FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2001 Commission File Number 1-3610
ALCOA INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0317820
(State of incorporation) (I.R.S. Employer Identification No.)
201 Isabella Street, Pittsburgh, Pennsylvania 15212-5858
(Address of principal executive offices) (Zip Code)
Office of Investor Relations 212-836-2674
Office of the Secretary 412-553-4707
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
As of October 19, 2001, 849,303,285 shares of common stock, par value
$1.00 per share, of the Registrant were outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. - Financial Statements.
Alcoa and subsidiaries
Condensed Consolidated Balance Sheet
(in millions)
(unaudited)
September 30 December 31
2001 2000
-------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 472 $ 315
Short-term investments 12 56
Receivables from customers, less allowances of
$90 in 2001 and $69 in 2000 2,905 3,461
Other receivables 300 354
Inventories (C) 2,847 2,703
Deferred income taxes 370 385
Prepaid expenses and other current assets 587 304
------- -------
Total current assets 7,493 7,578
------- -------
Properties, plants and equipment, at cost 22,165 22,600
Less: accumulated depreciation, depletion and
amortization 10,150 9,750
------- -------
Net properties, plants and equipment 12,015 12,850
------- -------
Goodwill, net of accumulated amortization of $478 in
2001 and $344 in 2000 5,754 6,003
Other assets, including assets held for sale (H) 3,407 5,260
------- -------
Total assets $28,669 $31,691
======= =======
LIABILITIES
Current liabilities:
Short-term borrowings $ 87 $ 2,719
Accounts payable, trade 1,626 1,876
Accrued compensation and retirement costs 808 928
Taxes, including taxes on income 747 702
Other current liabilities 1,500 1,302
Long-term debt due within one year 216 427
------- -------
Total current liabilities 4,984 7,954
------- -------
Long-term debt, less amount due within one year (D) 6,114 4,987
Accrued postretirement benefits 2,532 2,719
Other noncurrent liabilities and deferred credits 2,176 2,126
Deferred income taxes 780 969
------- -------
Total liabilities 16,586 18,755
------- -------
MINORITY INTERESTS 1,265 1,514
------- -------
CONTINGENT LIABILITIES (E) - -
SHAREHOLDERS' EQUITY
Preferred stock 56 56
Common stock 925 925
Additional capital 6,116 5,927
Retained earnings 7,658 7,127
Treasury stock, at cost (2,618) (1,717)
Accumulated other comprehensive loss (F and J) (1,319) (896)
------- -------
Total shareholders' equity 10,818 11,422
-------- -------
Total liabilities and equity $28,669 $31,691
======== =======
The accompanying notes are an integral part of the financial statements.
2
Alcoa and subsidiaries
Condensed Statement of Consolidated Income (unaudited)
(in millions, except per share amounts)
Third quarter ended Nine months ended
September 30 September 30
------------ ------------
2001 2000 2001 2000 *
---- ---- ---- ----
Sales $ 5,511 $ 6,298 $ 17,678 $ 16,376
-------- -------- -------- --------
Cost of goods sold 4,228 4,798 13,548 12,328
Selling, general administrative
and other expenses 273 314 922 813
Research and development expenses 47 47 151 134
Provision for depreciation,
depletion and amortization 309 350 939 865
Special items (B) - - 212 -
Interest expense 85 141 293 287
Other expense (income), net 3 (46) (196) (139)
-------- -------- -------- --------
4,945 5,604 15,869 14,288
-------- -------- -------- --------
Income before taxes on income 566 694 1,809 2,088
Provision for taxes on income 175 235 579 710
-------- -------- -------- --------
Income from operations 391 459 1,230 1,378
Less: Minority interests' share 52 91 180 281
-------- -------- -------- --------
Income before accounting change 339 368 1,050 1,097
Cumulative effect of accounting change
for revenue recognition (J) - - - (5)
-------- -------- -------- --------
NET INCOME $ 339 $ 368 $ 1,050 $ 1,092
======== ======== ======== ========
EARNINGS PER SHARE (G)
Basic $ .40 $ .42 $ 1.22 $ 1.36
======== ======== ======== ========
Diluted $ .39 $ .42 $ 1.21 $ 1.35
======== ======== ======== ========
Dividends paid per common share $ .150 $ .125 $ .450 $ .375
======== ======== ======== ========
The accompanying notes are an integral part of the financial statements.
*Restated, see Note J
3
Alcoa and subsidiaries
Condensed Statement of Consolidated Cash Flows (unaudited)
(in millions)
Nine months ended
September 30
--------------
2001 2000 *
--------- -----------
CASH FROM OPERATIONS
Net income $ 1,050 $ 1,092
Adjustments to reconcile net income to cash from operations:
Depreciation, depletion and amortization 949 874
Change in deferred income taxes (15) 42
Equity income, net of dividends (43) (57)
Noncash special items 196 -
Gains from investing activities - sale of assets (91) (7)
Minority interests 180 281
Accounting change - 5
Other (43) 14
Changes in assets and liabilities, excluding effects of acquisitions and
divestitures:
Reduction (increase) in receivables 364 (118)
Increase in inventories (217) (17)
Increase in prepaid expenses and other
current assets (134) (166)
Reduction in accounts payable and accrued expenses (438) (267)
Increase in taxes, including taxes on income 160 289
Net change in noncurrent assets and liabilities (190) (57)
--------- ----------
CASH PROVIDED FROM OPERATIONS 1,728 1,908
--------- ----------
FINANCING ACTIVITIES
Net changes to short-term borrowings (2,625) 1,856
Common stock issued for stock compensation plans 555 182
Repurchase of common stock (1,338) (730)
Dividends paid to shareholders (390) (310)
Dividends paid to minority interests (245) (192)
Net change in commercial paper (144) 849
Additions to long-term debt 1,985 1,703
Payments on long-term debt (803) (1,689)
--------- ----------
CASH (USED FOR) PROVIDED FROM FINANCING ACTIVITIES (3,005) 1,669
--------- ----------
INVESTING ACTIVITIES
Capital expenditures (813) (740)
Acquisitions, net of cash acquired (I) (126) (2,745)
Proceeds from the sale of assets 2,485 22
Additions to investments (87) (37)
Changes in short-term investments 45 (14)
Other (10) (9)
--------- ----------
CASH PROVIDED FROM (USED FOR) INVESTING ACTIVITIES 1,494 (3,523)
--------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (60) (7)
--------- ----------
Net change in cash and cash equivalents 157 47
Cash and cash equivalents at beginning of year 315 237
--------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 472 $ 284
========= ==========
The accompanying notes are an integral part of the financial statements.
* Restated, see Note J
4
Notes to Condensed Consolidated Financial Statements
(dollars and shares in millions, except per share amounts)
A. Basis of Presentation - The Condensed Consolidated Financial Statements are
unaudited. These statements include all adjustments, consisting of normal
recurring accruals, considered necessary by management to fairly present the
results of operations, financial position and cash flows. The results reported
in these 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, 2000.
