine-month period primarily due to the increase in realized prices as well as increased volumes due to strengthening in the downstream aluminum fabricating businesses.

 

ATOI for this segment increased 15% in the 2004 third quarter and 24% in the 2004 nine-month period due to higher realized prices and higher total volumes, somewhat offset by higher costs for energy, the impact of unfavorable foreign currency exchange movements, and the effects of the strike at the Becancour smelter.

 

Alcoa has approximately 719,000 mt per year (mtpy) of idle capacity on a base capacity of 3,977,000 mtpy. On October 7, 2004, the workers at the Wenatchee smelter voted to accept a labor agreement. Alcoa will begin the process to restart two potlines at this facility, which has been idled since July of 2001.

 

Aluminum prices continue to be strong in the fourth quarter of 2004. Alcoa will continue its program of metal purchases to optimize the selling of value-added products. A resolution to the strike at the Becancour smelter would not likely generate any significant benefits in the fourth quarter, nor would the restart of the Wenatchee smelter. Higher energy costs will continue to negatively impact results.

 

18


III. Flat-Rolled Products

 

     Third quarter ended
September 30


   Nine months ended
September 30


     2004

   2003

   2004

   2003

Third-party aluminum shipments (mt)

     521      450      1,553      1,337

Third-party sales

   $ 1,520    $ 1,176    $ 4,460    $ 3,528

Intersegment sales

     25      17      71      52
    

  

  

  

Total sales

   $ 1,545    $ 1,193    $ 4,531    $ 3,580
    

  

  

  

ATOI

   $ 62    $ 59    $ 187    $ 168

 

Third-party sales for the Flat-Rolled Products segment increased 29% in the 2004 third quarter and 26% in the 2004 nine-month period, as compared to the same periods in 2003. The increase resulted from the acquisition of the remaining 50% interest in KAAL Australia (can sheet rolling mills) in October of 2003, higher prices, and higher volumes due to improved demand in the commercial transportation, packaging, aerospace, automotive, and industrial products markets.

 

ATOI for this segment increased 5% in the third quarter of 2004 and 11% for the 2004 nine-month period due to higher volumes; favorable mix; improved productivity in the sheet and plate business; and the contribution of KAAL Australia. In the 2004 nine-month period, these positive contributions were somewhat offset by a hot mill interruption at the Kitts Green facility in the U.K. and temporary throughput issues at the Tennessee can sheet facility, and these issues have been resolved.

 

In the fourth quarter, seasonal volume declines are expected for rigid container sheet. The commercial vehicle market, while recovering, is projected to experience seasonal softening as well. The aerospace and distribution markets are expected to continue to strengthen in the fourth quarter.

 

IV. Engineered Products

 

     Third quarter ended
September 30


   Nine months ended
September 30


     2004

   2003

   2004

   2003

Third-party aluminum shipments (mt)

     234      222      707      666

Third-party sales

   $ 1,583    $ 1,369    $ 4,704    $ 4,214

Intersegment sales

     4      5      13      19
    

  

  

  

Total sales

   $ 1,587    $ 1,374    $ 4,717    $ 4,233
    

  

  

  

ATOI

   $ 60    $ 47    $ 200    $ 122

 

Third-party sales for the Engineered Products segment increased 16% the 2004 third quarter and 12% in the 2004 nine-month period, as compared to 2003 corresponding periods, principally due to higher volumes in the businesses serving the commercial transportation, aerospace, building and construction, and distribution markets.

 

ATOI for this segment increased 28% in the third quarter of 2004 and 64% in the 2004 nine-month period. The increase in 2004 was principally due to higher volumes as a result of improved market conditions and increased productivity, which were slightly offset by increased pricing pressures.

 

The aerospace and distribution markets are expected to strengthen in the fourth quarter. Anticipated seasonal weakness in the automotive, building and construction, and commercial vehicle markets will likely mitigate such strengthening.

 

19


V. Packaging and Consumer

 

     Third quarter ended
September 30


   Nine months ended
September 30


     2004

   2003

   2004

   2003

Third-party aluminum shipments (mt)

     39      40      118      118

Third-party sales

   $ 797    $ 787    $ 2,339    $ 2,325

Intersegment sales

     —        —        —        —  
    

  

  

  

Total sales

   $ 797    $ 787    $ 2,339    $ 2,325
    

  

  

  

ATOI

   $ 41    $ 56    $ 130    $ 163

 

Third-party sales for the Packaging and Consumer segment were relatively flat in the 2004 third quarter and nine-month period, compared with the 2003 corresponding periods. Higher volumes in the thermoformed plastics, closures, consumer products, and packaging graphics and design businesses were offset by a decline in sales due to the divestiture of the Latin America PET business in 2003.

