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, 2002 Commission File Number 1-3610
ALCOA INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0317820
(State of incorporation) (I.R.S. Employer Identification No.)
201 Isabella Street, Pittsburgh, Pennsylvania 15212-5858
(Address of principal executive offices) (Zip Code)
Office of Investor Relations 212-836-2674
Office of the Secretary 412-553-4707
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
As of October 18, 2002, 844,270,310 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
ASSETS 2002 2001
------------ -------------
Current assets:
Cash and cash equivalents $ 463 $ 512
Short-term investments 74 15
Receivables from customers, less allowances of
$119 in 2002 and $129 in 2001 2,662 2,577
Other receivables 259 288
Inventories (F) 2,388 2,531
Deferred income taxes 382 410
Prepaid expenses and other current assets 538 459
------- -------
Total current assets 6,766 6,792
------- -------
Properties, plants and equipment, at cost 23,000 22,536
Less: accumulated depreciation, depletion and amortization 10,787 10,554
------- -------
Net properties, plants and equipment 12,213 11,982
------- -------
Goodwill (C) 6,314 5,733
Other assets (C) 3,882 3,848
------- -------
Total assets $29,175 $28,355
======= =======
LIABILITIES
Current liabilities:
Short-term borrowings $ 98 $ 142
Accounts payable, trade 1,591 1,630
Accrued compensation and retirement costs 860 889
Taxes, including taxes on income 621 903
Other current liabilities 1,146 1,336
Long-term debt due within one year 96 103
------- -------
Total current liabilities 4,412 5,003
------- -------
Long-term debt, less amount due within one year (G) 7,938 6,388
Accrued postretirement benefits 2,408 2,513
Other noncurrent liabilities and deferred credits 1,817 1,968
Deferred income taxes 588 556
------- -------
Total liabilities 17,163 16,428
------- -------
MINORITY INTERESTS 1,284 1,313
------- -------
COMMITMENTS AND CONTINGENCIES (H)
SHAREHOLDERS' EQUITY
Preferred stock 55 56
Common stock 925 925
Additional capital 6,096 6,114
Retained earnings 7,651 7,517
Treasury stock, at cost (2,845) (2,706)
Accumulated other comprehensive loss (I) (1,154) (1,292)
------- -------
Total shareholders' equity 10,728 10,614
------- -------
Total liabilities and equity $29,175 $28,355
======= =======
The accompanying notes are an integral part of the financial statements.
2
Alcoa and subsidiaries
Condensed Statement of Consolidated Income (unaudited)
(in millions, except per share amounts)
Third quarter ended Nine months ended
September 30 September 30
------------ ------------
2002 2001 2002 2001
---- ---- ---- ----
Sales $ 5,222 $ 5,511 $ 15,450 $ 17,678
-------- -------- -------- --------
Cost of goods sold 4,165 4,228 12,405 13,548
Selling, general administrative
and other expenses 268 273 823 922
Research and development expenses 53 47 156 151
Provision for depreciation,
depletion and amortization (C) 290 309 820 939
Special items (B) 39 - 39 212
Interest expense 95 85 253 293
Other(income)expense, net (23) 3 (112) (196)
-------- -------- -------- --------
4,887 4,945 14,384 15,869
-------- -------- -------- --------
Income before taxes on income 335 566 1,066 1,809
Provision for taxes on income 93 175 320 579
-------- -------- -------- --------
Income from operations 242 391 746 1,230
Less: Minority interests' share 49 52 137 180
-------- -------- -------- --------
Income before accounting change 193 339 609 1,050
Cumulative effect of accounting change
for goodwill (C) - - 34 -
-------- -------- -------- --------
NET INCOME $ 193 $ 339 $ 643 $ 1,050
======== ======== ======== ========
EARNINGS PER SHARE (J)
Basic (before cumulative effect) $ .23 $ .40 $ .72 $ 1.22
======== ======== ======== ========
Basic cumulative effect of
accounting change - - .04 -
-------- -------- -------- --------
Basic (after cumulative effect) $ .23 $ .40 $ .76 $ 1.22
======== ======== ======== ========
Diluted (before cumulative effect) $ .23 $ .39 $ .71 $ 1.21
======== ======== ======== ========
Diluted cumulative effect of
accounting change - - .04 -
-------- -------- -------- --------
Diluted (after cumulative effect) $ .23 $ .39 $ .75 $ 1.21
======== ======== ======== ========
Dividends paid per common share $ .150 $ .150 $ .450 $ .450
======== ======== ======== ========
The accompanying notes are an integral part of the financial statements.
3
Alcoa and subsidiaries
Condensed Statement of Consolidated Cash Flows (unaudited)
(in millions)
Nine months ended
September 30
------------
2002 2001
--------- ---------
CASH FROM OPERATIONS
Net income $ 643 $ 1,050
Adjustments to reconcile net income to cash from operations:
Depreciation, depletion and amortization 827 949
Change in deferred income taxes (4) (15)
Equity income, net of dividends (32) (43)
Noncash special items (B) 39 196
Gains from investing activities - sale of assets (16) (91)
Minority interests 137 180
Accounting change (C) (34) -
Other 48 (43)
Changes in assets and liabilities, excluding effects of
acquisitions and divestitures:
Reduction in receivables 133 364
Reduction (increase) in inventories 193 (217)
Reduction (increase) in prepaid expenses and
other current assets 28 (134)
Reduction in accounts payable and accrued expenses (454) (438)
(Reduction) increase in taxes, including taxes on income (265) 160
Net change in noncurrent assets and liabilities (234) (190)
------- -------
CASH PROVIDED FROM OPERATIONS 1,009 1,728
------- -------
FINANCING ACTIVITIES
Net changes to short-term borrowings (310) (2,625)
Common stock issued for stock compensation plans 48 555
Repurchase of common stock (224) (1,338)
Dividends paid to shareholders (382) (390)
Dividends paid to minority interests (122) (245)
Net change in commercial paper 56 (144)
Additions to long-term debt 1,593 1,985
Payments on long-term debt (137) (803)
------- -------
CASH PROVIDED FROM (USED FOR) FINANCING ACTIVITIES 522 (3,005)
------- -------
INVESTING ACTIVITIES
Capital expenditures (856) (813)
Acquisitions, net of cash acquired (E) (595) (126)
Proceeds from the sale of assets 54 2,485
Additions to investments (28) (87)
Changes in short-term investments (59) 45
Changes in minority interests (39) -
Other (8) (10)
------- -------
CASH (USED FOR) PROVIDED FROM INVESTING ACTIVITIES (1,531) 1,494
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (49) (60)
------- -------
Net change in cash and cash equivalents (49) 157
Cash and cash equivalents at beginning of year 512 315
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 463 $ 472
======= =======
The accompanying notes are an integral part of the financial statements.
4
Notes to Condensed Consolidated Financial Statements
(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 normal
recurring accruals, considered necessary by management to fairly present the
results of operations, financial position and cash flows. The results reported
in these Condensed Consolidated Financial Statements are not necessarily
indicative of the results that may be expected for the entire year.
This Form 10-Q report should be read in conjunction with Alcoa's annual
report on Form 10-K for the year ended December 31, 2001.
B. Special Items - During 2001, Alcoa recorded charges of $566 ($355 after tax
and minority interests) as a result of a restructuring plan based on a strategic
review of the company's primary products and fabricating businesses aimed at
optimizing and aligning its manufacturing systems with customer needs, while
positioning the company for stronger profitability. The charge of $566 consisted
of a charge of $212 ($114 after tax and minority interests) in the second
quarter of 2001 and a charge of $354 ($241 after tax and minority interests) in
the fourth quarter of 2001. These charges consisted of asset write-downs,
employee termination and severance costs related to workforce reductions of
approximately 10,400 employees, and other exit costs related to the shutdown of
facilities. The second quarter charge was primarily due to actions taken in
Alcoa's primary products businesses because of economic and competitive
conditions. These actions included the shutdown of three facilities in the U.S.
These actions have been substantially completed with the exception of site
remediation work that is ongoing. The fourth quarter charge was primarily due to
actions taken in Alcoa's fabricating businesses. These actions include the
shutdown of 15 facilities in the U.S. and Europe. Alcoa expects to complete
these actions by the end of 2002. The results of operations related to these
facilities were not material. For further details on the restructuring plan, see
Note B to the audited financial statements contained in the Annual Report on
Form 10-K for the year ended December 31, 2001.
During 2002, various adjustments were recorded to the 2001 restructuring
program reserves. Additional restructuring charges of $9 ($2 of which was
recorded in the 2002 third quarter) were recorded for employee termination and
severance costs, primarily related to additional severance costs not accruable
in 2001 for layoffs of approximately 250 salaried and hourly employees,
primarily in Europe and Mexico. Also, reversals of restructuring reserves of $23
($9 of which was recorded in the 2002 third quarter) were recorded due to
changes in estimates of liabilities resulting from lower than expected costs
associated with certain plant shutdowns and disposals.
