FORM 10-QSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MarkFORM 10-Q
(Mark One)
[X]
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 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
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended
September 30, 2002March 31, 2003Commission File Number 1-3610
ALCOA INC.
(Exact(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)
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(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
Xx No ¨Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
As of
October 18, 2002, 844,270,310April 23, 2003, 845,246,716 shares of common stock, par value $1.00 per share, of the Registrant were outstanding.PART I
-– FINANCIAL INFORMATIONITEMItem 1.
-– Financial Statements.Alcoa and subsidiaries
Condensed Consolidated Balance Sheet
(in(unaudited)(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 ======= =======
March 31
2003
December 31
2002
ASSETS
Current assets:
Cash and cash equivalents
$
370
$
344
Receivables from customers, less allowances of $127 in 2003 and $120 in 2002
2,611
2,378
Other receivables
253
174
Inventories (F)
2,557
2,441
Deferred income taxes
457
468
Prepaid expenses and other current assets
437
508
Total current assets
6,685
6,313
Properties, plants and equipment, at cost
23,606
23,120
Less: accumulated depreciation, depletion and amortization
11,420
11,009
Net properties, plants and equipment
12,186
12,111
Goodwill
6,365
6,365
Other assets
4,511
4,446
Assets held for sale (D)
609
575
Total assets
$
30,356
$
29,810
LIABILITIES
Current liabilities:
Short-term borrowings
$
32
$
37
Accounts payable, trade
1,762
1,618
Accrued compensation and retirement costs
846
933
Taxes, including taxes on income
817
818
Other current liabilities
865
970
Long-term debt due within one year
75
85
Total current liabilities
4,397
4,461
Long-term debt, less amount due within one year
8,672
8,365
Accrued postretirement benefits
2,304
2,320
Other noncurrent liabilities and deferred credits
2,931
2,878
Deferred income taxes
509
502
Liabilities of operations held for sale (D)
90
64
Total liabilities
18,903
18,590
MINORITY INTERESTS
1,370
1,293
COMMITMENTS AND CONTINGENCIES (G)
SHAREHOLDERS’ EQUITY
Preferred stock
55
55
Common stock
925
925
Additional capital
6,098
6,101
Retained earnings
7,451
7,428
Treasury stock, at cost
(2,819
)
(2,828
)
Accumulated other comprehensive loss (H)
(1,627
)
(1,754
)
Total shareholders’ equity
10,083
9,927
Total liabilities and equity
$
30,356
$
29,810
The accompanying notes are an integral part of the financial statements.
2
Alcoa and subsidiaries
Condensed Statement of Consolidated Income (unaudited)
(in(in millions, except
per shareper-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 ======== ======== ======== ========
First quarter ended
March 31
2003
2002
Sales
$
5,112
$
4,900
Cost of goods sold
4,073
3,968
Selling, general administrative and other expenses
294
273
Research and development expenses
50
51
Provision for depreciation, depletion and amortization
285
259
Special items (E)
(4
)
—
Interest expense
88
75
Other income, net (J)
(37
)
(55
)
4,749
4,571
Income from continuing operations before taxes on income
363
329
Provision for taxes on income
109
104
Income from continuing operations before minority interests’ share
254
225
Less: Minority interests’ share
59
41
Income from continuing operations
195
184
Income from discontinued operations (D)
3
—
Cumulative effect of accounting change (B)
(47
)
34
NET INCOME
$
151
$
218
EARNINGS PER SHARE (I)
Basic:
Income from continuing operations
$
.23
$
.22
Cumulative effect of accounting change
(.06
)
.04
Net income
$
.17
$
.26
Diluted:
Income from continuing operations
$
.23
$
.22
Cumulative effect of accounting change
(.06
)
.04
Net income
$
.17
$
.26
Dividends paid per common share
$
.15
$
.15
The accompanying notes are an integral part of the financial statements.