 

ATOI for this segment declined 27% in the third quarter of 2004 and 20% in the 2004 nine-month period compared to 2003 corresponding periods. The higher volumes noted previously were more than offset by the negative impact of persistently higher resin costs, higher costs for metal and paper, the divestitures of the Latin America PET business and Latasa (a Latin America aluminum can business in which Alcoa had an equity interest), and the fire at the Kama packaging facility.

 

In the fourth quarter, seasonal weakness is expected in closures while seasonal demand for consumer products is anticipated to increase. Raw materials costs continue to increase, but pass-through opportunities may mitigate some of those increases.

 

VI. Other

 

     Third quarter ended
September 30


   Nine months ended
September 30


     2004

   2003

   2004

   2003

Third-party aluminum shipments (mt) *

     21      25      55      67

Third-party sales

   $ 655    $ 636    $ 2,009    $ 2,014

Intersegment sales

     —        —        —        —  
    

  

  

  

Total sales

   $ 655    $ 636    $ 2,009    $ 2,014
    

  

  

  

ATOI

   $ 12    $ 8    $ 60    $ 34

* Third party aluminum shipments for previously reported periods have been properly adjusted to reflect international selling company activity.

 

Third-party sales for the Other group increased 3% in the 2004 third quarter and remained relatively flat in the 2004 nine-month period compared with 2003 corresponding periods, principally due to volume increases in the residential building products and telecommunications businesses, which were offset by lower volumes at AFL automotive, as this business continued to rebalance its customer base. The 2004 nine-month period was also negatively affected by the disposition of distribution facilities in Europe.

 

ATOI for this group increased 50% in the 2004 third quarter and 76% in the 2004 nine-month period, compared to corresponding 2003 periods, due to increased volumes in the telecommunications business and higher equity income from Integris Metals, Inc. (a metals distribution joint venture in which Alcoa has a 50% equity interest). These positive contributions were somewhat offset by lower volumes in the automotive businesses.

 

In the fourth quarter, automotive will continue to be weak based on production cuts at Ford and General Motors and platform specific cutbacks to reduce field inventories on specific models. Seasonal declines are expected in the building and construction market.

 

20


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; interest income and expense; 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; restructuring and other charges; discontinued operations; the accounting change for asset retirement obligations in 2003; 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 currency translation gains/losses.

 

The following reconciles segment information to consolidated totals.

 

     Third quarter ended
September 30


    Nine months ended
September 30


 
     2004

    2003

    2004

    2003

 

Total ATOI

   $ 532     $ 446     $ 1,642     $ 1,271  

Impact of intersegment profit adjustments

     3       2       34       5  

Unallocated amounts (net of tax):

                                

Interest income

     8       7       20       18  

Interest expense

     (44 )     (49 )     (130 )     (158 )

Minority interests

     (71 )     (54 )     (194 )     (188 )

Corporate expense

     (68 )     (65 )     (205 )     (203 )

Restructuring and other charges

     (3 )     (1 )     24       1  

Discontinued operations

     (15 )     (5 )     (11 )     (1 )

Accounting change

     —         —         —         (47 )

Other

     (59 )     (1 )     (138 )     (51 )
    


 


 


 


Consolidated net income

   $ 283     $ 280     $ 1,042     $ 647  
    


 


 


 


 

The significant changes in the reconciling items between ATOI and consolidated net income for the 2004 third quarter and nine-month period compared with the corresponding 2003 periods consisted of:

 

  a decrease in interest expense due to lower average debt levels and lower average effective interest rates,

 

  an increase in the loss from discontinued operations due to the movement of the protective packaging business into discontinued operations and the recording of an impairment loss to reflect the current fair market value of the business, and

 

  an increase in other, principally caused by the tax benefit for international tax legislation enacted in 2003 and an increase in LIFO inventory adjustments due to the increase in the price of aluminum.

 

The 2004 nine-month period was also negatively impacted by a $42 increase of the environmental reserve primarily for the Grasse River project and the absence of the sale of assets (primarily office space) that occurred in the first half of 2003. These are partially offset by the $58 gain recognized on the debt restructuring in the second quarter of 2004. See Note B in Part I, Item I for additional details surrounding the restructuring of debt.