In the third quarter of 2002, Alcoa recorded a special charge of $39
($23 after tax and minority interests), primarily as a result of the curtailment
of aluminum production at three smelters. Alcoa temporarily curtailed aluminum
production at its Badin, North Carolina plant and permanently closed its
Troutdale, Oregon plant as well as approximately 25% of the capacity at its
Rockdale, Texas facility. The actions taken resulted in charges of $9 for asset
write-downs of buildings and equipment, $24 for employee termination and
severance costs related to approximately 500 salaried and hourly employees at
the various facilities, and charges of $13 primarily for remediation and
demolition costs. The remaining carrying value and results of operations related
to these facilities were not material. These charges of $46, as previously
detailed, were somewhat offset by a net credit of $7, primarily related to
reversals of 2001 restructuring reserves as noted above.
As of September 30, 2002, approximately 8,300 of the 11,150 employees
had been terminated. The workforce reductions consisted of hourly and salaried
employees at various manufacturing facilities-primarily located outside of the
U.S.-due to weak market conditions and the shutdowns of several manufacturing
facilities.
5
The reserve balances and associated activity consisted of:
Employee
Termination
Asset and Severance
Write-downs Costs Other Total
--------------------------------------------------------------------------------------------------------------------
2001:
----
Total restructuring charges $ 372 $ 178 $ 16 $ 566
Cash payments (3) (32) (5) (40)
Noncash charges* (288) - - (288)
--------------------------------------------------------------------------------------------------------------------
Reserve balance at December 31, 2001 $ 81 $ 146 $ 11 $ 238
--------------------------------------------------------------------------------------------------------------------
2002:
----
Cash payments (15) (52) (7) (74)
2002 restructuring charges 9 24 13 46
Noncash charges (9) - - (9)
Additions to 2001 restructuring charges - 9 - 9
Reversals of 2001 restructuring reserves (10) (13) - (23)
--------------------------------------------------------------------------------------------------------------------
Reserve balance at September 30, 2002 $ 56 $ 114 $ 17 $ 187
--------------------------------------------------------------------------------------------------------------------
* Adjusted
C. Recently Adopted Accounting Standards - Alcoa adopted Statement of Financial
Accounting Standards (SFAS) No. 141, "Business Combinations" which requires that
the purchase method of accounting be applied to all business combinations after
June 30, 2001. SFAS No. 141 also established criteria for recognition of
intangible assets and goodwill. Effective January 1, 2002, Alcoa adopted SFAS
No. 142 "Goodwill and Other Intangible Assets." Under this standard, goodwill
and intangibles with indefinite useful lives are no longer amortized. This
standard also requires, at a minimum, an annual assessment of the carrying value
of goodwill and intangibles with indefinite useful lives. If the carrying value
of goodwill or an intangible asset exceeds its fair value, an impairment loss
shall be recognized. A discounted cash flow model was used to determine the fair
value of Alcoa's businesses for purposes of testing goodwill for impairment. The
discount rate used was based on a risk-adjusted weighted average cost of capital
for each business.
The effects of adopting the new standards on net income and diluted
earnings per share for the three-month and nine-month periods ended September
30, 2002 and 2001, follow.
Third quarter ended Nine months ended
September 30: September 30:
------------- -------------
Net Income Diluted EPS Net Income Diluted EPS
---------- ----------- ---------- -----------
2002 2001 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ---- ---- ----
Net income $ 193 $ 339 $ .23 $ .39 $ 643 $1,050 $ .75 $1.21
Less: cumulative effect
income from accounting
change for goodwill - - - - (34) - (.04) -
----- ----- ----- ----- ----- ------ ----- -----
Income, excluding
cumulative effect 193 339 .23 .39 609 1,050 .71 1.21
Add: goodwill
amortization - 41 - .05 - 128 - .15
----- ----- ----- ----- ----- ------ ----- -----
Income excluding
cumulative effect in
2002 and goodwill
amortization in 2001 $ 193 $ 380 $ .23 $ .44 $ 609 $1,178 $ .71 $1.36
===== ===== ===== ===== ===== ====== ===== =====
The cumulative effect adjustment recognized upon adoption of these new
standards was $34 (after tax), consisting of income from the write-off of
negative goodwill from prior acquisitions of $49, offset by a $15 write-off for
the impairment of goodwill in the automotive business resulting from a change in
the criteria for the measurement of impairments under SFAS No. 142 from an
undiscounted to a discounted cash flow method. Net income for the three-month
and nine-month periods ended September 30, 2001, would have been $41, or five
cents per share, and $128, or 15 cents per share, higher if goodwill
amortization had been discontinued effective January 1, 2001. Net income for the
full year of 2001 would have been $171, or 20 cents per share, higher if
goodwill amortization had been discontinued effective January 1, 2001.
6
Changes to goodwill and intangible assets during the nine-month period
ended September 30, 2002, including the effects of adopting these new accounting
standards, follow.
Goodwill Intangible assets
-------- -----------------
Balance at December 31, 2001, net of
accumulated amortization $ 5,733 $ 674
Intangible assets reclassified to goodwill 28 (28)
Write-off of goodwill recognized in
cumulative effect adjustment (15) -
Additions during the period 602 72
Translation and other adjustments (34) 4
Amortization expense - (50)
-------- ------
Balance at September 30, 2002, net of
accumulated amortization $ 6,314 $ 672
======== ======
In accordance with the provisions of these new standards, on January 1,
2002, Alcoa transferred $28 (after tax) of customer base intangibles, initially
recorded in the Reynolds acquisition, to goodwill (Packaging and Consumer
segment). Goodwill also increased $602 during the period related to eight
acquisitions (in the Engineered Products segment, the Packaging and Consumer
segment, and the Other group) and adjustments to preliminary purchase price
allocations from prior periods.
Intangible assets, which are included in other assets, totaled $672, net
of accumulated amortization of $345, at September 30, 2002. Of this amount, $169
represents intangibles with indefinite useful lives, consisting of trade names
that are not being amortized under SFAS No. 142. The remaining intangibles
relate to customer relationships, computer software, patents and licenses.
Amortization expense for intangible assets is expected to range from
approximately $65 to $40 each year between 2003 and 2007.
Effective January 1, 2002, Alcoa adopted SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." This statement supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 144 retains the recognition and measurement
criteria of SFAS No. 121 for long-lived assets to be held and used, while
expanding the measurement requirements of long-lived assets to be disposed of by
sale to include discontinued operations. It also broadens the previously
existing reporting requirement for the presentation of discontinued operations
to include a component of an entity rather than a segment of a business. This
new standard did not have a material impact on Alcoa's financial statements
during the period.
D. Recently Issued Accounting Standards - In June 2001, the Financial Accounting
Standards Board (FASB) issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement establishes standards for accounting for
obligations associated with the retirement of tangible long-lived assets. Alcoa
must adopt this standard on January 1, 2003. Management is currently assessing
the details of the standard and is preparing a plan of implementation.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity," under which
a liability for an exit cost was recognized at the date of an entity's
commitment to an exit plan. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized at fair value when
the liability is incurred. The provisions of this statement are effective for
exit or disposal activities that are initiated after December 31, 2002.
E. Acquisitions - During the first nine months of 2002, Alcoa completed eight
acquisitions, the most significant of which was Ivex Packaging Corporation in
July 2002. The cost of these eight acquisitions was $915, of which $595 was paid
in cash. The Ivex transaction was valued at approximately $790, including debt
assumed of $320. The Ivex preliminary purchase price allocation resulted in
goodwill of approximately $450. Pro-forma results of the company, assuming all
acquisitions had been made at the beginning of each period presented, would not
be materially different from the results reported.
On July 17, 2002, Alcoa agreed to acquire the assets of Fairchild
Fasteners from The Fairchild Corporation for $657 in cash. Fairchild Fasteners,
a leading supplier of aerospace fasteners, will become part of Alcoa's
Engineered Products
7
segment. On October 14, 2002, Alcoa received antitrust clearance from the
European Union to complete the Fairchild acquisition. The transaction is
expected to close in the fourth quarter of 2002, subject to the completion of
customary approvals and approval by The Fairchild Corporation shareholders.
F. Inventories
September 30 December 31
2002 2001
---------- -----------
Finished goods $ 666 $ 691
Work in process 746 734
Bauxite and alumina 368 410
Purchased raw materials 436 531
Operating supplies 172 165
--------- -------
$ 2,388 $ 2,531
========= =======
Approximately 48% of total inventories at September 30, 2002, was valued
on a LIFO basis. If valued on an average cost basis, total inventories would
have been $603 and $605 higher at September 30, 2002, and December 31, 2001,
respectively.