B. Special Items and Other Charges- In the second quarter of 2001, Alcoa
recorded a charge of $212 ($114 after tax and minority interest) as part of its
ongoing segment review to optimize assets and lower costs. This charge consisted
of asset write-downs ($172 pre-tax), employee termination and severance costs
($32 pre-tax) and exit costs ($8 pre-tax). The charge was primarily due to
actions taken in Alcoa's Primary Products businesses (within the Alumina and
Chemicals segment and the Primary Metals segment) because of economic and
competitive conditions. These actions include the shutdown of the company's
magnesium plant in Addy, Washington and closing the company's alumina refinery
on St. Croix, U.S. Virgin Islands, its smelter in Suriname, and a chemical plant
located in Louisiana.
Asset write-downs of $172 were recorded as a direct result of the
company's decision to close certain operations, as well as the closing of
MetalSpectrum, the online marketplace for specialty metals in which Alcoa had an
investment. The asset write-downs, primarily consisting of structures, machinery
and equipment, and associated selling costs, were based on management's
estimates of salvage value and anticipated proceeds upon sale of certain of the
affected assets. The remaining carrying amount of these long-term assets was
approximately $10 at September 30, 2001. These assets were removed from service
in October 2001 and will be sold or vacated by mid-2002. The results of
operations related to these assets were not material.
Employee termination and severance costs of $32 were recorded as
management implemented workforce reductions of approximately 3,100 employees at
various manufacturing facilities-primarily located outside of the U.S.-due to
weak market conditions, and approximately 320 additional employees as a direct
result of the shutdowns mentioned above. These workforce reductions primarily
consisted of a combination of early retirement incentives and involuntary
severance programs. As of September 30, 2001, approximately $11 of the severance
costs had been paid and 2,700 employees had been terminated.
The remaining $8 of the special items charge relates to exit cost
activities associated with the shutdowns above, which will be substantially
complete by mid-2002. As of September 30, 2001, approximately $5 of the exit
costs had been paid.
In the third quarter of 2001, Alcoa recorded a charge of $21 (pre-tax)
to cost of goods sold under a voluntary retirement incentive and severance
program offered to and accepted by approximately 280 employees at one of its
Northwestern U.S. smelters. Pursuant to an agreement for the sale of power at
this facility, Alcoa has reflected a reimbursement from the power supplier of
$21 for these employee-related costs. Severance payments related to this program
began in October 2001.
C. Inventories
September 30 December 31
2001 2000
------------ ----------
Finished goods $ 863 $ 814
Work in process 845 806
Bauxite and alumina 408 311
Purchased raw materials 557 562
Operating supplies 174 210
------- -------
$ 2,847 $ 2,703
======= =======
Approximately 51% of total inventories at September 30, 2001, was valued
on a LIFO basis. If valued on an average cost basis, total inventories would
have been $651 and $658 higher at September 30, 2001, and December 31, 2000,
respectively.
5
D. Long-Term Debt - On May 23, 2001, Alcoa issued $1,500 of callable notes. Of
these notes, $1,000 mature in 10 years and carry a coupon rate of 6.50%, and
$500 mature in 5 years and carry a coupon rate of 5.875%. The proceeds from
these borrowings were used to refinance debt and for general corporate purposes.
In 2000, Alcoa entered into a $2,490 revolving-credit facility that expired
in April 2001 and a $510 revolving credit-facility that expires in April 2005.
In April 2001, these facilities were refinanced into a $2,000 revolving credit
agreement that expires in April 2002 and a $1,000 revolving credit agreement
that expires in April 2005.
E. 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 might 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 material
adverse impact on the financial position of the company.
Alcoa Aluminio S.A. (Aluminio) is a participant in a hydroelectric
construction project in Brazil and has guaranteed up to 36% of the project's
total debt of approximately $300. As of September 30, 2001, all of the long-term
financing for the project had been obtained. If other participants fail to meet
obligations, Aluminio may be required to fund a portion of the deficiency and
would be entitled to an increase in the output of the project. The project is
scheduled to begin operating in February 2002.
F. Comprehensive Income
Third quarter Nine months
ended ended
September 30 September 30
------------ ------------
2001 2000 2001 2000*
------- ------ ------- ------
Net income $ 339 $ 368 $ 1,050 $1,092
Other comprehensive loss:
Unrealized translation adjustments (42) (181) (258) (301)
Unrealized gains/(losses) on derivatives:
Cumulative effect of accounting change - - (4) -
Net change from periodic revaluations (69) - (183) -
Net amount reclassified to income 32 - 22 -
------- ------- ------- ------
Total unrealized gains/(losses) on derivatives (37) - (165) -
------- ------- ------- ------
Comprehensive income $ 260 $ 187 $ 627 $ 791
======= ======= ======= ======
* Restated, see Note J
6
G. Earnings Per Share - The detail of basic and diluted EPS follows:
Third quarter ended Nine months ended
September 30 September 30
------------ ------------
2001 2000 2001 2000*
---- ---- ---- -----
Income before cumulative effect $ 339 $ 368 $1,050 $1,097
Less: Preferred stock dividends 1 1 2 2
------ ------ ------ ------
Income available to common stockholders
before cumulative effect 338 367 1,048 1,095
Cumulative effect of accounting change - - - (5)
------ ------ ------ ------
Income available to common stockholders
after cumulative effect $ 338 $ 367 $1,048 $1,090
====== ====== ====== ======
Average shares outstanding - basic 856 866 861 799
Effect of dilutive securities:
Shares issuable upon exercise of
dilutive outstanding stock options 8 8 9 9
------ ------ ------ ------
Average shares outstanding - diluted 864 874 870 808
Basic EPS (before cumulative effect) $ .40 $ .42 $ 1.22 $ 1.37
====== ====== ====== ======
Basic EPS (after cumulative effect) $ .40 $ .42 $ 1.22 $ 1.36
====== ====== ====== ======
Diluted EPS (before cumulative effect) $ .39 $ .42 $ 1.21 $ 1.36
====== ====== ====== ======
Diluted EPS (after cumulative effect) $ .39 $ .42 $ 1.21 $ 1.35
====== ====== ====== ======
* Restated, see Note J
Options to purchase 33 shares of common stock at an average exercise
price of $40.00 were outstanding as of September 30, 2001, 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.
H. Acquisitions and Divestitures - In May of 2000, Alcoa completed a merger with
Reynolds Metals Company (Reynolds) by issuing approximately 135 shares of Alcoa
common stock. The transaction was valued at approximately $5,900, including debt
assumed of $1,297. The goodwill of approximately $2,100 resulting from the
purchase price allocation is being amortized over a 40-year period.
As part of the merger with Reynolds, Alcoa agreed to divest Reynolds'
interests in the alumina refineries in Worsley, Australia; Stade, Germany; and
Sherwin, Texas as well as 25% of Reynolds' interest in the aluminum smelter
located in Longview, Washington. Under current accounting requirements, the fair
values of the net assets to be divested were reported as assets held for sale in
the balance sheet and the results of operations were not included in the
statement of income. The sale of Sherwin was completed in December 2000; the
sales of Worsley and 100% of Longview were completed in the first quarter of
2001; and the sale of Stade was completed in the second quarter of 2001.