3
Alcoa and subsidiaries
Condensed Statement of Consolidated Cash Flows (unaudited)
(in(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 ======= =======
Three months ended
March 31
2003
2002
CASH FROM OPERATIONS
Net income
$
151
$
218
Adjustments to reconcile net income to cash from operations:
Depreciation, depletion and amortization
287
261
Change in deferred income taxes
6
(7
)
Equity income, net of dividends
(61
)
4
Noncash special items (E)
(4
)
—
Losses from investing activities – sale of assets
1
—
Minority interests
59
41
Income from discontinued operations (D)
(3
)
—
Accounting changes (B)
47
(34
)
Other
38
(16
)
Changes in assets and liabilities, excluding effects of acquisitions and divestitures:
Increase in receivables
(275
)
(42
)
(Increase) reduction in inventories
(89
)
108
Reduction in prepaid expenses and other current assets
—
(69
)
Reduction in accounts payable and accrued expenses
(46
)
(220
)
Reduction in taxes, including taxes on income
(18
)
(48
)
Net change in noncurrent assets and liabilities
(88
)
26
(Increase) reduction in net assets held for sale
(36
)
15
CASH (USED FOR) PROVIDED FROM CONTINUING OPERATIONS
(31
)
237
CASH PROVIDED FROM DISCONTINUED OPERATIONS
1
—
CASH FROM OPERATIONS
(30
)
237
FINANCING ACTIVITIES
Net changes to short-term borrowings
(5
)
(65
)
Common stock issued for stock compensation plans
4
34
Repurchase of common stock
—
(105
)
Dividends paid to shareholders
(127
)
(127
)
Dividends paid to minority interests
(45
)
—
Net change in commercial paper
352
480
Additions to long-term debt
101
17
Payments on long-term debt
(94
)
(29
)
CASH PROVIDED FROM FINANCING ACTIVITIES
186
205
INVESTING ACTIVITIES
Capital expenditures
(180
)
(233
)
Capital expenditures of discontinued operations
(1
)
(5
)
Acquisitions, net of cash acquired
(6
)
(105
)
Proceeds from the sale of assets
14
23
Additions to investments
(3
)
(10
)
Changes in short-term investments
44
(33
)
Changes in minority interests
—
(10
)
Other
(6
)
(7
)
CASH USED FOR INVESTING ACTIVITIES
(138
)
(380
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
8
(5
)
Net change in cash and cash equivalents
26
57
Cash and cash equivalents at beginning of year
344
512
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
370
$
569
The accompanying notes are an integral part of the financial statements.
4
Notes to Condensed Consolidated Financial Statements
(dollars(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'sAlcoa’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)2002, which includes all disclosures required by accounting principles generally accepted in thesecond quarterUnited States of2001 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. 5The 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.America.B. Recently Adopted Accounting Standards
-– Effective January 1, 2003, 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 criteria143, “Accounting forrecognition of intangible assets and goodwill. Effective January 1, 2002, Alcoa adopted SFAS No. 142 "Goodwill and Other Intangible Assets."Asset Retirement Obligations.” Under this new standard,goodwill and intangibles with indefinite useful lives are no longer amortized. This standard also requires,Alcoa recognized additional liabilities, ata 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 thefair value, ofAlcoa's businessesapproximately $136 at January 1, 2003, forpurposesasset retirement obligations (ARO’s), consisting primarily oftesting goodwillcosts associated with spent pot lining disposal, bauxite residue disposal, mine reclamation and landfills. These costs reflect the legal obligations associated with the normal operation of Alcoa’s bauxite mining, alumina refining, and aluminum smelting facilities. Alcoa had previously recorded liabilities forimpairment. The discount rate used was based on a risk-adjusted weighted average costcertain ofcapital for each business. The effectsthese costs. Additionally, Alcoa capitalized asset retirement costs by increasing the carrying amount ofadoptingrelated long-lived assets, primarily machinery and equipment, and recorded associated accumulated depreciation from thenew standards ontime the original assets were placed into service. At January 1, 2003, Alcoa increased the following: netincomeproperties, plants anddiluted earnings perequipment by $74, net deferred tax assets by $22 and minority interests’ sharefor the three-month and nine-month periods ended September 30, 2002 and 2001, follow.by $7.
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 this standard was $47, consisting primarily of costs to establish assets and liabilities related to spent pot lining disposal for pots currently in operation. Net income for the quarter ended March 31, 2002 and for the full year of 2002 would not have been materially different if this standard had been adopted effective January 1, 2002.
The changes in the carrying amount of ARO’s for the quarter ended March 31, 2003, and the pro forma impact for the year ended December 31, 2002, as if this standard had been adopted effective January 1, 2002, follow.