G. Long-Term Debt - In August 2002, Alcoa issued $1,400 of notes. Of these
notes, $800 mature in 2007 and carry a coupon rate of 4.25%, and $600 mature in
2013 and carry a coupon rate of 5.375%. The proceeds from these borrowings were
used to fund the acquisition of Ivex and to refinance commercial paper.
In April 2002, Alcoa refinanced its $2,000 revolving-credit agreement
that was to expire in April 2002 into a revolving-credit agreement that expires
in April 2003.
H. 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 of the company.
Alcoa Aluminio S.A. (Aluminio) is a participant in several hydroelectric
construction projects in Brazil for purposes of increasing its energy
self-sufficiency and providing a long-term, low-cost source of power for its
facilities. As a participant in Machadinho, one of its hydroelectric
construction projects in Brazil, Aluminio has guaranteed up to 36% of the
project's total debt of approximately $315. Aluminio committed to taking a share
of the output of the completed project for 30 years at cost (including cost of
financing the project), which began in the first quarter of 2002. In the event
that other participants in this project fail to fulfill their financial
responsibilities, Aluminio may be required to fund a portion of the deficiency.
In accordance with the agreement, if Aluminio funds any such deficiency, its
participation and share of the output from the project will increase
proportionately.
Aluminio also entered into agreements in 2001 to participate in four
additional hydroelectric construction projects in Brazil that are scheduled to
be completed at various dates ranging from 2005 to 2008. These projects are
Barra Grande, Santa Isabel, Pai-Quere and Serra do Facao. Aluminio's share of
the output from these hydroelectric facilities, when completed, ranges from 20%
to 39.5%. Total costs for all four projects are estimated at $1,400, with
Aluminio's share of total project costs totaling approximately 30%. The plans
for financing these projects have not yet been finalized. Aluminio may be
required to provide guarantees of project financing or commit to additional
investments as these projects progress. At September 30, 2002, Aluminio had
provided $16 of guarantees on these hydroelectric construction projects in the
form of performance bonds.
In July 2002, Aluminio was the successful bidder in a public auction to
participate in Estreito, an additional hydroelectric construction project in
Brazil. This project is scheduled to be completed in 2007. Aluminio's share of
the output from this hydroelectric facility, when completed, will be 19% and
total costs for this project are estimated at $555, of which Aluminio's share is
$105. The plans for financing this project have not yet been finalized. Aluminio
may be required to
8
provide guarantees of project financing or commit to additional investments as
this project progresses.
Aluminio accounts for its investments in these hydroelectric projects on
the equity method. Aluminio's investment in these projects was $92 and $108 at
September 30, 2002, and December 31, 2001, respectively.
In January 2002, Alcoa raised its equity stake in Elkem ASA, a Norwegian
metals producer, above 40%, which, under Norwegian law, required Alcoa to
initiate an unconditional cash tender offer for the remaining outstanding shares
of Elkem. Under the tender offer that expired in February 2002, Alcoa acquired
additional shares, raising its total equity stake in Elkem to 40.2%. In the
third quarter of 2002, Alcoa purchased additional shares of Elkem that resulted
in an increase of its equity ownership in Elkem to 46.3%.
On July 19, 2002, Alcoa signed a Memorandum of Understanding (MOU) with
the Government of Iceland and Landsvirkjun, Iceland's national power company,
formalizing their cooperation in the evaluation and potential development of a
320,000-mt per year (mtpy) aluminum smelter in eastern Iceland. The MOU
encompasses the development of a 500-megawatt hydropower facility by
Landsvirkjun in eastern Iceland; environmental and engineering studies of the
smelter by Alcoa; and development of harbor and port facilities and related
infrastructure improvements in eastern Iceland by Icelandic municipalities.
I. Comprehensive Income
Third quarter ended Nine months
September 30 ended
------------ September 30
------------
2002 2001 2002 2001
-------- ------- -------- --------
Net income $ 193 $ 339 $ 643 $1,050
Other comprehensive income (loss):
Changes in:
Unrealized losses on available-for-sale
securities (47) - (50) -
Minimum pension liability - - (31) -
Unrealized translation adjustments (49) (42) 145 (258)
Unrecognized gains/losses on derivatives 7 (37) 74 (165)
------ ----- ------ ------
Comprehensive income $ 104 $ 260 $ 781 $ 627
====== ===== ====== ======
J. Earnings Per Share - The details of basic and diluted EPS follow (shares in
millions).
Third quarter ended Nine months ended
September 30 September 30
------------ ------------
2002 2001 2002 2001
---- ---- ---- ----
Income before cumulative effect $ 193 $ 339 $ 609 $1,050
Less: Preferred stock dividends 1 1 2 2
------ ------ ------ ------
Income available to common stockholders
before cumulative effect 192 338 607 1,048
Cumulative effect of accounting change - - 34 -
------ ------ ------ ------
Income available to common stockholders
after cumulative effect $ 192 $ 338 $ 641 $1,048
====== ====== ====== ======
Average shares outstanding - basic 844 856 846 861
Effect of dilutive securities:
Shares issuable upon exercise of
dilutive outstanding stock options 3 8 5 9
------ ------ ------ ------
Average shares outstanding - diluted 847 864 851 870
Basic EPS (before cumulative effect) $ .23 $ .40 $ .72 $ 1.22
====== ====== ====== ======
Basic EPS (after cumulative effect) $ .23 $ .40 $ .76 $ 1.22
====== ====== ====== ======
Diluted EPS (before cumulative effect) $ .23 $ .39 $ .71 $ 1.21
====== ====== ====== ======
Diluted EPS (after cumulative effect) $ .23 $ .39 $ .75 $ 1.21
====== ====== ====== ======
Options to purchase 67 million shares of common stock at an average
exercise price of $36.00 were outstanding as of September 30, 2002, but were not
included in the computation of diluted EPS because the option exercise price was
greater than the average market price of the common shares.
9
K. 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, 2002 and 2001. Also included below are the balances
of goodwill at September 30, 2002, as well as goodwill amortization expense for
the three-month and nine-month periods ended September 30, 2001 for each
reportable segment. For more information on segments, see Management's
Discussion and Analysis and the segment disclosures included in Alcoa's Form
10-K for the year ended December 31, 2001.
Segment Information:
Third quarter ended Alumina & Primary Flat-Rolled Engineered Packaging &
September 30, 2002 Chemicals Metals Products Products Consumer Other Total
Sales:
Third-party sales $ 469 $ 792 $1,162 $ 1,311 $ 757 $ 731 $ 5,222
Intersegment sales 235 888 21 8 - - 1,152
------ ------ ------ ------- ------ ------ -------
Total sales $ 704 $1,680 $1,183 $ 1,319 $ 757 $ 731 $ 6,374
====== ====== ====== ======= ====== ====== =======
After-tax operating
income $ 93 $ 175 $ 46 $ 25 $ 51 $ 8 $ 398
====== ====== ====== ======= ====== ====== =======
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
====== ====== ====== ======= ====== ====== =======
Goodwill amortization
included in ATOI (2) $ - $ (6) $ 2 $ (15) $ (4) $ (7) $ (30)
====== ====== ====== ======= ====== ====== =======
Segment Information:
Nine months ended Alumina & Primary Flat-Rolled Engineered Packaging &
September 30, 2002 Chemicals Metals Products Products Consumer Other Total
Sales:
Third-party sales $1,313 $2,344 $3,510 $ 4,118 $2,059 $2,106 $15,450
Intersegment sales 697 2,767 54 26 - - 3,544
------ ------ ------ -------- ------ ------ -------
Total sales $2,010 $5,111 $3,564 $ 4,144 $2,059 $2,106 $18,994
====== ====== ====== ======= ====== ====== =======
After-tax operating
income $ 231 $ 493 $ 173 $ 121 $ 134 $ 34 $ 1,186
====== ====== ====== ======= ====== ====== =======
Goodwill (1) $ 24 $ 933 $ 153 $ 2,351 $ 850 $ 365 $ 4,676
====== ====== ====== ======= ====== ====== =======
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
====== ====== ====== ======= ====== ====== =======
Goodwill amortization
included in ATOI (2) $ - $ (17) $ 4 $ (45) $ (12) $ (25) $ (95)
====== ====== ====== ======= ====== ====== =======
(1) Goodwill balances by segment at December 31, 2001, are as follows: Alumina &
Chemicals $35, Primary Metals $929, Flat-Rolled Products $145, Engineered
Products $2,312, Packaging & Consumer $331 and Other $271. Goodwill of $1,638
and $1,710 at September 30, 2002, and December 31, 2001, respectively, is
included in corporate.
(2) Goodwill amortization of $11 and $33 is included in corporate for the
three-month and nine-month periods ended September 30, 2001, respectively.