In May and June of 2000, Alcoa completed the acquisitions of Cordant
Technologies Inc. (Cordant) and Howmet International Inc., a majority owned
company of Cordant. The transactions were valued at approximately $3,300,
including debt assumed of $826. The goodwill of approximately $2,500 resulting
from the above transactions is being amortized over a 40-year period.
7
The following unaudited pro forma information assumes that the
acquisitions of Reynolds and Cordant had occurred at the beginning of 2000.
Adjustments that have been made to arrive at the pro forma totals primarily
include those related to acquisition financing, the amortization of goodwill,
the elimination of transactions between Alcoa, Reynolds, and Cordant, and
additional depreciation related to the increase in basis that resulted from the
transactions. Tax effects from the pro forma adjustments noted above also have
been included at the 35% U.S. statutory rate.
Nine months ended
September 30, 2000
------------------
Sales $19,180
Net Income 1,145
Basic EPS $ 1.32
=======
Diluted EPS $ 1.31
=======
The pro forma results are not necessarily indicative of what actually
would have occurred if the transactions had been in effect for the entire period
presented, are not intended to be a projection of future results, and do not
reflect any cost savings that might have been achieved from the combined
operations.
Alcoa completed a number of other acquisitions in 2001 and 2000. None of
these transactions had a material impact on Alcoa's financial statements.
On April 20, 2001, Alcoa sold Thiokol, a business acquired in the
Cordant transaction, to Alliant Techsystems Inc. for $685 in cash and recognized
a $38 pre-tax gain.
I. Cash Flow Information - The details of cash payments related to acquisitions
follow.
Nine months ended
September 30, 2000
------------------
Fair value of assets acquired $14,519
Liabilities assumed (7,021)
Stock issued (4,649)
-------
Cash paid 2,849
Less: cash acquired (104)
-------
Net cash paid for acquisitions $ 2,745
=======
J. Recently Adopted Accounting Standards - In 2000, Alcoa changed its method of
accounting for revenue recognition in accordance with Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements." Under the new accounting
method, adopted retroactive to January 1, 2000, Alcoa recognizes revenue upon
the passage of title, ownership and risk of loss to the customer. The cumulative
effect adjustment of $43 in revenue ($5 in net income) as of January 1, 2000,
was recognized during the first quarter of 2000. The nine months ended September
30, 2000, amounts have been restated for the effect of the change in accounting
for revenue recognition. Amounts originally reported were as follows: Sales,
$16,398; Income from operations, $1,381; Net income, $1,100; Earnings per share,
basic $1.37 and diluted, $1.36.
Effective January 1, 2001, Alcoa adopted Statement of Financial
Accounting Standards (SFAS) No. 133 "Accounting for Derivative Instruments and
Hedging Activities," as amended. The fair values of all outstanding derivative
instruments are now recorded on the balance sheet. The transition adjustment on
January 1, 2001, resulted in a net charge of $4 (after tax and minority
interest), which was recorded in other comprehensive income.
Derivatives are held as part of a formally documented risk management
(hedging) program and are held for purposes other than trading. Alcoa measures
hedge effectiveness by formally assessing, at least quarterly, the historical
and probable future high correlation of changes in the fair value or expected
future cash flows of the hedged item. The ineffective portions are recorded in
other income or expense in the current period and are not material. If the
hedging relationship ceases to be highly effective or it becomes probable that
an expected transaction will no longer occur, gains or losses on the derivative
are recorded in other income or expense (none in 2001).
Changes in the fair value of derivatives are recorded in current
earnings if the derivative is designated as a fair value hedge or in other
comprehensive income if the derivative is designated as a cash flow hedge.
8
Fair Value Hedges
-----------------
Aluminum
--------
Customers often require Alcoa to enter into long-term fixed-price
commitments. These commitments expose Alcoa to the risk of fluctuating
aluminum prices between the time the order is committed and the time
that the order is shipped. Alcoa's commodity risk management policy is
to hedge, through the use of futures and option contracts, the aluminum
price risk for a portion of its firm commitments. These contracts cover
exposures, generally within three years.
Interest Rates
--------------
Alcoa attempts to maintain a reasonable balance between fixed- and
floating-rate debt and uses interest rate swaps to manage this balance.
The company has entered into pay floating, receive fixed interest rate
swaps to effectively convert the interest rate from fixed to floating on
$2,250 of debt.
Hedges of these existing assets, liabilities and firm commitments
qualify as "fair value" hedges. As a result, the fair values of derivatives and
changes in the fair values of the underlying hedged items are reported in the
balance sheet. Changes in the fair values of these derivatives and underlying
hedged items generally offset and are recorded each period in sales or interest
expense. There were no transactions that ceased to qualify as a fair value hedge
in 2001.
Cash Flow Hedges
----------------
Currencies
----------
Alcoa is subject to exposure from fluctuations in foreign currencies.
Foreign currency exchange contracts are used to hedge the variability in
cash flows from the forecasted payment or receipt of currencies other
than the functional currency.
Commodities
-----------
Alcoa may elect to sell forward a portion of its anticipated primary
aluminum and alumina production. In addition, Alcoa anticipates the
continued requirement to purchase aluminum and other commodities such as
natural gas, fuel oil and electricity for its operations. Alcoa enters
into futures and options contracts to reduce volatility in the price of
these commodities.
Interest Rates
--------------
In addition to fair value interest rate hedges, Alcoa has also entered
into pay fixed, receive floating interest rate swaps to hedge the
interest rate risk exposure of forecasted interest payments on $163 of
variable rate debt.
For these cash flow hedge transactions, the fair values of the
derivatives are recorded on the balance sheet. The effective portion of the
changes in the fair values of these derivatives are recorded in other
comprehensive income and are reclassified to sales, cost of goods sold or
interest expense in the period in which earnings are impacted by the hedged
items or in the period that the transaction no longer qualifies as a cash flow
hedge (none in 2001). These contracts cover periods commensurate with known or
expected exposures, generally within three years. Assuming market rates remain
constant with the rates at September 30, 2001, $109 of the $165 loss included in
other comprehensive income is expected to be recognized in earnings over the
next twelve months.
9
K. Recently Issued Accounting Standards - In June 2001, the Financial Accounting
Standards Board (FASB) issued SFAS No. 141 "Business Combinations" and SFAS No.
142 "Goodwill and Other Intangible Assets." These standards require that all
business combinations be accounted for using the purchase method and that
goodwill and intangible assets with indefinite useful lives should not be
amortized but should be tested for impairment at least annually, and they
provide guidelines for new disclosure requirements. These standards outline the
criteria for initial recognition and measurement of intangibles, assignment of
assets and liabilities including goodwill to reporting units and goodwill
impairment testing. Additionally, under the provisions of these standards, the
unamortized balance of negative goodwill will be written off and recognized as a
change in accounting principle. The provisions of SFAS Nos. 141 and 142 apply to
all business combinations after June 30, 2001. The provisions of SFAS No. 142
for existing goodwill and other intangible assets are required to be implemented
effective January 1, 2002. The company is currently evaluating the impact of
SFAS No. 142 on the consolidated financial statements.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations." This statement establishes standards for accounting for
obligations associated with the retirement of tangible long-lived assets. The
standard is required to be adopted by Alcoa beginning on January 1, 2003.