Quarter ended
March 31, 2003
(Pro forma)
Year ended
December 31, 2002
Balance at beginning of period
$
224
$
214
Accretion expense
3
12
Payments
(9
)
(27
)
Liabilities incurred
8
22
Translation and other
(1
)
3
Balance at end of period
$
225
$
224
In addition to the ARO’s discussed above, Alcoa may have other obligations in the event of a permanent plant shutdown. However, these
new standards wasplant assets have indeterminate lives and, therefore, the associated ARO’s are not reasonably estimable and liabilities cannot be established.In 2002, Alcoa adopted SFAS No. 141, “Business Combinations” and SFAS No. 142 “Goodwill and Other Intangible Assets.” As a result, Alcoa recognized a cumulative effect adjustment of $34
(after tax),in the first quarter of 2002, 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 impairmentsunder SFAS No. 142from an undiscounted to a discounted cash flow method.Net incomeC. Stock-Based Compensation – Stock options granted under the company’s stock incentive plans are generally granted at market prices on the date of grant and include a reload or stock continuation ownership feature. Stock options
5
granted have a maximum term of ten years. Vesting periods for new option grants prior to 2003 are one year from the
three-monthdate of grant andnine-month periods ended September 30, 2001, would have been $41,six months for options granted under the reload feature. New option grants issued after this date vest one-third in each of the three years from the date of the grant, and the reload feature of new options is subject to cancellation orfive cents per share, and $128, or 15 cents per share, higher if goodwill amortization had been discontinued effective January 1, 2001. Net incomemodification.Alcoa accounts 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. 6Changes 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 recognizedstock-based compensation incumulative 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 ======== ====== Inaccordance with the provisions ofthese new standards,Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations using the intrinsic value method, which resulted in no compensation cost for options granted.Alcoa’s net income and earnings per share would have been reduced to the pro forma amounts shown below if compensation cost had been determined based on
January 1,the fair value at the grant dates in accordance with SFAS Nos. 123 and 148, “Accounting for Stock-Based Compensation.”
First quarter ended March 31
2003
2002
Net income, as reported
$
151
$
218
Less: compensation cost determined under the fair value method, net of tax
4
32
Pro forma net income
$
147
$
186
Basic earnings per share:
As reported
$
.17
$
.26
Pro forma
.17
.22
Diluted earnings per share:
As reported
$
.17
$
.26
Pro forma
.17
.22
D. Discontinued Operations and Assets Held for Sale – During the fourth quarter of 2002, Alcoa
transferred $28 (after tax)performed a portfolio review ofcustomer base intangibles, initially recordedits businesses and the markets they serve. As a result of this review, Alcoa committed to a plan to divest certain noncore businesses that do not meet internal growth and return measures. Certain of the businesses to be divested were classified as discontinued operations and they include Alcoa’s commodity automotive fasteners business, certain fabricating businesses serving the residential building and construction market in North America, a packaging business in South America, and the protective packaging business acquired in theReynoldsIvex Packaging Corporation acquisitionto goodwill (Packaging and Consumer segment). Goodwill also increased $602 during the period related to eight acquisitions (inin 2002. These businesses were previously included within the Engineered Productssegment, theand Packaging and Consumersegment,segments and have been reclassified to corporate. The financial information for 2002 has been reclassified to reflect these businesses as assets held for sale and liabilities of operations held for sale on theOther group)Condensed Consolidated Balance Sheet andadjustmentsas discontinued operations on the Condensed Statement of Consolidated Income. Sales and income from operations for the businesses included within discontinued operations were $90 and $3, respectively, for the first quarter of 2003 and $83 and $0, respectively, for the first quarter of 2002.Certain other businesses to
preliminary purchase price allocations from prior periods. Intangiblebe divested are classified as assetswhichheld for sale due to management’s belief that Alcoa may enter into supply agreements in connection with the sale of these businesses. These businesses to be divested principally include certain architectural products businesses in North America, certain fabricating and packaging operations in South America, and foil facilities in St. Louis, MO and Russellville, AR. The operating results of these businesses are included within the Engineered Products, Flat-Rolled Products, and Packaging and Consumer segments. The assets and liabilities of these businesses have been classified as assets held for sale and liabilities of operations held for sale on the Condensed Consolidated Balance Sheet. Alcoa continues to actively market these businesses. Alcoa expects that all of the businesses will be sold within a one-year period. The fair values that are ultimately realized upon the sale of the businesses to be divested may differ from the estimated fair values used to record the loss inother2002.For further details on discontinued operations and assets