10
The following table reconciles segment information to consolidated totals.
Third quarter ended Nine months ended
September 30 September 30
------------ ------------
2002 2001 2002 2001
------ ------ ------- -------
Total after-tax operating income $ 398 $ 503 $1,186 $1,781
Impact of intersegment profit eliminations (5) (14) (9) (18)
Unallocated amounts (net of tax):
Interest income 7 10 26 30
Interest expense (62) (55) (165) (191)
Minority interests (49) (52) (137) (180)
Corporate expense (40) (45) (151) (177)
Special items (B) (25) - (25) (148)
Accounting change (C) - - 34 -
Other (31) (8) (116) (47)
----- ----- ------ ------
Consolidated net income $ 193 $ 339 $ 643 $1,050
===== ===== ====== ======
The following table represents segment assets.
Segment assets: September 30 December 31
2002 2001
------------ ------------
Alumina and Chemicals $ 2,740 $ 2,797
Primary Metals 7,052 7,122
Flat-Rolled Products 3,449 3,453
Engineered Products 6,269 6,231
Packaging and Consumer 3,279 2,498
Other 1,991 1,883
------- -------
Total segment assets $24,780 $23,984
======= =======
The change in segment assets within the Packaging and Consumer segment is
primarily due to the acquisition of Ivex in the third quarter of 2002. The
increase in assets in the Other group is primarily due to Alcoa Fujikura
Ltd.'s (AFL) acquisition of the remaining 50% interest in Engineered Plastic
Components, Inc. as well as several smaller acquisitions in the AFL
telecommunications business.
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, 2002, the related unaudited
condensed statement of consolidated income for the three-month and nine-month
periods ended September 30, 2002 and 2001, and the unaudited condensed statement
of consolidated cash flows for the nine-month periods ended September 30, 2002
and 2001. These financial statements are the responsibility of Alcoa's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the condensed consolidated 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, 2001, and the related statements of
consolidated income, shareholders' equity, and cash flows for the year then
ended (not presented herein). In our report dated January 9, 2002, we expressed
an unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 2001, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
As discussed in Note C to the unaudited condensed consolidated financial
statements, Alcoa changed its method of accounting for goodwill and other
intangible assets effective January 1, 2002.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
October 4, 2002
12
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(dollars in millions, except per share amounts and ingot prices; shipments in
thousands of metric tons (mt))
Certain statements in this report under this caption and elsewhere relate to
future events and expectations and, as such, constitute forward-looking
statements. Forward-looking statements include those containing such words as
"anticipates," "believes," "estimates," "expects," "hopes," "targets," "should,"
"will," "will likely result," "forecast," "outlook," "projects" or similar
expressions. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements of Alcoa to be different from those expressed or implied in the
forward-looking statements. For a discussion of some of the specific factors
that may cause such a difference, see Note H to the financial statements; the
disclosures included below under Segment Information, Market Risks and
Environmental Matters; and the Business section in Alcoa's Form 10-K for the
year ended December 31, 2001.
Results of Operations
Third quarter ended Nine months ended
September 30 September 30
------------ ------------
2002 2001 2002 2001
------- ------- ------- -------
Sales $ 5,222 $ 5,511 $15,450 $17,678
Net income $ 193 $ 339 $ 643 $ 1,050
Income (excluding cumulative effect
adjustment in 2002 and goodwill
amortization in 2001) $ 193 $ 380 $ 609 $ 1,178
Basic earnings per common share
(after cumulative effect) $ .23 $ .40 $ .76 $ 1.22
Diluted earnings per common share
(after cumulative effect) $ .23 $ .39 $ .75 $ 1.21
Shipments of aluminum products (mt) 1,321 1,212 3,913 3,824
Shipments of alumina (mt) 1,939 1,789 5,560 5,550
Alcoa's average realized ingot price $ .66 $ .71 $ .66 $ .74
Average 3-month LME price $ .60 $ .64 $ .62 $ .68
Earnings Summary
Net income for the 2002 third quarter and 2002 nine-month period was $193,
or 23 cents per diluted share, and $643, or 75 cents per share, respectively.
The decline in net income of 43% in the 2002 third quarter and 39% in the 2002
nine-month period, when compared to the corresponding 2001 periods, is primarily
due to lower realized prices for alumina and aluminum, lower volumes in
businesses serving the aerospace, industrial gas turbine and telecommunications
markets, and the absence of power sales that were recognized in the 2001
periods. Partly offsetting these declines were continued cost reduction efforts;
special charges of $114 (after tax and minority interests) that were recognized
in 2001 as compared with a special charge of $23 (after tax and minority
interests) recognized in 2002; as well as the fact that goodwill is no longer
amortized in 2002, resulting in positive impacts of $41 and $128 in the 2002
third quarter and nine-month period, respectively. Additionally, net income in
the 2002 nine-month period included income of $34 from the cumulative effect of
the change in accounting for goodwill under SFAS No. 142. This income is
primarily the result of the write-off of negative goodwill from prior
acquisitions.
Third quarter 2002 sales decreased 5% from the 2001 third quarter and
sales for the 2002 nine-month period decreased 13% from the corresponding 2001
period. Lower prices for alumina and aluminum, lower volumes in downstream
businesses serving the aerospace, industrial gas turbine and telecommunications
markets, the lack of power sales in 2002 and the divestiture of Reynolds' metal
distribution business (RASCO) contributed to the revenue decline in both the
2002 third quarter and 2002 nine-month period compared with the corresponding
2001 periods. Additionally, the disposition of Thiokol in 2001 also contributed
to the decline in revenues in the 2002 nine-month period compared with the 2001
nine-month period. These decreases in the 2002 third quarter and nine-month
period were somewhat offset by increased volumes in the alumina and primary
metals businesses as well as the acquisitions of Ivex and several smaller
businesses.
Annualized return on shareholders' equity was 7.9% for the 2002 nine-month
period, compared with 12.6% for the 2001 nine-month period. The decrease was
primarily due to lower earnings in the 2002 period.
13
Cost of goods sold (COGS) as a percentage of sales in the 2002 third
quarter and nine-month period was 79.8% and 80.3%, respectively, versus 76.7%
and 76.6% in the corresponding 2001 periods. The higher percentages in 2002 were
due to lower realized prices and the lack of power sales, offset somewhat by
ongoing cost reductions generated by productivity and purchasing cost savings.
Selling and general administrative expenses (S&GA) decreased 2% from the
2001 third quarter and 11% from the 2001 nine-month period. The decreases were
primarily due to lower spending, lower employee compensation costs, the
disposition of RASCO, and lower bad debt expense and bad debt recoveries. S&GA
as a percentage of sales was 5.1% and 5.3% for the 2002 third quarter and
nine-month period, respectively, compared to 5.0% and 5.2% in the corresponding
2001 periods.
The provision for depreciation, depletion and amortization decreased by 6%
in the 2002 third quarter and 13% in the 2002 nine-month period compared with
the corresponding 2001 periods. These decreases were primarily the result of
ceasing amortization of goodwill in 2002 under the provisions of SFAS No. 142.
The decrease in amortization expense of $41 in the 2002 third quarter was
partially offset by increases in depreciation expense related to acquisitions in
the 2002 period.
In the third quarter of 2002, Alcoa recorded a special charge of $39 ($23
after tax and minority interests), primarily as a result of the curtailment of
aluminum production at three smelters. Alcoa temporarily curtailed aluminum
production at its Badin, North Carolina plant and permanently closed its
Troutdale, Oregon plant as well as approximately 25% of the capacity at its
Rockdale, Texas facility. Actions taken in the third quarter resulted in charges
of $9 for asset write-downs of buildings and equipment, $24 for employee
termination and severance costs related to approximately 500 salaried and hourly
employees at the various facilities, and charges of $13 primarily for
remediation and demolition costs. These charges were somewhat offset by a net
credit of $7, primarily related to reversals of 2001 restructuring reserves due
to changes in estimates of liabilities resulting from lower than expected costs
associated with certain plant shutdowns and disposals.
Special charges of $212 ($114 after tax and minority interests) were
recorded in the 2001 nine-month period as a result of Alcoa's ongoing segment
review to optimize assets and lower costs. These actions were substantially
completed in 2001, with the exception of site remediation work that is ongoing.
Interest expense increased 12% in the 2002 third quarter compared with the
2001 third quarter due to higher debt levels in 2002 related to acquisitions, as
well as higher interest rates from a shift to longer term debt. Interest expense
decreased 14% in the 2002 nine-month period compared with the 2001 nine-month
period due to lower average effective interest rates.