Management is currently assessing the details of the standard and is preparing a
plan of implementation.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement addresses financial
accounting and reporting for the impairment and disposal of long-lived assets.
This standard is required to be adopted by Alcoa beginning on January 1, 2002.
Management is currently assessing the details of this standard and is preparing
a plan of implementation.
L. Reclassifications - Certain amounts have been reclassified to conform to
current year presentation.
M. 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, 2001 and 2000. For more information on segments, see
Management's Discussion and Analysis and the segment disclosures included in
Alcoa's Form 10-K for the year ended December 31, 2000.
Segment Information: Alumina Flat- Engi- Pack-
& Chem- Primary Rolled neered aging &
icals Metals Products Products Consumer Other Total
Third quarter ended
September 30, 2001
Sales:
Third-party sales $ 454 $ 808 $ 1,219 $ 1,514 $ 671 $ 845 $ 5,511
Intersegment sales 246 839 20 9 - - 1,114
------ ------ ------- ------- ------ ------ -------
Total sales $ 700 $1,647 $ 1,239 $ 1,523 $ 671 $ 845 $ 6,625
====== ====== ======= ======= ====== ====== =======
After-tax operating income $ 115 $ 216 $ 59 $ 62 $ 47 $ 4 $ 503
====== ====== ======= ======= ====== ====== =======
Third quarter ended
September 30, 2000
Sales:
Third-party sales $ 529 $1,049 $ 1,361 $ 1,586 $ 631 $1,142 $ 6,298
Intersegment sales 294 936 29 18 - - 1,277
------ ------ ------- ------- ------ ------ -------
Total sales $ 823 $1,985 $ 1,390 $ 1,604 $ 631 $1,142 $ 7,575
====== ====== ======= ======= ====== ====== =======
After-tax operating income $ 146 $ 254 $ 83 $ 49 $ 38 $ 39 $ 609
====== ====== ======= ======= ====== ====== =======
Nine months ended
September 30, 2001
Sales:
Third-party sales $1,491 $2,747 $ 3,817 $ 4,689 $2,018 $2,916 $17,678
Intersegment sales 804 2,593 51 26 - - 3,474
------ ------ ------- ------- ------ ------ -------
Total sales $2,295 $5,340 $ 3,868 $ 4,715 $2,018 $2,916 $21,152
====== ====== ======= ======= ====== ====== =======
After-tax operating income $ 411 $ 774 $ 198 $ 162 $ 137 $ 99 $ 1,781
====== ====== ======= ======= ====== ====== =======
Nine months ended
September 30, 2000 *
Sales:
Third-party sales $1,584 $2,512 $ 4,159 $ 3,935 $1,358 $2,828 $16,376
Intersegment sales 818 2,618 71 46 - - 3,553
------ ------ ------- ------- ------ ------ -------
Total sales $2,402 $5,130 $ 4,230 $ 3,981 $1,358 $2,828 $19,929
====== ====== ======= ======= ====== ====== =======
After-tax operating income $ 441 $ 706 $ 230 $ 164 $ 90 $ 115 $ 1,746
====== ====== ======= ======= ====== ====== =======
10
The following table reconciles segment information to consolidated totals.
Third quarter ended Nine months ended
September 30 September 30
------------ ------------
2001 2000 2001 2000 *
------- ------- -------- --------
Total after-tax operating income $ 503 $ 609 $ 1,781 $ 1,746
Impact of intersegment profit eliminations (14) 7 (18) 16
Unallocated amounts (net of tax):
Interest income 10 4 30 30
Interest expense (55) (85) (191) (187)
Minority interests (52) (91) (180) (281)
Corporate expense (45) (66) (177) (173)
Special items - - (148) -
Other (8) (10) (47) (59)
------- ------- -------- --------
Consolidated net income $ 339 $ 368 $ 1,050 $ 1,092
======= ======= ======== ========
* Restated, see Note J
The following table represents segment assets.
Segment assets: September 30 December 31
2001 2000
------------ -----------
Alumina and chemicals $ 2,722 $ 2,924
Primary metals 7,238 7,700
Flat-rolled products 3,565 3,657
Engineered products 6,526 6,455
Packaging and consumer 2,579 2,457
Other 2,238 3,376
--------- --------
Total Segment Assets $ 24,868 $ 26,569
========= ========
The change in segment assets within the Other group is primarily due to the
sale of Thiokol in April 2001.
11
Report of Independent Accountants
---------------------------------
To the Shareholders and Board of Directors
Alcoa Inc. (Alcoa)
We have reviewed the accompanying unaudited condensed consolidated
balance sheet of Alcoa and subsidiaries as of September 30, 2001, and the
unaudited condensed statement of consolidated income for the three-month
and nine-month periods ended September 30, 2001 and 2000, and the
unaudited condensed statement of consolidated cash flows for the
nine-month periods ended September 30, 2001 and 2000, which are included
in Alcoa's Form 10-Q for the period ended September 30, 2001. These
financial statements are the responsibility of Alcoa's management.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with auditing standards generally
accepted in the United States of America, the objective of which is the
expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the condensed consolidated interim financial
statements referred to above for them to be in conformity with accounting
principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards
generally accepted in the United States of America, the consolidated
balance sheet of Alcoa and subsidiaries as of December 31, 2000, and the
related statements of consolidated income, shareholders' equity, and cash
flows for the year then ended (not presented herein). In our report dated
January 8, 2001, except for Note U, for which the date is January 31,
2001, 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, 2000, is fairly
stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
October 4, 2001
12
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(dollars and shares 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 discussion of some of the specific factors that may cause such a
difference, see Note E to the financial statements; the disclosures included
below under Segment Information, Market Risks and Environmental Matters; and the
Business section and Management's Discussion and Analysis in Alcoa's Form 10-K
for the year ended December 31, 2000.
Results of Operations
Principal income and operating data follow.
Third quarter ended Nine months ended
September 30 September 30
------------ ------------
2001 2000 2001 2000 *
--------- --------- --------- --------
Sales $ 5,511 $ 6,298 $ 17,678 $ 16,376
Net income 339 368 1,050 1,092
Basic earnings per common share $ .40 $ .42 $ 1.22 $ 1.36
Diluted earnings per common share $ .39 $ .42 $ 1.21 $ 1.35
Shipments of aluminum products (mt) 1,212 1,419 3,824 3,913
Shipments of alumina (mt) 1,789 1,893 5,550 5,527
Alcoa's average realized ingot price $ .71 $ .77 $ .74 $ .77
Average 3-month LME price $ .64 $ .72 $ .68 $ .72
* Restated, see Note J to the financial statements
___________________
Earnings Summary
Alcoa reported quarterly earnings in the 2001 third quarter and 2001
nine-month period of $339 and $1,050, respectively, a decrease of 8% and 4%,
when compared to the corresponding 2000 periods. For the quarter, lower prices
and lower volumes due to weak end markets in the U.S. and Europe, as well as
production cutbacks in refining and smelting were partly offset by continued
cost-reduction efforts. Year-to-date 2001 earnings include special charges of
$114 (after tax and minority interest). Excluding special charges, net income
grew to $1,164 or 7% year-over-year as continued cost savings coupled with
additional volumes due to acquisitions and gains on the sales of businesses and
power outweighed unfavorable price variances and weak market conditions.