totaled $672, netheld for sale, see Note B to the audited financial statements contained in the Annual Report on Form 10-K for the year ended December 31, 2002.E. Special Items – During 2002, Alcoa recorded special charges of
accumulated amortization of $345, at September 30, 2002. Of this amount, $169 represents intangibles with indefinite useful lives,$407 ($261 after tax and minority interests) for restructurings, consisting oftrade 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,a charge6
of $39 in the third quarter of 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 includeas acomponent 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 detailsresult of thestandard and is preparingcurtailment of aluminum production at three smelters; aplancharge ofimplementation. 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 7segment. On October 14, 2002, Alcoa received antitrust clearance from the European Union to complete the Fairchild acquisition. The transaction is expected to close$154 in the fourth quarter of 2002subjectrelated to restructuring operations in the U.S. smelting system and for those businesses experiencing negligible growth due to continued market declines in aerospace, automotive, and industrial gas turbines markets; and $214 in the fourth quarter of 2002 related to impairment charges on businesses to be divested that have failed to meet internal growth and return measures. The charges of $407 are comprised of $278 for asset write-downs, consisting of $136 of goodwill on businesses to be divested, as well as $142 for structures, machinery, and equipment; $105 for employee termination and severance costs related to approximately 8,500 hourly and salaried employees at over 70 locations, primarily in Mexico, Europe, and the U.S.; and charges of $31 for exit costs, primarily for remediation, demolition, and lease termination costs.As of March 31, 2003, approximately 1,300 of the 8,500 employees associated with the 2002 restructuring program had been terminated.
During 2001, Alcoa recorded charges of $565 ($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. These charges were comprised of asset write-downs of $371; employee termination and severance costs of $178 related to workforce reductions of approximately 10,400 hourly and salaried employees, primarily located outside of the U.S.; and other exit costs of $16 related to the
completionshutdown ofcustomary approvalsfacilities. These charges were primarily due to actions taken in Alcoa’s primary products andapproval byfabricating businesses because of economic and competitive conditions and included the shutdown of 18 facilities in the U.S. and Europe. TheFairchild Corporation shareholders. F. Inventories September 30results of operations related to these facilities were not material.As of March 31, 2003, approximately 9,400 of the 10,650 employees (comprised of 10,400 from above as well as an additional 250 announced in 2002) associated with the 2001 restructuring program had been terminated.
7
The reserve balances consisted of the following.
Assets
write-downs
Employee termination and severance costs
Other
Total
2001:
Total restructuring charges
$
371
$
178
$
16
$
565
Cash payments
(3
)
(32
)
(5
)
(40
)
Noncash charges
(288
)
—
—
(288
)
Reserve balances at December 31, 2001
$
80
$
146
$
11
$
237
2002:
Cash payments
(17
)
(74
)
(13
)
(104
)
2002 restructuring charges
278
105
31
414
Noncash charges in 2002
(278
)
—
—
(278
)
Additions to 2001 restructuring charges
9
9
—
18
Reversals of 2001 restructuring charges
(10
)
(20
)
(2
)
(32
)
Reserve balances at December 31, 2002
$
62
$
166
$
27
$
255
2003:
Cash payments
(1
)
(36
)
(4
)
(41
)
Reversals of 2002 restructuring charges
(2
)
(2
)
—
(4
)
Reserve balances at March 31, 2003
$
59
$
128
$
23
$
210
For further details on the restructurings, see Note C to the audited financial statements contained in the Annual Report on Form 10-K for the year ended 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 ========= =======2002.F. Inventories
March 31
2003
December 31
2002
Finished goods
$
783
$
754
Work in process
844
750
Bauxite and alumina
335
341
Purchased raw materials
408
420
Operating supplies
187
176
$
2,557
$
2,441
Approximately
48%50% of total inventories atSeptember 30, 2002,March 31, 2003, was valued on a LIFO basis. If valued on an average cost basis, total inventories would have been$603$527 and$605$514 higher atSeptember 30, 2002,March 31, 2003 and December 31,2001,2002, 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 its8
The completed and committed hydroelectric construction projects that Aluminio participates in
Brazil, Aluminio has guaranteed up to 36% ofare outlined in theproject's total debt of approximately $315.following tables.