Other income increased $26 in the 2002 third quarter, while declining $84
in the 2002 nine-month period compared with the corresponding 2001 periods. The
increase in the 2002 third quarter compared with the 2001 third quarter is
primarily due to favorable currency translation adjustments of $30
quarter-over-quarter, somewhat offset by lower equity earnings at Elkem. The
decrease in the 2002 nine-month period compared with the corresponding 2001
period was due to $76 higher net gains on asset sales recognized in 2001,
primarily attributable to the sales of Thiokol, Alcoa Proppants, Inc. and
Alcoa's interest in a Latin American cable business and a decrease of $41 in
equity earnings, driven by a restructuring at Elkem. These decreases were
somewhat offset by $28 related to several favorable nonoperating gains.
The effective tax rate of 30% in 2002 differs from the 2001 rate of 32% and
the statutory rate of 35% due to taxes on foreign income, the impact of ceasing
goodwill amortization, the sale of Thiokol, and adjustments to prior year taxes.
Minority interests' share of income from operations decreased 6% and 24% in
the 2002 third quarter and nine-month period, respectively, compared with the
corresponding 2001 periods. The decrease of 6% in the 2002 third quarter is due
to lower earnings at Alcoa World Alumina and Chemicals (AWAC), partially offset
by higher earnings at Alcoa Aluminio and other Latin America holdings. The
decrease of 24% in the 2002 nine-month period is primarily due to lower earnings
at AWAC and Alcoa Fujikura Ltd. (AFL).
14
Segment Information
I. Alumina and Chemicals
Third quarter ended Nine months ended
September 30 September 30
------------ ------------
2002 2001 2002 2001
------ ------ ------ ------
Alumina production 3,348 2,984 9,661 9,572
Third-party alumina shipments 1,939 1,789 5,560 5,550
Third-party sales $ 469 $ 454 $1,313 $1,491
Intersegment sales 235 246 697 804
------ ------ ------ ------
Total sales $ 704 $ 700 $2,010 $2,295
====== ====== ====== ======
After-tax operating income $ 93 $ 115 $ 231 $ 411
====== ====== ====== ======
Third-party sales for the 2002 third quarter increased 3% from the 2001
third quarter as higher shipments more than offset a 4% decline in realized
prices. For the 2002 nine-month period, third-party sales decreased 12% due to
lower realized prices. Intersegment sales for the 2002 third quarter and
nine-month period decreased 4% and 13%, respectively, from the corresponding
2001 periods due to lower prices.
ATOI for this segment decreased 19% and 44% from the 2001 third quarter and
nine-month period, respectively. The decreases were primarily due to lower
realized prices. Higher volumes and cost savings in the 2002 third quarter and
2002 nine-month period partly offset the negative impact of lower realized
prices compared with the corresponding 2001 periods.
Volume in the fourth quarter is anticipated to remain flat with third
quarter levels, while prices are expected to trend downward due to a pricing lag
as compared to the LME.
II. Primary Metals
Third quarter ended Nine months ended
September 30 September 30
------------ ------------
2002 2001 2002 2001
------ ------ ------ ------
Aluminum production 891 846 2,610 2,654
Third-party aluminum shipments 517 448 1,527 1,418
Third-party sales $ 792 $ 808 $2,344 $2,747
Intersegment sales 888 839 2,767 2,593
------ ------ ------ ------
Total sales $1,680 $1,647 $5,111 $5,340
====== ====== ====== ======
After-tax operating income $ 175 $ 216 $ 493 $ 774
====== ====== ====== ======
Third-party sales decreased 2% in the 2002 third quarter and 15% in the
2002 nine-month period compared with the corresponding 2001 periods. Higher
shipments in both periods were more than offset by lower realized prices and the
absence of power sales resulting from production curtailments at plants located
in the northwestern U.S. in 2001. Alcoa's average realized third-party price for
ingot declined 7% from the 2001 third quarter and 11% from the 2001 nine-month
period.
ATOI for this segment decreased 19% from the 2001 third quarter and 36%
from the 2001 nine-month period. The decreases were driven by lower realized
prices and the absence of power sales, which net of power and other
contractually required costs and the impact of lost aluminum sales, contributed
approximately $14 and $84 to ATOI in the 2001 third quarter and nine-month
period, respectively. These decreases were somewhat offset by increased volumes
and lower tax rates.
Alcoa has approximately 438,000 mt per year (mtpy) of idle capacity on a
base capacity of 3,948,000 mtpy.
Volume in the fourth quarter is anticipated to remain flat with third
quarter levels, while current LME prices would indicate lower realized prices in
the fourth quarter.
15
III. Flat-Rolled Products
Third quarter ended Nine months ended
September 30 September 30
------------ ------------
2002 2001 2002 2001
-------- -------- -------- --------
Third-party aluminum shipments 446 442 1,341 1,362
Third-party sales $1,162 $1,219 $3,510 $3,817
Intersegment sales 21 20 54 51
------ ------ ------ ------
Total sales $1,183 $1,239 $3,564 $3,868
====== ====== ====== ======
After-tax operating income $ 46 $ 59 $ 173 $ 198
====== ====== ====== ======
Third-party sales decreased 5% in the 2002 third quarter and 8% in the
2002 nine-month period compared with the corresponding 2001 periods. Lower
shipments and lower metal prices for rigid container sheet and lower prices and
a weaker product mix for sheet and plate in the U.S. and Europe due to continued
weakness in the aerospace market contributed to the revenue decline in both the
2002 third quarter and nine-month period compared with the corresponding 2001
periods.
ATOI for this segment declined 22% and 13% in 2002 compared with the
2001 third-quarter and nine-month period, respectively. The decreases in the
2002 third quarter and 2002 nine-month period were primarily due to unfavorable
product mix for sheet and plate in the U.S. and Europe due to continued weakness
in the aerospace market. Further contributing to the ATOI decline in the 2002
nine-month period were lower volumes and lower prices in Europe, while cost
savings in rigid container sheet helped to offset the declines in ATOI in the
2002 nine-month period compared with the corresponding 2001 period.
For the fourth quarter, overall shipments are expected to decline
slightly with rigid container sheet experiencing seasonal volume softening.
Aerospace volumes are expected to track declining build rates and automotive
volumes are expected to remain steady.
IV. Engineered Products
Third quarter ended Nine months ended
September 30 September 30
------------ ------------
2002 2001 2002 2001
-------- -------- -------- --------
Third-party aluminum shipments 231 232 711 728
Third-party sales $1,311 $1,514 $4,118 $4,689
Intersegment sales 8 9 26 26
------ ------ ------ ------
Total sales $1,319 $1,523 $4,144 $4,715
====== ====== ====== ======
After-tax operating income $ 25 $ 62 $ 121 $ 162
====== ====== ====== ======
Third-party sales declined 13% and 12% in the 2002 third quarter and
nine-month period compared to the corresponding 2001 periods, primarily due to
lower volumes as the aerospace, industrial gas turbine, and commercial building
and construction markets continued to decline, while the commercial
transportation market continued to show favorable increases.
ATOI for this segment decreased 60% for the 2002 third quarter and 25%
for the 2002 nine-month period versus the corresponding 2001 periods. These
decreases resulted from declining volumes due to continued weak market
conditions for aerospace and industrial gas turbines. These declines were
partially offset by higher volumes due to continued strength in the commercial
transportation market, productivity and purchasing cost savings, as well as the
absence of goodwill amortization of $15 and $45 in the 2002 third quarter and
nine-month period, respectively.
In the fourth quarter, we anticipate commercial transportation market
activity to be reduced, continued build rate declines in the industrial gas
turbine market, and seasonal slowdowns in the building and construction market.
Aerospace volumes are expected to track declining build rates. Automotive
volumes are expected to remain steady.
16
V. Packaging and Consumer
Third quarter ended Nine months ended
September 30 September 30
------------ ------------
2002 2001 2002 2001
-------- -------- -------- --------
Third-party aluminum shipments 47 33 109 116
Third-party sales $ 757 $ 671 $2,059 $2,018
After-tax operating income $ 51 $ 47 $ 134 $ 137
Third-party sales for the 2002 third quarter and nine-month period were
up 13% and 2%, respectively, compared to the corresponding 2001 periods. These
increases were primarily due to the acquisition of Ivex in the third quarter of
2002, which contributed $88, as well as higher volumes for the closures and
packaging design businesses. These increases in the 2002 third quarter and
nine-month period were partly offset by lower volumes, lower prices, and
currency devaluation in Latin America, as well as lower prices and lower volumes
across other businesses within the segment.
For this segment, ATOI rose 9% in the 2002 third quarter, while
declining 2% in the 2002 nine-month period compared with the comparable 2001
periods. The increase in ATOI in the 2002 third quarter is primarily due to
higher volumes and lower conversion costs in the packaging design business as
well as higher volumes in the closures business, somewhat offset by lower
volumes, lower prices and currency devaluation in Latin America. The decrease in
ATOI in the 2002 nine-month period is primarily due to business conditions in
Latin America as noted previously, partially offset by higher volumes in
closures and higher volumes and lower conversion costs in the packaging design
and consumer products businesses.