 

Liquidity and Capital Resources

 

Cash from Operations

 

Cash from operations was $1,407 in the 2004 nine-month period compared with $1,697 in the same period of 2003. The decrease of $290 is principally due to net increases in inventories, receivables, payables, and taxes of $171, and the absence of a $440 advance payment received in 2003 against a long-term aluminum supply contract, partially offset by the increase in net income.

 

Financing Activities

 

Cash used for financing activities of $1,072 in the 2004 nine-month period was relatively flat with cash used of $1,097 in the 2003 nine-month period.

 

21


In June 2004, Alcoa completed the early retirement of $1,200 of debt securities, consisting of the following: $200 of 6.125% Bonds due in 2005, $500 of 7.25% Notes due in 2005, and $500 of 5.875% Notes due in 2006. These debt securities were retired primarily with proceeds from commercial paper borrowings.

 

On April 23, 2004 Alcoa refinanced its $2,000 revolving-credit agreement that was to expire in April 2004 into a new $1,000 revolving-credit agreement that will expire in April 2005, with an option to extend the maturity date of any borrowings outstanding on the April 2005 expiration date for one year. Additionally, Alcoa refinanced its $1,000 revolving-credit agreement that was to expire in April 2005 into a new agreement that will expire in April 2009.

 

Investing Activities

 

Cash used for investing activities was $348 in the 2004 nine-month period compared with $563 in the same period in 2003. The change of $215 was primarily due to proceeds received from the divestitures of Alcoa’s specialty chemicals, packaging equipment, and automotive fasteners businesses, as well as foil facilities, and a European extrusion facility. This was somewhat offset by cash used to acquire 44 million additional shares of Chalco to maintain Alcoa’s 8% ownership interest.

 

Due to the timing of spend on growth projects, Alcoa will spend approximately $1.2 billion on capital in 2004. This amount is almost $100 million lower than original projections.

 

Environmental Matters

 

Alcoa continues to participate in environmental assessments and cleanups at a number of locations. These include approximately 30 owned or operating facilities and adjoining properties, approximately 39 previously owned or operating facilities and adjoining properties and approximately 67 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.

 

The following discussion provides additional details regarding the current status of Alcoa’s significant sites where the final outcome cannot be determined or the potential costs in the future cannot be estimated.

 

Massena, NY. 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. 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 2002, Alcoa submitted an Analysis of Alternatives Report that detailed a variety of remedial alternatives with estimated costs ranging from $2 to $525. Because the selection of the $2 alternative (natural recovery) was considered remote, Alcoa adjusted the reserve for the Grasse River in 2002 to $30 representing the low end of the range of possible alternatives, as no single alternative could be identified as more probable than the others.

 

In June of 2003, based on river observations during the spring of 2003, the EPA requested that Alcoa gather additional field data to assess the potential for sediment erosion from winter river ice formation and breakup. The results of these additional studies, submitted in a report to the EPA in April of 2004, suggest that this phenomenon has the potential to occur approximately every 10 years and may impact sediments in certain portions of the river under all remedial scenarios. The EPA informed Alcoa that a final remedial decision for the river could not be made without substantially more information, including river pilot studies on the effects of ice formation and breakup on each of the remedial techniques. The EPA requested that Alcoa consider a Remedial Options Study to gather this information. The scope of this study includes sediment removal and capping, the installation of an ice control structure, and significant monitoring.

 

22


In May of 2004, Alcoa agreed to perform the study at an estimated cost of $35. Most of the work should be completed by the fourth quarter of 2005. The findings will be incorporated into a revised Analysis of Alternatives Report, which is expected to be submitted in 2006. This information will be used by the EPA to propose a remedy for the entire river.

 

Alcoa adjusted the reserves in the second quarter to include the $35 for the Remedial Options Study. This is in addition to the $30 previously reserved. Currently, none of the existing alternatives in the 2002 Analysis of Alternatives Report is more probable than the others and the results of the Remedial Options Study are necessary to revise the scope and estimated cost of many of the current alternatives.

 

The EPA’s ultimate selection of a remedy could result in additional liability. Alcoa may be required to record a subsequent reserve adjustment at the time the EPA’s Record of Decision is issued.

 

Sherwin, TX. 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.

 

Based on the foregoing, 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 September 30, 2004 was $410 and $395 at December 31, 2003 (of which $65 was classified as a current liability in both periods), 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 2004 nine-month period were approximately $25. They include expenditures currently mandated, as well as those not required by any regulatory authority or third party. The reserve balance was increased by $40 in the 2004 nine-month period, principally due to the additional reserve recorded for the Grasse River site in the second quarter of 2004.