Third quarter 2001 sales decreased 13% versus the 2000 third quarter,
while on a year-to-date basis sales rose 8% over the corresponding 2000 period.
The quarter-over-quarter decrease resulted from lower shipment volumes due to
continued weakness in the transportation, building and construction and
industrial products markets, as well as lower realized metal and alumina prices.
The year-over-year increase resulted from higher shipment volumes due to
acquisitions as well as power sales, offset by lower realized metal and alumina
prices and lower demand from the aforementioned markets.
Annualized return on shareholders' equity was 12.6% (13.6% excluding
special items) for the 2001 nine-month period, compared with 17.0% for the 2000
period. The decrease was due to a larger average number of shares outstanding
during the 2001 period primarily resulting from the Reynolds acquisition, the
special items recorded in the 2001 second quarter and the earnings declines
mentioned above.
Cost of goods sold as a percentage of sales in the 2001 third quarter and
nine-month period was 76.7% and 76.6%, respectively, versus 76.2% and 75.3% in
the corresponding 2000 periods. The higher percentage for the 2001 nine-month
period was due to the relatively higher cost of sales ratios of the acquired
13
Reynolds and Cordant businesses as well as lower sales volumes in 2001, offset
somewhat by cost-cutting efforts.
Selling and general administrative expenses (S&GA) were down $41 from the
2000 third quarter, while on a year-to-date basis, S&GA was up $109 from the
2000 nine-month period. The quarter-over-quarter decrease is due to lower
employee benefit costs in 2001 as well as cost reductions. The year-over-year
increase was due to Reynolds and Cordant costs which were not present in the
entire corresponding 2000 period results. S&GA as a percentage of sales was 5.0%
and 5.2% for the 2001 third quarter and nine-month period, respectively, versus
5.0% in each of the corresponding 2000 periods.
Research and development expenses increased $17 over the 2000 nine-month
period, while remaining constant quarter-over-quarter. The increase in the 2001
year-to-date period is due to spending at Reynolds and Cordant that was not
present in the entire corresponding 2000 period results, as well as the timing
of project expenses.
In the second quarter of 2001, Alcoa recorded a charge of $212 ($114 after
tax and minority interest) as part of its ongoing segment review to optimize
assets and lower costs. This charge consisted of asset write-downs ($172 pre-
tax), employee termination and severance costs ($32 pre-tax) and exit costs ($8
pre-tax). The charge was primarily due to actions taken in Alcoa's Primary
Products businesses (within the Alumina and Chemicals segment and the Primary
Metals segment) because of economic and competitive conditions. These actions
include the shutdown of the company's magnesium plant in Addy, Washington and
closing the company's alumina refinery on St. Croix, U.S. Virgin Islands, its
smelter in Suriname, and a chemical plant located in Louisiana.
Interest expense was down $56 from the 2000 third quarter due to lower
interest rates as well as lower average debt levels.
Other income decreased $49 in the 2001 third quarter and increased $57 in
the 2001 nine-month period versus the comparable 2000 periods. Quarter-over-
quarter results were negatively impacted by $24 in foreign currency exchange
adjustments and $16 for cash surrender value on life insurance. The year-over-
year increase was primarily due to $80 higher gains on asset sales as well as
$18 increase in equity earnings, offset by a $22 reduction in cash surrender
value on life insurance and $13 lower mark-to-market gains.
Income taxes have been provided at a rate of 30.9% for the 2001 third
quarter and 32.0% for the 2001 nine-month period. These rates differ from the
statutory rate of 35.0% and the effective rate of 34.0% for the 2000 periods due
to taxes on foreign income, the sale of Thiokol and adjustments to prior year
taxes.
Minority interests' share of income from operations decreased 43% from the
2000 third quarter and 36% from the 2000 nine-month period. These decreases were
primarily due to lower income at Alcoa Fujikura Ltd. (AFL), Alcoa World Alumina
and Chemicals (AWAC), and Aluminio, as well as the impact of special charges of
$34 in the second quarter of 2001.
Segment Information
I. Alumina and Chemicals
Third quarter ended Nine months ended
September 30 September 30
------------ ------------
2001 2000 2001 2000
-------- -------- -------- --------
Alumina production 2,984 3,509 9,572 10,481
Third-party alumina shipments 1,789 1,893 5,550 5,527
Third-party sales $ 454 $ 529 $ 1,491 $ 1,584
Intersegment sales 246 294 804 818
-------- -------- -------- --------
Total sales $ 700 $ 823 $ 2,295 $ 2,402
======== ======== ======== ========
After-tax operating income $ 115 $ 146 $ 411 $ 441
======== ======== ======== ========
14
In the 2001 third quarter, this segment's third-party sales decreased
14% from the 2000 quarter due to 6% lower shipments and 11% lower realized
prices. For the 2001 nine-month period, third-party revenues decreased 6% due
mainly to lower prices. Intersegment sales in the 2001 third quarter decreased
16% over the 2000 third quarter primarily due to the curtailment of aluminum
production at smelters in the northwestern U.S.
ATOI for this segment in the 2001 third quarter and nine-month period
decreased 21% and 7%, respectively, from the corresponding 2000 periods. The
decreases were due to lower volumes, resulting from curtailments at Point
Comfort and Brazil and the shutdown of St. Croix, as well as lower prices,
offset by cost reductions.
Alumina demand is anticipated to remain weak due to continued smelter
curtailments and lower primary aluminum production. Pricing levels are projected
to be lower in the near term based on recent LME price levels.
II. Primary Metals
Third quarter ended Nine months ended
September 30 September 30
------------ ------------
2001 2000 2001 2000
------- ------- ------- -------
Aluminum production 846 965 2,654 2,556
Third-party aluminum shipments 448 574 1,418 1,406
Third-party sales $ 808 $ 1,049 $ 2,747 $ 2,512
Intersegment sales 839 936 2,593 2,618
------- ------- ------- -------
Total sales $ 1,647 $ 1,985 $ 5,340 $ 5,130
======= ======= ======= =======
After-tax operating income $ 216 $ 254 $ 774 $ 706
======= ======= ======= =======
Total third-party sales for this segment decreased 23% in the 2001 third
quarter and increased 9% in the 2001 nine-month period versus the corresponding
2000 periods. Lower shipments and lower prices contributed to the
quarter-over-quarter decrease, partially offset by power sales. The increase in
the year-over-year period was due to acquisitions as well as power sales,
partially offset by lower shipments from existing facilities and lower prices.
Alcoa's average realized third-party price for ingot declined 8% from the 2000
third quarter and 4% from the 2000 nine-month period.