Demand in the fourth quarter is expected to increase due to seasonal
increases in the consumer products market, somewhat offset by seasonal slowdowns
anticipated for closures. Ivex is expected to contribute to ATOI beginning in
the fourth quarter.
VI. Other
Third quarter ended Nine months ended
September 30 September 30
------------ ------------
2002 2001 2002 2001
-------- -------- -------- --------
Third-party aluminum shipments 80 57 225 200
Third-party sales $ 731 $ 845 $2,106 $2,916
After-tax operating income $ 8 $ 4 $ 34 $ 99
For this group, third-party sales decreased 13% in the 2002 third
quarter and 28% in the 2002 nine-month period compared with the corresponding
2001 periods. The decreases were the result of the divestitures of Thiokol and
RASCO in 2001, as well as lower volumes and lower prices in the AFL
telecommunications business as the market for this business continued to
decline. These decreases in the 2002 third quarter and nine-month period were
somewhat offset by increases in the automotive businesses, which were aided by
the acquisition of the remaining 50% interest in Engineered Plastic Components,
Inc.
ATOI for this group increased $4 in the 2002 third quarter, while
declining $65 in the 2002 nine-month period compared with the corresponding 2001
periods. The increase in ATOI in the 2002 third quarter is primarily due to
increased volumes and productivity and purchasing cost improvements in the
automotive businesses as well as the absence of goodwill amortization that
favorably impacted the segment by $7 in the 2002 third quarter. These increases
more than offset continued volume and price declines in the telecommunications
business as well as lower volumes and higher costs in the building products
business. The decrease in ATOI in the 2002 nine-month period is primarily due to
volume declines in the telecommunications business and the absence of gains on
the sales of Thiokol, Alcoa Proppants and Alcoa's interest in a Latin American
cable business which were recognized in 2001, partially offset by performance
improvements in the automotive businesses and the absence of goodwill
amortization which favorably impacted the segment by $25 in the 2002 nine-month
period.
In the fourth quarter, seasonal slowdowns are expected in the building
and construction market and the telecommunications market is expected to remain
depressed. Automotive volumes are expected to remain steady.
17
Reconciliation of ATOI to Consolidated Net Income
Items required to reconcile ATOI to consolidated net income include: corporate
adjustments to eliminate any remaining profit or loss between segments; 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; special items; accounting change; and other, which
includes the impact of LIFO, differences between estimated tax rates used in the
segments and the corporate effective tax rate, and other nonoperating items such
as foreign exchange.
The following table reconciles segment information to consolidated totals.
Third quarter ended Nine months ended
September 30 September 30
------------ ------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Total after-tax operating income $ 398 $ 503 $ 1,186 $ 1,781
Impact of intersegment profit eliminations (5) (14) (9) (18)
Unallocated amounts (net of tax):
Interest income 7 10 26 30
Interest expense (62) (55) (165) (191)
Minority interests (49) (52) (137) (180)
Corporate expense (40) (45) (151) (177)
Special items (25) - (25) (148)
Accounting change - - 34 -
Other (31) (8) (116) (47)
------- ------- ------- -------
Consolidated net income $ 193 $ 339 $ 643 $ 1,050
======= ======= ======= =======
The significant changes in the reconciling items between ATOI and
consolidated net income for the 2002 third quarter compared with the
corresponding 2001 period consisted of: an increase in special items of $25
(after tax, before minority interests) primarily related to smelter production
curtailments in the 2002 third quarter, and an increase of $23 in other
primarily due to intracompany profit eliminations, the impact of LIFO
adjustments, and differences between estimated tax rates used in the segments
and the corporate effective tax rate, partially offset by favorable currency
translation adjustments.
The significant changes in the reconciling items between ATOI and
consolidated net income for the 2002 nine-month period compared with the
corresponding 2001 period consisted of: a decrease of $26 in interest expense
due to lower average effective interest rates; a decrease of $43 in minority
interests due to lower earnings at AWAC and AFL; a decrease of $26 in corporate
expense due to lower employee compensation costs; a decrease of $123 in special
items due to restructuring charges of $148 (after tax, before minority
interests) recorded in 2001; an increase of $34 in accounting change as a result
of the cumulative effect of the accounting change for goodwill recognized in
2002; and an increase of $69 in other related to the items noted above for the
2002 third quarter increase in other.
Market Risks
In addition to the risks inherent in its operations, Alcoa is exposed to
financial, market, political and economic risks. The following discussion
provides additional detail regarding Alcoa's exposure to the risks of changing
commodity prices, foreign exchange rates and interest rates.
Derivatives
Alcoa's commodity and derivative activities are subject to the management,
direction and control of the Strategic Risk Management Committee (SRMC). SRMC is
composed of the chief executive officer, the chief financial officer and other
officers and employees that the chief executive officer selects. SRMC reports to
the Board of Directors on the scope of its derivative activities.
All of the aluminum and other commodity contracts, as well as various
types of derivatives, are held for purposes other than trading. They are used
primarily to mitigate uncertainty and volatility, and cover underlying
exposures. The company is not involved in energy trading activities or weather
derivatives or to any material extent in other nonexchange commodity trading
activities.
Commodity Price Risks - Alcoa is a leading global producer of aluminum ingot and
aluminum fabricated products. As a condition of sale, customers often require
Alcoa
18
to enter into long-term fixed-price commitments. These commitments expose Alcoa
to the risk of fluctuating aluminum prices between the time the order is
committed and the time the order is shipped.
Alcoa's aluminum commodity risk management policy is to manage, through the
use of futures and options contracts, the aluminum price risk associated with a
portion of its fixed price firm commitments. At September 30, 2002, these
contracts totaled approximately 87,000 mt with a fair value loss of
approximately $51 (pre-tax).
Alcoa sells products to various third parties at prices that are influenced
by changes in LME aluminum prices. From time to time, the company may elect to
sell forward a portion of its anticipated primary aluminum and alumina
production to reduce the risk of fluctuating market prices on these sales.
Toward this end, Alcoa may enter into short positions using futures and options
contracts. At September 30, 2002, these contracts totaled 5,000 mt. The fair
value of these contracts at September 30, 2002 was not material. These contracts
act to fix a portion of the sales price related to these sales contracts.
Alcoa purchases natural gas and fuel oil to meet its production
requirements. These purchases expose the company to the risk of higher natural
gas and fuel oil prices. To hedge this risk, Alcoa enters into long positions,
principally futures and options. Alcoa follows a stable pattern of purchasing
natural gas and fuel oil; therefore, it is highly likely that anticipated
purchases will occur. At September 30, 2002, the fair value of the contracts for
natural gas and fuel oil was a gain of approximately $34 (pre-tax).
Alcoa also purchases certain other commodities, such as electricity, for
its operations and may enter into futures and options contracts to eliminate
volatility in the price of these commodities. None of these contracts were
material at September 30, 2002.
Financial Risk
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. These contracts cover periods commensurate
with known or expected exposures, generally within three years. The fair value
of these contracts was a gain of approximately $49 (pre-tax) at September 30,
2002.
In addition, certain contracts are used to offset a portion of the impact
of exchange and interest rate changes on foreign currency denominated debt.
These contracts are marked to market and offset a portion of the impact of the
exchange differences on the debt. The mark to market gains on these contracts
were $118 (pre-tax) at September 30, 2002.
Interest Rates - Alcoa uses interest rate swaps to help maintain a reasonable
balance between fixed- and floating-rate debt and to keep financing costs as low
as possible. The company has entered into pay floating, receive fixed interest
rate swaps to change the interest rate risk exposure of a portion of its
outstanding fixed-rate debt. The fair value of these swaps was a gain of
approximately $42 (pre-tax) at September 30, 2002.
Material Limitations - The disclosures with respect to commodity prices,
interest rates, and foreign exchange risk do not take into account the
underlying anticipated purchase obligations and the underlying transactional
foreign exchange exposures. If the underlying items were included in the
analysis, the gains or losses on the futures and options contracts may be
offset. Actual results will be determined by a number of factors that are not
under Alcoa's control and could vary significantly from those factors disclosed.
Alcoa is exposed to credit loss in the event of nonperformance by
counterparties on the above instruments, as well as credit or performance risk
with respect to its hedged customers' commitments. Although nonperformance is
possible, Alcoa does not anticipate nonperformance by any of these parties.
Futures and options contracts are with creditworthy counterparties and are
further supported by cash, treasury bills or irrevocable letters of credit
issued by carefully chosen banks. In addition, various master netting
arrangements are in place with counterparties to facilitate settlement of gains
and losses on these contracts.