 

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.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

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). The SRMC is composed of the chief executive officer, the chief financial officer, and other officers and employees that the chief executive officer selects. The 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 principally to mitigate uncertainty and volatility, and to cover underlying exposures. The company is not involved in energy-trading activities, weather derivatives, or other nonexchange commodity trading activities.

 

Commodity Price Risks - Alcoa is the world’s leading producer of aluminum ingot and fabricated products. As a condition of sale, customers often require Alcoa to enter into forward-dated, 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.

 

23


Alcoa’s aluminum commodity risk management policy is to manage, through the use of futures contracts, the aluminum price risk associated with a portion of its fixed-price firm commitments. At September 30, 2004, these contracts totaled approximately 740,000 mt with a fair value gain of approximately $144 (pre-tax).

 

Alcoa has also entered into certain derivatives to minimize its aluminum price risk. A portion of these derivatives do not qualify for hedge accounting treatment under U.S. GAAP, and are marked to market through earnings. These contracts totaled 76,000 mt at September 30, 2004. Additionally, in the second quarter of 2004, Alcoa entered into a long-term power supply contract that provides for increased pricing if the LME exceeds a certain price. The LME linked pricing feature in this contract is considered an embedded derivative and is also marked to market through earnings. The impact to earnings for these mark to market derivatives was a gain of $1 in the third quarter of 2004 and a loss of $1 in the 2004 nine-month period.

 

Alcoa purchases natural gas, fuel oil, and electricity to meet its production requirements. These purchases expose the company to the risk of higher prices. To hedge a portion of this risk, Alcoa enters into long positions, principally using futures contracts. Alcoa follows a stable pattern of purchasing these commodities; therefore, it is highly likely that anticipated purchases will occur. The fair value of these contracts was a gain of approximately $128 (pre-tax) at September 30, 2004.

 

Financial Risk

 

Currencies - Alcoa is subject to exposure from fluctuations in foreign currencies. Foreign currency exchange contracts may be used from time to time 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 $11 (pre-tax) at September 30, 2004. These contracts are principally related to foreign exchange and inflation exposure in Brazil.

 

Interest Rates - Alcoa uses interest rate swaps to help maintain a strategic balance between fixed- and floating-rate debt and to manage overall financing costs. The company has entered into pay floating, receive fixed interest rate swaps to change the interest rate risk exposure of its outstanding debt. The fair value of these swaps was a loss of approximately $15 (pre-tax) at September 30, 2004.

 

Alcoa previously used interest rate swaps to establish fixed interest rates on anticipated borrowings between June 2005 and June 2006. Due to a change in forecasted borrowing requirements, resulting from the early retirement of debt in June 2004 and a forecasted increase in future operating cash flows resulting from improved market conditions, it is no longer probable that the anticipated borrowings will occur in 2005 and 2006. Therefore, Alcoa recognized $33 of gains that had been deferred on previously settled swaps and $44 of additional gains to unwind the remaining interest rate swaps. These gains were recorded in other income in the second quarter of 2004. See Note B in Part I, Item I for additional information.

 

Material Limitations - The disclosures with respect to commodity prices, interest rates, and foreign exchange risk do not take into account the underlying commitments or anticipated transactions. If the underlying items were included in the analysis, the gains or losses on the futures 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 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.

 

24


Item 4. Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures

 

Alcoa’s Chief Executive Officer and Chief Financial Officer have evaluated the company’s disclosure controls and procedures as of the end of the period covered by this report, and they have concluded that these controls and procedures are effective.

 

(b) Changes in Internal Control Over Financial Reporting

 

There have been no significant changes in internal control over financial reporting that occurred during the quarter ended September 30, 2004, that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

25


PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

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, and Alcoa and Region VI of the EPA entered into an administrative order on consent, EPA docket no. 6-11-94, concerning the site. The administrative order required the company to conduct a remedial investigation and feasibility study under EPA oversight. Following submission by the company of all required information, in December 2001, the EPA issued its Record of Decision selecting the final remedial approach for the site, which is fully reserved. In addition, 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. Alcoa does not believe that any additional liability for this site is reasonably possible. The company and the responsible federal and state government agencies have now negotiated Consent Orders to implement the remedial and restoration remedies. Following signature by the company and the agencies, entry of the Consent Orders in federal court is anticipated during the fourth quarter of 2004.