Primary Metals 2001 third-quarter ATOI decreased 15%, while the
year-to-date ATOI increased 10% from the 2000 period. The decrease from
quarter-to-quarter was due to lower volumes and lower realized prices, partially
offset by power sales and cost reductions. The increase from year-to-year was
driven by acquisitions, which contributed approximately $60 for the nine-month
period as compared to the prior year period, as well as power sales and cost
reductions, partially offset by volume declines and lower prices. Power sales in
the Pacific Northwest, net of power and other contractually required costs and
the impact of lost aluminum sales, positively impacted the Primary Metals
segment by approximately $35 in each of the first and second quarters of 2001,
and approximately $14 in the third quarter of 2001.
The company entered into additional agreements to curtail production and
sell power during the second quarter of 2001, which significantly reduce the
realized price for power sales in the third and fourth quarters of 2001 to the
extent that Alcoa can only be reimbursed for employee related costs at the
curtailed facilities. The impact of the new agreements resulted in a reduction
in ATOI from the second quarter to the third quarter of $21, with an additional
decline of approximately $48 expected from the third quarter to the fourth
quarter of 2001.
For the full year 2001, the impact of the power sales agreements, after
considering the lost profits on aluminum sales and the costs of related
curtailments in the Alumina and Chemicals segment, is not expected to be
material.
Significant changes in the demand for primary aluminum are not
anticipated. Downward price pressure is expected in the near term based on
recent LME price levels.
15
III. Flat-Rolled Products
Third quarter ended Nine months ended
September 30 September 30
------------ ------------
2001 2000 2001 2000
------- ------- ------- -------
Third-party aluminum shipments 442 492 1,362 1,503
Third-party sales $ 1,219 $ 1,361 $ 3,817 $ 4,159
Intersegment sales 20 29 51 71
------- ------- ------- -------
Total sales $ 1,239 $ 1,390 $ 3,868 $ 4,230
======= ======= ======= =======
After-tax operating income $ 59 $ 83 $ 198 $ 230
======= ======= ======= =======
Third-party flat-rolled product sales decreased 10% in the 2001 third
quarter and 8% in the 2001 nine-month period from the comparable 2000 periods.
These decreases were driven by lower shipments of 10% quarter-over-quarter and
9% year-over-year due to continued weakness in the automotive, commercial
transportation and distribution markets in North America and Europe.
ATOI for the Flat-Rolled Products segment fell $24 in the 2001 third
quarter and $32 in the 2001 nine-month period from the corresponding 2000
periods due to lower volumes in North America and Europe which were partly
offset by a more profitable product mix for sheet and plate in the U.S. as well
as cost reductions.
Anticipated aerospace build rate reductions will impact this segment.
Also, we expect seasonal decreases in demand in the beverage can business for
the fourth quarter of 2001.
IV. Engineered Products
Third quarter ended Nine months ended
September 30 September 30
------------ ------------
2001 2000 2001 2000
------- ------- ------- -------
Third-party aluminum shipments 232 258 728 806
Third-party sales $ 1,514 $ 1,586 $ 4,689 $ 3,935
Intersegment sales 9 18 26 46
------- ------- ------- -------
Total sales $ 1,523 $ 1,604 $ 4,715 $ 3,981
======= ======= ======= =======
After-tax operating income $ 62 $ 49 $ 162 $ 164
======= ======= ======= =======
Engineered Products' third-party sales decreased 5% in the 2001 third
quarter as increases in aerospace and industrial gas turbine sales were more
than offset by decreases in automotive, commercial transportation and
distribution volumes in North America. Third-party sales increased 19% in the
2001 nine-month period due to the acquisitions of Reynolds, Cordant and British
Aluminium. Excluding these acquisitions, third-party sales decreased 12%
year-to-year, reflecting the continuing weakness in the automotive, commercial
transportation and distribution markets in North America and weakening market
conditions in Europe.
ATOI for the segment increased $13 for the 2001 third quarter, while
remaining relatively flat for the nine-month period. The quarterly increase is
due to higher revenues at Howmet which were aided by strong aerospace and
industrial gas turbine markets as well as increased profitability in Europe due
to improved mix and conversion cost reductions, partially offset by lower
volumes in North America. For the nine-month period, ATOI remained relatively
flat as volume declines were offset by the impact of acquisitions.
Anticipated aerospace market declines will affect the demand for
extrusions and engine spare parts. We expect automotive business slowdowns which
will also impact the results of this segment.
16
V. Packaging and Consumer
Third quarter ended Nine months ended
September 30 September 30
------------ ------------
2001 2000 2001 2000
------- ------- ------- -------
Third-party aluminum shipments 33 37 116 71
Third-party sales $ 671 $ 631 $ 2,018 $ 1,358
After-tax operating income $ 47 $ 38 $ 137 $ 90
Third-party sales for this segment for the 2001 third quarter and
nine-month period were up 6% and 49%, respectively, compared to the
corresponding 2000 periods. These increases were due primarily to the
acquisitions of Reynolds and several smaller businesses. Excluding these
acquisitions, third-party sales rose $8 versus the 2000 quarter and $38 versus
the 2000 nine-month period, primarily due to increased closures sales.
For this segment, ATOI rose $9 in the 2001 third quarter and $47 in the
2001 year-to-date period from the comparable 2000 periods. These increases were
due to the acquisitions noted above, which contributed $4 to the
quarter-over-quarter and $18 to the year-over-year ATOI, an increase in closure
sales noted earlier, and increased profitability in Latin America.
In the fourth quarter of 2001, we expect seasonal increases to be
experienced in the packaging and consumer business along with some seasonal
slowdown in the closures business.
VI. Other
Third quarter ended Nine months ended
September 30 September 30
------------ ------------
2001 2000 2001 2000 *
------- ------- ------- -------
Third-party aluminum shipments 57 58 200 127
Third-party sales $ 845 $ 1,142 $ 2,916 $ 2,828
After-tax operating income $ 4 $ 39 $ 99 $ 115
* Restated, see Note J to the financial statements
Third-party sales for this group decreased 26% quarter-over-quarter and
increased 3% year-over-year. The quarter-over-quarter decrease was due to the
sale of Thiokol in the second quarter of 2001, as well as lower volumes and
prices in the automotive, telecommunications and distribution businesses,
somewhat offset by improved residential building product volumes. On a
year-over-year basis, the increase in sales is attributed to the acquisitions of
Reynolds' metal distribution business (RASCO) as well as several smaller
acquisitions, and improved sales of residential building products, offset by
volume and pricing declines within the distribution, telecommunications and
automotive markets.
ATOI for this group was down $35 and $16 in the 2001 third quarter and
year-to-date periods. Impacting the third quarter ATOI were lower earnings from
AFL due to weak automotive and telecommunications markets,
the sale of Thiokol in the second quarter of 2001, as well as the sale of
Alcoa's interest in a Latin American cable business that positively impacted the
third quarter of 2000, partially offset by increased volume of residential
building products. ATOI declined year-over-year as a result of decreased volume
at AFL, which was partially offset by gains from the sales of Thiokol, Alcoa
Proppants, Inc. and Alcoa's interest in a Latin American cable business as well
as improved sales of building products.