Environmental Matters
19
Alcoa continues to participate in environmental assessments and cleanups at a
number of locations. These include approximately 28 owned or operating
facilities and adjoining properties, approximately 38 previously owned or
operating facilities and adjoining properties and approximately 71 Superfund and
other waste sites. A liability is recorded for environmental remediation costs
or damages when a cleanup program becomes probable and the costs or damages can
be reasonably estimated.
As assessments and cleanups proceed, the liability is adjusted based on
progress made in determining the extent of remedial actions and related costs
and damages. The liability can change substantially due to factors such as the
nature and extent of contamination, changes in remedial requirements and
technological changes. Therefore, it is not possible to determine the outcomes
or to estimate with any degree of accuracy the potential costs for certain of
these matters. For example, there are issues related to Alcoa's Massena, New
York site where investigations are ongoing and where natural resource damage or
off-site contaminated sediments have been alleged. The following discussion
provides additional details regarding the current status of certain sites.
MASSENA. Alcoa has been conducting investigations and studies of the Grasse
River, adjacent to Alcoa's Massena, New York plant site, under order from the
U.S. Environmental Protection Agency (EPA) issued under the Comprehensive
Environmental Response, Compensation and Liability Act, also known as Superfund.
Sediments and fish in the river contain varying levels of polychlorinated
biphenyl (PCB).
In the fourth quarter of 1999, Alcoa submitted an Analysis of Alternatives
Report to the EPA. This report identified potential courses of remedial action
related to the PCB contamination of the river. The EPA indicated to Alcoa that
it believed additional remedial alternatives needed to be included in the
Analysis of Alternatives Report. During 2000 and 2001, Alcoa completed certain
studies and investigations on the river, including pilot tests of
sediment-capping techniques and other remediation technologies. In February
2002, Alcoa submitted a revised draft Analysis of Alternatives Report to the EPA
based on these additional evaluations and included additional remedial
alternatives required by the EPA. The additional alternatives required by the
EPA involve removal of more sediment than was included in the 1999 Analysis of
Alternatives Report. The range of costs associated with the remedial
alternatives evaluated in the 2002 report is between $2 and $525. Alcoa believes
that several of those alternatives, involving the largest amounts of sediment
removal, should not be selected for the Grasse River remedy. Alcoa believes the
alternatives that should be selected are those ranging from monitored natural
recovery ($2) to a combination of moderate dredging and capping ($90). A reserve
of $2 has been recorded for any probable losses, as no one of the alternatives
is more likely to be selected than any other.
Portions of the St. Lawrence River system adjacent to a former Reynolds
plant are also contaminated with PCB, and during 2001, Alcoa substantially
completed a dredging remedy for the St. Lawrence River. Further analysis of the
condition of the sediment is being performed. Any required additional dredging
or capping of residual contamination is likely to be completed during the 2003
construction season. The most probable cost of any such additional remediation
is fully reserved and Alcoa does not believe that any additional liability for
this site is reasonably possible.
POINT COMFORT/LAVACA BAY. Since 1990, Alcoa has undertaken investigations
and evaluations concerning alleged releases of mercury from its Point Comfort,
Texas facility into the adjacent Lavaca Bay pursuant to a Superfund order from
the EPA. In March 1994, the EPA listed the "Alcoa (Point Comfort)/Lavaca Bay
Site" on the National Priorities List. In December 2001, the EPA issued its
Record of Decision (ROD) selecting the final remedial approach for the site,
which is fully reserved. The company is negotiating a Consent Order with the EPA
under which it will undertake to implement the remedy. The company and certain
federal and state natural resource trustees, who previously served Alcoa with
notice of their intent to file suit to recover damages for alleged loss or
injury of natural resources in Lavaca Bay, have cooperatively identified
restoration alternatives and approaches for Lavaca Bay. The cost of such
restoration is reserved and Alcoa anticipates negotiating a Consent Decree with
the trustees under which it will implement the restoration. Alcoa does not
believe that any additional liability for this site is reasonably possible.
TROUTDALE, OREGON. In 1994, the EPA added Reynolds' Troutdale, Oregon
primary aluminum production plant to the National Priorities List of Superfund
sites. Alcoa has been cooperating with the EPA under a September 1995 consent
order to identify cleanup solutions for the site. Further analyses were done to
determine the effects
20
of the July 2002 decision to permanently close the Troutdale production plant on
the number and scope of remedial alternatives for the facility. In August 2002,
the EPA issued a preliminary remedial action plan representing the most probable
scope and cost of cleanup. That cost has been fully reserved and Alcoa does not
believe that any additional liability for this site is reasonably possible.
SHERWIN, TEXAS. In connection with the sale of the Sherwin alumina refinery
in Texas, which was required to be divested as part of the Reynolds merger in
2000, Alcoa has agreed to retain responsibility for the remediation of then
existing environmental conditions, as well as a pro rata share of the final
closure of the active waste disposal areas, which remain in use. Alcoa's share
of the closure costs is proportional to the total period of operation of the
active waste disposal areas. Alcoa estimated its liability for the active
disposal areas by making certain assumptions about the period of operation, the
amount of material placed in the area prior to closure, and the appropriate
technology, engineering and regulatory status applicable to final closure. The
most probable cost for remediation has been reserved. It is reasonably possible
that an additional liability, not expected to exceed $75, may be incurred if
actual experience varies from the original assumptions used.
Based on the above, it is possible that Alcoa's results of operations, in a
particular period, could be materially affected by matters relating to these
sites. However, based on facts currently available, management believes that
adequate reserves have been provided and that the disposition of these matters
will not have a materially adverse effect on the financial position or liquidity
of the company.
Alcoa's remediation reserve balance at September 30, 2002 was $407 (of
which $68 was classified as a current liability) and reflects the most probable
costs to remediate identified environmental conditions for which costs can be
reasonably estimated. Remediation costs charged to the reserve in the 2002 third
quarter were $16. They include expenditures currently mandated, as well as those
not required by any regulatory authority or third party.
Included in annual operating expenses are the recurring costs of managing
hazardous substances and environmental programs. These costs are estimated to be
about 2% of cost of goods sold.
Liquidity and Capital Resources
Cash from Operations
Cash from operations for the 2002 nine-month period totaled $1,009, compared
with $1,728 in the corresponding 2001 period. The decrease of $719, or 42%,
resulted primarily from a decrease of $575 in net income after non-cash
adjustments, with the remaining $144 decrease primarily due to higher tax
payments. The decrease in adjustments for non-cash items was primarily due to
lower depreciation and amortization expense, primarily due to the change in
accounting for goodwill under SFAS No. 142, and the special items charges
recognized in 2001.
Financing Activities
Financing activities provided $522 of cash in the 2002 nine-month period,
compared with $3,005 used in the corresponding 2001 period. The change in cash
provided from financing activities in the 2002 nine-month period compared with
the 2001 nine-month period is primarily due to the following: a change of $2,315
in short-term borrowings due to repayments of short-term debt in the 2001
nine-month period that were funded by the proceeds from the sales of operations
required to be divested from the Reynolds merger, the sale of Thiokol and the
issuance of additional debt; a decrease of $507 related to common stock issued
for stock plans; a decrease in share repurchases of the company's common stock,
using $224 to repurchase 6,313,100 shares in the 2002 nine-month period versus
$1,338 used to repurchase 36,146,236 shares in the 2001 nine-month period; an
increase of $123 in cash due to a decrease in dividend payments to minority
interests; and an increase of $474 in cash due to net borrowings on long-term
debt, including commercial paper, in 2002 which exceeded net borrowings in 2001.
In August 2002, Alcoa issued $1,400 of notes. Of these notes, $800 mature
in 2007 and carry a coupon rate of 4.25%, and $600 mature in 2013 and carry a
coupon rate of 5.375%. The proceeds from these borrowings were used to fund the
acquisition of Ivex and to refinance commercial paper.
In August 2002, Moody's Investors Service downgraded the long-term debt
ratings of Alcoa from A1 to A2 and its rated subsidiaries principally from A2 to
A3. Alcoa's Prime-1 short term rating was not included in the review. In October
2002, Standard
21
& Poor's lowered Alcoa's long-term corporate credit rating to A from A+, while
affirming Alcoa's A-1 short-term corporate credit and commercial paper ratings.
The impact of the downgrades is not expected to be material to the company.
In April 2002, Alcoa refinanced its $2,000 revolving-credit agreement that
was to expire in April 2002 into a revolving-credit agreement that expires in
April 2003.
Investing Activities
Investing activities used cash of $1,531 in the 2002 nine-month period, compared
with cash provided from investing activities of $1,494 in the corresponding 2001
period. The change in cash of $3,025 in the 2002 nine-month period is primarily
due to proceeds received from the dispositions of assets required to be divested
from the Reynolds merger, as well as proceeds from the sale of Thiokol, which
returned $2,485 in the 2001 period. In addition, $469 more of cash was used in
the 2002 nine-month period related to acquisitions.