Completed projects
Date completed
Investment
participation
Share of output
Debt guarantee
Debt guarantee through 2013
Machadinho
2002
27.23%
22.62%
35.53%
$ 95
Aluminio committed to taking a share of the output of the completed project for 30 years at cost,
(includingincluding cost of financing theproject), which began in the first quarter of 2002.project. In the event that other participants in this project fail to fulfill their financial responsibilities, Aluminio may be required to fund a portion of the deficiency. In accordance with the agreement, if Aluminio funds any such deficiency, its participation and share of the output from the project will increase proportionately.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.
Committed projects
Scheduled
completion date
Share of output
Investment participation
Total estimated
project costs
Aluminio’s share
of project costs
Performance bond guarantee
Barra Grande
2005
42.20%
42.20%
$ 359
$ 151
$ 5
Serra do Facao
2006
39.50%
39.50%
$ 149
$ 59
$ 3
Pai-Quere
2007
35.00%
35.00%
$ 180
$ 63
$ 2
Santa Isabel
To be determined
20.00%
20.00%
$ 460
$ 92
$ 7
Estreito
2008
19.08%
19.08%
$ 511
$ 97
$ 8
These projects
arewere committed to during 2001 and 2002, and the Barra GrandeSanta 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 totalprojectcosts totaling approximately 30%.commenced construction in 2002. The plans for financing these projects have not yet been finalized. It is anticipated that a portion of the project costs will be financed with third parties. Aluminio may be required to provide guarantees of project financing or commit to additional investments as these projects progress.At September 30, 2002, Aluminio had provided $16The future ofguarantees on these hydroelectric construction projects intheform 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. ThisSanta Isabel project isscheduledsubject tobe completed in 2007. Aluminio's share ofreceiving theoutput 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 8provide guarantees of project financing or commit to additional investments as this project progresses.appropriate regulatory licenses.Aluminio accounts for
its investments in thesethe Machadinho and Barra Grande hydroelectric projects on the equity method.Aluminio'sIts total investment in these projects was$92$96 and$108$88 atSeptember 30, 2002,March 31, 2003, and December 31,2001,2002, respectively.In January 2002, Alcoa raised its equity stakeThere have been no significant investments made inElkem 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 studiesany of thesmelter by Alcoa; and development of harbor and port facilities and related infrastructure improvements in eastern Iceland by Icelandic municipalities. I.other projects.H. 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.
First quarter ended March 31
2003
2002
Net income
$
151
$
218
Other comprehensive income (loss):
Changes in (net of tax):
Unrealized gains on available-for-sale securities
19
19
Minimum pension liability
(2
)
(31
)
Unrealized translation adjustments
90
(31
)
Unrecognized gains on derivatives
20
45
Comprehensive income
$
278
$
220
I. Earnings Per Share
-– Thedetails ofinformation used to compute basic and diluted EPSfollowon income from continuing operations follows: (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 ====== ====== ====== ======
First quarter ended March 31
2003
2002
Income from continuing operations
$
195
$
184
Less: preferred stock dividends
—
—
Income from continuing operations available to common shareholders
$
195
$
184
Average shares outstanding – basic
845
847
Effect of dilutive securities:
Shares issuable upon exercise of dilutive stock options
1
7
Average shares outstanding – diluted
846
854
Options to purchase
6782 million and 30 million shares of common stock atanaverage exercisepriceprices of$36.00$33.00 and $40.00 were outstanding as ofSeptember 30,March 31, 2003 and 2002, respectively, but were not included in the computation of diluted EPS because the option exercise price was greater than the average market price of the common shares.9
J. Other income, net
First quarter ended March 31
2003
2002
Equity income
$
56
$
3
Interest income
8
15
Foreign exchange (losses) gains
(26
)
1
Other income
(1
)
36
$
37
$
55
K. Reclassifications – Certain amounts have been reclassified to conform to current year presentation.
L. Segment Information
-– The following table details sales and after-tax operating income (ATOI) for each reportable segment for the three-monthand nine-monthperiods endedSeptember 30, 2002March 31, 2003 and2001. 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.2002. For more information on segments, seeManagement'sManagement’s Discussion and Analysis and the segment disclosures included inAlcoa'sAlcoa’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 TotalSales: 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 TotalSales: 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. 102002.