We expect continued reductions in telecommunications and automotive
industries which will unfavorably impact this group. Seasonal slowdown in
residential construction is anticipated, directly affecting our residential
building products division in the fourth quarter of 2001.
Reconciliation of ATOI to Consolidated Net Income
Items required to reconcile ATOI to consolidated net income include:
corporate adjustments to eliminate any remaining profit or loss between
segments; the after-tax impact of interest income and expense at the statutory
rate; minority interests; corporate expense, comprised of the general
administrative and selling expenses of operating the corporate headquarters and
other global administrative facilities along with depreciation on corporate-
owned assets; special items; and other, which includes the impact of LIFO
inventory accounting, differences between estimated tax rates used in
17
the segments and the corporate effective tax rate, and other non-operating items
such as foreign exchange.
Interest expense decreased $30 in the third quarter of 2001 versus 2000 due
to lower interest rates and lower average debt levels. Minority interests
decreased $39 quarter-over-quarter and $101 year-over-year primarily due to
lower income at AFL, AWAC and Aluminio, as well as special charges of $34
recorded in the second quarter of 2001. Corporate expense decreased $21 in the
third quarter of 2001 versus 2000 primarily due to a decrease in employee
benefit costs. Special items of $148 (after-tax, before minority interests) were
recorded in the 2001 nine-month period.
Market Risks
In addition to the risks inherent in its operations, Alcoa is exposed to
financial, market, political and economic risks. The following discussion, which
provides additional detail regarding Alcoa's exposure to the risks of changing
commodity prices, foreign exchange rates and interest rates, includes forward-
looking statements that involve risk and uncertainties. Actual results could
differ materially from those projected in these forward-looking statements.
Commodity Price Risks - Alcoa is a leading global producer of aluminum ingot and
aluminum fabricated products. As a condition of sale, customers often require
Alcoa to enter into long-term fixed-price commitments. These commitments expose
Alcoa to the risk of fluctuating aluminum prices between the time the order is
committed and the time that the order is shipped.
Alcoa's aluminum commodity risk management policy is to hedge, through the
use of futures and options contracts, the aluminum price risk for a portion of
its firm commitments.
Past accounting convention required that certain long positions be marked
to market, which resulted in a year-to-date, after-tax credit to earnings of $2
at September 30, 2000. As a result of the change in accounting under SFAS No.
133, these contracts were re-designated as qualified fair value hedges on
January 1, 2001. At September 30, 2001, contracts qualifying as fair value
hedges totaled approximately 778,000 tons with a fair value loss of
approximately $96.
Alcoa may sell forward a portion of its forecasted primary aluminum and
alumina production. In addition, Alcoa expects the continued requirement to
purchase aluminum and other commodities such as natural gas, fuel oil and
electricity for its operations. Alcoa enters into futures and options contracts
to reduce volatility in the price of these commodities. At September 30, 2001,
the fair value of the contracts recorded in other comprehensive income for these
hedges was a loss of approximately $32 (net of tax and minority interest). These
contracts cover periods commensurate with known or expected exposures, generally
within three years.
The futures and options contracts used by Alcoa are with creditworthy
counterparties and are further supported by cash, treasury bills or irrevocable
letters of credit issued by carefully chosen banks.
Financial Risk
Currencies - Alcoa is subject to significant exposure from fluctuations in
foreign currencies. Foreign currency exchange contracts are used to hedge the
variability in cash flows from the forecasted payment or receipt of currencies
other than the functional currency. These contracts cover periods commensurate
with known or expected exposures, generally within three years. At September 30,
2001, the fair value of the contracts recorded in other comprehensive income for
these hedges was a loss of approximately $131 (net of tax and minority
interest).
Interest Rates - Alcoa attempts to maintain a reasonable balance between fixed-
and floating-rate debt and uses interest rate swaps to keep financing costs as
low as possible. The company has entered into pay fixed, receive floating
interest rate swaps to hedge the interest rate risk exposure of forecasted
interest payments on its outstanding debt. At September 30, 2001,
18
the fair value of the contracts recorded in other comprehensive income for these
hedges was a loss of approximately $2 (net of tax and minority interest). In
addition, the company has entered into pay floating, receive fixed interest rate
swaps to hedge changes in the fair value of certain fixed-rate debt obligations.
Risk Management - All of the aluminum and other commodity contracts, as well as
the various types of financial instruments, are straightforward and held for
purposes other than trading. They are used primarily to mitigate uncertainty and
volatility and principally cover underlying exposures.
Alcoa's commodity and derivative activities are subject to the management,
direction and control of the Strategic Risk Management Committee (SRMC). SRMC is
composed of the chief executive officer, the chief financial officer and other
officers and employees that the chief executive officer selects. SRMC reports to
the Board of Directors on the scope of its derivative activities.
Environmental Matters
Alcoa participates in environmental assessments and cleanups at a number of
locations. These include 31 owned or operating facilities and adjoining
properties, approximately 28 previously owned or operating facilities and
adjoining properties and approximately 91 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 in determining the extent of remedial actions and related costs and
damages. The liability can change substantially due to factors such as the
nature and extent of contamination, changes in remedial requirements and
technological changes. Therefore, it is not possible to determine the outcomes
or to estimate with any degree of accuracy the potential costs for certain of
these matters. For example, there are issues related to the Massena, New York,
Pt. Comfort, Texas and Troutdale, Oregon sites where investigations are ongoing
and where natural resource damage or off-site migrations of contaminants to
sediments has been alleged. The following discussion provides additional details
regarding the current status of these sites.
MASSENA. Since 1989, 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).
Alcoa continues to perform studies and investigations on the river,
including ongoing pilot tests of sediment capping techniques and other
remediation technologies. Alcoa submitted a draft Analysis of Alternatives
report in December 1999 and, based on additional evaluations and information
required by the EPA, a revised report is being prepared and is currently
expected to be submitted by January 2002. Based on the 1999 report, the range of
costs associated with the potential courses of remedial action is between zero
and $53. Currently, no one of the alternatives is more likely to be selected
than any other. During meetings through September 2001 the EPA has indicated to
Alcoa that it believes additional remedial alternatives need to be included in
the revised Analysis of Alternatives. Such additional remedies involve removal
of more sediment than was included in the 1999 Analysis of Alternatives report.
The cost of such potential additional remedial alternatives cannot be estimated
at this time. The results of the pilot tests and the revised Analysis of
Alternatives should provide additional information for the selection and
approval of the appropriate remedial alternative.
Portions of the St. Lawrence River system adjacent to the former Reynolds
plant are also contaminated with PCB. Since 1989, Reynolds had been conducting
investigations and studies of the river system under order from the EPA issued
under Superfund. The dredging remedy for the St. Lawrence River has commenced
and is expected to be substantially concluded by the end of 2001 and has been
included in the reserve.
19
Alcoa is aware of natural resource damage claims that may be asserted
by certain federal, state and tribal natural resource trustees at these
locations.