Critical Accounting Policies
A summary of the company's significant accounting policies is included in Note A
to the audited consolidated financial statements contained in the Annual Report
on Form 10-K for the year ended December 31, 2001. Management believes that the
application of these policies on a consistent basis enables the company to
provide the users of the financial statements with useful and reliable
information about the company's operating results and financial condition.
The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make judgments, estimates
and assumptions regarding uncertainties that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities and the
reported amounts of revenues and expenses. Areas of uncertainty that require
judgments, estimates and assumptions include the accounting for derivatives,
environmental and tax matters as well as the annual testing of goodwill for
impairment. Management uses historical experience and all available information
to make these judgments and estimates and actual results will inevitably differ
from those estimates and assumptions that are used to prepare the company's
financial statements at any given time. Despite these inherent limitations,
management believes that Management's Discussion and Analysis and the financial
statements and footnotes provide a meaningful and fair perspective of the
company. A discussion of the judgments and uncertainties associated with
accounting for derivatives and environmental matters can be found in the Market
Risks and Environmental Matters sections of Management's Discussion and
Analysis.
Recent declines in equity markets and interest rates have had a negative
impact on Alcoa's pension plan liability and fair value of plan assets. As a
result, the fair value of plan assets is projected to be lower than the
accumulated pension benefit obligation at the end of 2002. Based on current fair
values of plan assets and current interest rates, we anticipate a charge to
shareholders' equity of approximately $700 - $1,000. The charge to be recorded
is subject to changes in market conditions experienced through the remainder of
the year.
Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
143, "Accounting for Asset Retirement Obligations." This statement establishes
standards for accounting for obligations associated with the retirement of
tangible long-lived assets. Alcoa must adopt this standard on January 1, 2003.
Management is currently assessing the details of the standard and is preparing a
plan of implementation.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity," under which
a liability for an exit cost was recognized at the date of an entity's
commitment to an exit plan. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized at fair value when
the liability is incurred. The provisions of this statement are effective for
exit or disposal activities that are initiated after December 31, 2002.
22
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 October 21, 2002, and they
concluded that these controls and procedures are effective.
(b) Changes in Internal Controls
There are no significant changes in internal controls or in other factors that
could significantly affect these controls subsequent to October 21, 2002.
23
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
In May through September of 2002, eleven lawsuits were filed against Reynolds
and Alcoa in the District Court of Wharton County, Texas, two of which have
since been dismissed. In the same timeframe, an additional lawsuit was filed in
the United States District Court, Southern District of Texas, Victoria Division.
The lawsuits seek to recover damages relating to the presence of
trichloroethylene in the groundwater near a former Reynolds extrusion facility
in El Campo, Texas. Additional defendants included in some of the lawsuits are
the current operators to whom Reynolds sold the facility in 1997, Bon L. Campo
Limited Partnership (Bon L. Campo) and Tredegar Corporation, a few former
employees of the current plant operators and two neighboring businesses. Some of
the cases request class certification to include other allegedly affected
individuals as plaintiffs. Damages sought include those for the contamination of
private wells, diminution of property value, medical monitoring and punitive
damages. The defendants have answered the complaints and removed all but one of
the cases to the United States District Court, Southern District of Texas,
Houston Division. Alcoa and Reynolds have filed counterclaims and requests that
the litigation be stayed temporarily in order to permit their continued
performance with the Voluntary Cleanup Program administered by the Texas
Commission of Environmental Quality (TCEQ, formerly TNRCC) to identify the
source of the contamination and plan appropriate remediation. Reynolds owned and
operated the facility from 1971 to 1997 and sold it to Bon L. Campo before Alcoa
acquired Reynolds. Currently, the amount of any possible loss cannot be
estimated.
In August of 2000, the U.S. Department of Justice (DOJ) notified IPC, Inc.
(IPC), a wholly owned subsidiary of Ivex, and Consolidated Fibers, Inc. (CFI), a
wholly owned subsidiary of IPC, that they were potentially responsible parties
(PRPs) under the Comprehensive Environmental Response, Compensation, and
Liability Act (CERCLA) at the Agriculture Street Landfill Superfund Site, New
Orleans, Louisiana (the Site). In August of 2002, the DOJ extended an offer to
CFI to engage in pre-filing settlement discussions regarding the United States
claim for response costs at the Site. The DOJ stated that the government had
incurred approximately $40.6 million in response costs at the Site and sought a
settlement amount of approximately $13.8 million to be paid collectively by CFI
and other PRPs. Ivex has agreed to further discussions with the DOJ.
As previously reported in Alcoa's Form 10-Q for the quarter ended June 30, 2002,
in the first half of 2002, Alcoa discovered that a former Reynolds' distribution
entity, RASCO, may have sold upwards of 800,000 pounds of aluminum plate made by
an unrelated company for use in the Northwest maritime industry that may not be
suitable for that use. Reynolds and the current owner of the business and the
manufacturer of the metal are working jointly to identify the issues and find
resolutions. All customers have been notified of the issue, inspection protocols
have been put into place and the United States Coast Guard has been notified and
is involved in the resolution process. Three lawsuits were originally filed by
ship owners or operators. Two lawsuits were settled and one is still pending.
The parties have been working cooperatively toward satisfactory resolutions.
Currently, the amount of any possible loss cannot be estimated.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
12. Computation of Ratio of Earnings to Fixed Charges
15. Letter regarding unaudited interim financial information
(b) Reports on Form 8-K. During the third quarter of 2002, Alcoa filed the
following reports on Form 8-K with the Securities and Exchange Commission,
reporting matters under Item 5:
(1) a Form 8-K dated July 1, 2002, reporting that Alcoa had completed its
previously announced agreement to acquire Chicago-based Ivex
Packaging Corporation;
(2) a Form 8-K dated July 17, 2002, reporting that Alcoa had agreed to
acquire the assets of Fairchild Fasteners, a leading supplier of
aerospace fasteners, from The Fairchild Corporation for $657 million
in cash;
24
(3) a Form 8-K dated August 7, 2002, reporting that Alcoa's Chairman and
Chief Executive Officer, Alain J.P. Belda, and Executive Vice
President and Chief Financial Officer, Richard B. Kelson, submitted
sworn statements to the SEC affirming the SEC filings made by the
company in 2002; and
(4) a Form 8-K dated August 13, 2002, reporting that Alcoa completed the
offering and sale of $800,000,000 principal amount of 4.25% Notes due
2007 and $600,000,000 principal amount of 5.375% Notes due 2013 in an
underwritten public offering under Registration Statement No.
333-74874 on Form S-3 filed under the Securities Act of 1933, as
amended.
25
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 22, 2002 By /s/ RICHARD B. KELSON
---------------------- --------------------------------
Date Richard B. Kelson
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
October 22, 2002 By /s/ CHARLES D. MCLANE, JR.
---------------------- --------------------------------
Date Charles D. McLane, Jr.
Vice President - Alcoa Business
Support Services and Controller
(Chief Accounting Officer)
26
CERTIFICATIONS
I, Alain J. P. Belda, Chairman of the Board and Chief Executive Officer of Alcoa
Inc. (Alcoa), certify that:
1. I have reviewed this quarterly report on Form 10-Q of Alcoa;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of Alcoa as of, and for, the periods presented in this
quarterly report;
4. Alcoa's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for Alcoa and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to Alcoa, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of Alcoa's disclosure controls and
procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. Alcoa's other certifying officer and I have disclosed, based on our
most recent evaluation, to Alcoa's auditors and the audit committee
of Alcoa's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect Alcoa's ability
to record, process, summarize and report financial data and have
identified for Alcoa's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in Alcoa's internal
controls; and
6. Alcoa's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: October 22, 2002 /s/ ALAIN J. P. BELDA
---------------------------------------
Title: Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
27
I, Richard B. Kelson, Executive Vice President and Chief Financial Officer of
Alcoa Inc. (Alcoa), certify that:
1. I have reviewed this quarterly report on Form 10-Q of Alcoa;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of Alcoa as of, and for, the periods presented in this
quarterly report;
4. Alcoa's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for Alcoa and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to Alcoa, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of Alcoa's disclosure controls and
procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. Alcoa's other certifying officer and I have disclosed, based on our
most recent evaluation, to Alcoa's auditors and the audit committee
of Alcoa's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect Alcoa's ability
to record, process, summarize and report financial data and have
identified for Alcoa's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in Alcoa's internal
controls; and
6. Alcoa's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: October 22, 2002
/s/ RICHARD B. KELSON
--------------------------------------
Title: Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
28
EXHIBITS
12. Computation of Ratio of Earnings to Fixed Charges
15. Letter regarding unaudited interim financial information
29