 

26


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

(c) Issuer Purchases of Equity Securities:

 

Period


  

Total

Number

of Shares
Purchased

(a)


  

Average
Price

Paid

Per
Share


   Total Number of
Shares Purchased
as Part of Publicly
Announced
Repurchase Plans
or Programs (b)


  

Maximum Number

(or Approximate
Dollar Value)

of Shares that May
Yet Be Purchased
Under the Plans or
Programs (b)


January 1 - January 31, 2004

   674,679    $ 36.49    —      32,311,636

February 1 - February 29, 2004

   998,718      37.82    900,000    31,411,636

March 1 - March 31, 2004

   1,013,749      38.08    877,354    30,534,282
    
  

  
  

Total for quarter ended March 31, 2004

   2,687,146      37.58    1,777,354    30,534,282
    
  

  
  

April 1 - April 30, 2004

   2,712      35.23    —      30,534,282

May 1 - May 31, 2004

   —        —      —      30,534,282

June 1 - June 30, 2004

   23,654      32.11    —      30,534,282
    
  

  
  

Total for quarter ended June 30, 2004

   26,366      32.43    —      30,534,282
    
  

  
  

July 1 - July 31, 2004

   21,598      31.97    —      30,534,282

August 1 - August 31, 2004

   11,778      32.14    —      30,534,282

September 1 - September 30, 2004

   31,048      32.31    —      30,534,282
    
  

  
  

Total for quarter ended September 30, 2004

   64,424      32.17    —      30,534,282
    
  

  
  

(a) This column includes (i) purchases under Alcoa’s publicly announced share repurchase program described in (b) below and (ii) the deemed surrender to the company by plan participants of shares of common stock to satisfy the exercise price related to the exercise of employee stock options, in each case to the extent applicable during the period indicated. The shares used to satisfy the exercise price related to stock options are not considered part of the publicly announced share repurchase program approved by Alcoa’s Board of Directors as described in (b) below.
(b) Alcoa’s share repurchase program was approved by Alcoa’s Board of Directors and publicly announced on July 13, 2001. The program authorizes the repurchase of up to 50 million shares of Alcoa common stock from time to time, directly or through brokers or agents, and has no expiration date.

 

27


Item 6. Exhibits.

 

(a) Exhibits

 

10a.    Form of Agreement for Stock Option Awards under the 2004 Alcoa Stock Incentive Plan
10b.    Form of Agreement for Stock Awards under the 2004 Alcoa Stock Incentive Plan
10c.    Form of Agreement for Performance Share Awards under the 2004 Alcoa Stock Incentive Plan
10d.    Alcoa Inc. Rules for Stock Option Awards revised January 1, 2004
10e.    Alcoa Inc. Rules for Stock Awards effective January 1, 2004
10f.    Alcoa Inc. Rules for Performance Share Awards effective January 1, 2004
10g.    2004 Summary Description of the Alcoa Incentive Compensation Plan
10h.    Amended and Restated Dividend Equivalent Compensation Plan
12.    Computation of Ratio of Earnings to Fixed Charges
15.    Letter regarding unaudited interim financial information
31.    Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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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.

October 26, 2004

Date

  By  

/s/ RICHARD B. KELSON


        Richard B. Kelson
        Executive Vice President and
        Chief Financial Officer
        (Principal Financial Officer)

October 26, 2004

Date

  By  

/s/ CHARLES D. MCLANE, JR.


        Charles D. McLane, Jr.
        Vice President - Corporate Controller
        (Principal Accounting Officer)

 

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EXHIBITS

 

10a.    Form of Agreement for Stock Option Awards under the 2004 Alcoa Stock Incentive Plan
10b.    Form of Agreement for Stock Awards under the 2004 Alcoa Stock Incentive Plan
10c.    Form of Agreement for Performance Share Awards under the 2004 Alcoa Stock Incentive Plan
10d.    Alcoa Inc. Rules for Stock Option Awards revised January 1, 2004
10e.    Alcoa Inc. Rules for Stock Awards effective January 1, 2004
10f.    Alcoa Inc. Rules for Performance Share Awards effective January 1, 2004
10g.    2004 Summary Description of the Alcoa Incentive Compensation Plan
10h.    Amended and Restated Dividend Equivalent Compensation Plan
12.    Computation of Ratio of Earnings to Fixed Charges
15.    Letter regarding unaudited interim financial information
31.    Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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