PT. COMFORT/LAVACA BAY. Since 1990, as previously reported, Alcoa has
undertaken investigations and evaluations concerning alleged releases of
mercury from its Pt. 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. The
EPA is now evaluating the site and is expected to select a final remedy by the
end of 2001. The probable and estimable costs are fully reserved.
TROUTDALE, OREGON. In 1994, the EPA added Reynolds' Troutdale, Oregon
primary aluminum production plant to the National Priorities List of Superfund
sites. Alcoa is cooperating with the EPA. Under a September 1995 consent order,
Alcoa is working with the EPA to identify cleanup solutions for the site.
Following curtailment of active production operations and based on further
evaluation of remedial options, the company has determined the most probable
cost of clean up. This amount has been fully reserved.
Based on the above, it is possible that Alcoa's results of operations,
in a particular period, could be materially affected by matters relating to
these sites. However, based on facts currently available, management believes
that 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, 2001, was $454
(of which $75 was classified as a current liability) and reflects the most
probable costs to remediate identified environmental conditions for which costs
can be reasonably estimated. Remediation costs charged to the reserve in the
2001 third quarter were $23. They include expenditures currently mandated, as
well as those not required by any regulatory authority or third party.
Liquidity and Capital Resources
Cash from Operations
Cash from operations for the 2001 year-to-date period totaled $1,728, compared
with $1,908 in the 2000 period. The decrease of $180, or 9%, resulted primarily
from lower earnings and changes in noncurrent assets and liabilities, primarily
due to a decrease in accrued postretirement benefits.
Financing Activities
Financing activities used $3,005 of cash in the 2001 year-to-date period,
compared with $1,669 provided for in the 2000 period. The increase in cash used
was primarily due to debt repayments, net of refinancings, in the 2001 year-to-
date period that were funded by the proceeds from the sales of operations to be
divested from the Reynolds merger and the sale of Thiokol. Short-term borrowings
and commercial paper decreased by $2,625 and $144, respectively, in the 2001
period, compared with increases of $1,856 and $849 in the 2000 period,
respectively.
The increase in cash used was also due to the repurchase of common
stock, $1,338 in the 2001 nine-month period versus $730 in the 2000 period.
Alcoa's stock repurchase authorization of 50 shares currently has 40.7 shares
remaining.
Dividends paid to shareholders were $390 in the 2001 year-to-date
period, an increase of $80 over the 2000 period. The increase was due to a
higher number of shares outstanding as well as an increase in Alcoa's total
dividend, which was 45 cents in the 2001 period compared with 37.5 cents in the
2000 period.
Investing Activities
Investing activities provided $1,494 during the 2001 year-to-date period,
compared with cash used of $3,523 in the 2000 period. The increase of $5,017 is
partly due to dispositions of assets to be divested from the Reynolds merger as
well as proceeds from the sale of Thiokol, which accounted for $2,404 of the
change in the 2001 period. Additionally, cash paid for acquisitions in the 2001
year-to-date period was $126, while in the 2000 year-to-date period,
20
cash paid for acquisitions was $2,745, primarily attributable to the acquisition
of Cordant.
Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible
Assets." These standards require that all business combinations be accounted for
using the purchase method and that goodwill and intangible assets with
indefinite useful lives should not be amortized but should be tested for
impairment at least annually, and they provide guidelines for new disclosure
requirements. These standards outline the criteria for initial recognition and
measurement of intangibles, assignment of assets and liabilities including
goodwill to reporting units and goodwill impairment testing. Additionally, under
the provisions of these standards, the unamortized balance of negative goodwill
will be written off and recognized as a change in accounting principle. The
provisions of SFAS Nos. 141 and 142 apply to all business combinations after
June 30, 2001. The provisions of SFAS No. 142 for existing goodwill and other
intangible assets are required to be implemented effective January 1, 2002. The
company is currently evaluating the impact of SFAS No. 142 on the consolidated
financial statements.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." This statement establishes standards for accounting for
obligations associated with the retirement of tangible long-lived assets. The
standard is required to be adopted by Alcoa beginning on January 1, 2003.
Management is currently assessing the details of the standard and is preparing a
plan of implementation.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment and disposal of long-lived assets. This
standard is required to be adopted by Alcoa beginning on January 1, 2002.
Management is currently assessing the details of this standard and is preparing
a plan of implementation.
21
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
As previously reported, on October 15, 1999, Victoria Shaev, who represents
that she is an Alcoa shareholder, filed a purported derivative action on behalf
of the company in the United States District Court for the Southern District of
New York, naming as defendants the company, each member of Alcoa's Board of
Directors, certain officers of the company and PricewaterhouseCoopers LLP,
Alcoa's independent accountants. The shareholder did not make a demand on the
company before filing this lawsuit. Under relevant law, this demand is
required. The lawsuit alleged, among other things, that Alcoa's proxy statement
dated March 8, 1999, contained materially false and misleading representations
and omissions concerning the company's proposed Alcoa Stock Incentive Plan and
that the shareholder approval of the plan, based upon these alleged
representations and omissions, was defective. The plaintiff sought to
invalidate the shareholder approval of the plan and enjoin its implementation.
She also requested that Alcoa pay the costs and disbursements of the action,
including the fees of her accountants, counsel and experts. On March 19, 2001,
the court granted without prejudice the defendants' motion to dismiss the
plaintiff's claims. On May 31, 2001, Ms. Shaev served an amended complaint
making the same allegations as in the previous complaint but styling the
complaint as a class action on behalf of shareholders. The company served a
motion to dismiss on June 25, 2001. The issues have been briefed and argued.
The parties are awaiting the court's decision.
As previously reported, in October 1998, Region V of the EPA referred various
alleged environmental violations at Alcoa's Lafayette Operations to the civil
division of the U.S Department of Justice (DOJ). The alleged violations relate
to water permit exceedances as reported on monthly discharge monitoring
reports. The parties have been able to reach settlement on this matter and are
in the process of finalizing the terms and conditions of the settlement
agreement. A consent decree is currently being circulated and it is anticipated
this matter will be concluded in the next 60 days.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
12. Computation of Ratio of Earnings to Fixed Charges
15. Independent Accountants' letter regarding unaudited financial information
(b) Reports on Form 8-K. During the third quarter of 2001, Alcoa filed with
the Securities and Exchange Commission a Form 8-K, dated August 21, 2001,
reporting under Item 5 that Alcoa and BHP Billiton had announced that agreement
had been reached regarding the merger of their North American metals
distribution businesses.
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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 23, 2001 By /s/ RICHARD B. KELSON
------------------------- ----------------------------
Date Richard B. Kelson
Executive Vice President and
Chief Financial Officer
Chief Compliance Officer
(Principal Financial Officer)
October 23, 2001 By /s/ TIMOTHY S. MOCK
------------------------- ----------------------------
Date Timothy S. Mock
Vice President and Controller
(Chief Accounting Officer)
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EXHIBITS
--------
12. Computation of Ratio of Earnings to Fixed Charges
15. Independent Accountants' letter regarding unaudited financial
information
24