March 31, 2003
Alumina
& Chem-
icals
Primary
Metals
Flat-
Rolled
Products
Engi-
neered
Products
Pack-
aging &
Consumer
Other
Total
Sales:
Third-party sales
$
449
$
732
$
1,152
$
1,361
$
750
$
668
$
5,112
Intersegment sales
240
840
20
9
—
—
1,109
Total sales
$
689
$
1,572
$
1,172
$
1,370
$
750
$
668
$
6,221
After-tax operating income
$
91
$
166
$
53
$
29
$
53
$
9
$
401
March 31, 2002
Sales:
Third-party sales
$
425
$
764
$
1,156
$
1,319
$
618
$
618
$
4,900
Intersegment sales
229
629
15
8
—
—
881
Total sales
$
654
$
1,393
$
1,171
$
1,327
$
618
$
618
$
5,781
After-tax operating income
$
65
$
143
$
61
$
58
$
28
$
7
$
362
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
First quarter ended March 31
2003
2002
Total after-tax operating income
$
401
$
362
Impact of intersegment profit eliminations
7
(3
)
Unallocated amounts (net of tax):
Interest income
5
10
Interest expense
(57
)
(49
)
Minority interests
(59
)
(41
)
Corporate expense
(57
)
(58
)
Special items (D)
4
—
Discontinued operations
3
—
Accounting changes (B)
(47
)
34
Other
(49
)
(37
)
Consolidated net income
$
151
$
218
10
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,March 31, 2003, and the related unaudited condensedstatementstatements of consolidated incomefor the three-monthandnine-month periods ended September 30, 2002 and 2001, and the unaudited condensed statement of consolidatedcash flows for thenine-monththree-month periods endedSeptember 30, 2002March 31, 2003 and2001.2002. These interim financial statements are the responsibility ofAlcoa'sAlcoa’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 dataand 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 accompanying unaudited 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
havepreviously 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 31,2001,2002, and the related statements of consolidated income,shareholders'shareholders’ equity, and cash flows for the year then ended (not presented herein). In our report dated January9, 2002,8, 2003, 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 31,2001,2002 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.As discussed in Note
CB to the unaudited condensed consolidated financial statements, Alcoachanged its method of accounting for goodwill and other intangible assetsadopted SFAS No. 143 effective January 1,2002. /s/2003./s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
OctoberApril 4,
2002 12ITEM200311
Item 2.
Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations.(dollars(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“anticipates,” “believes,” “estimates,” “expects,” “hopes,” “targets,” “should,” “will,” “will likely result," "forecast," "outlook," "projects"” “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 NoteHG to the financial statements; the disclosures included below under Segment Information, Environmental Matters, and Quantitative and Qualitative Disclosures about MarketRisksRisks; andEnvironmental Matters; and the Business section in Alcoa'sAlcoa’s Form 10-K, Part I, Item 1, 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 $ .68Earnings Summary2002.Results of Operations
Selected Financial Data:
First quarter ended March 31
2003
2002
Sales
$
5,112
$
4,900
Income from continuing operations
195
184
Cumulative effect of accounting change
(47
)
34
Net income
$
151
$
218
Earnings per common share:
Diluted – Income from continuing operations
$
.23
$
.22
Diluted – Net income
$
.17
$
.26
Shipments of aluminum products (mt)
1,192
1,251
Shipments of alumina (mt)
1,794
1,825
Alcoa’s average realized ingot price
$
.69
$
.66
Average 3-month LME price
$
.63
$
.63
Net income
forin the2002 third2003 first quarterand 2002 nine-month periodwas$193,$151, or2317 cents per diluted share,and $643, or 75 cents per share, respectively. The decline ina decrease of 31% from 2002 first quarter net income of43% 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$218, or 26 cents per share. Higher realized prices for alumina and aluminum and ongoing cost savings in 2003 were more than offset by the negative impact of cumulative effect adjustments for accounting changes in 2003, unfavorable energy prices, and lower volumesin businesses servingprimarily for engineered products as the aerospace, industrial gas turbine andtelecommunicationscommercial building marketsandremained soft. Net income for theabsence 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 with2003 first quarter included aspecialcumulative effect charge of$23 (after tax and minority interests) recognized in 2002; as well as$47 for thefact that goodwill is no longer amortized in 2002, resulting in positive impacts of $41 and $128 inaccounting change for asset retirement obligations under SFAS No. 143, while net income for the 2002thirdfirst quarterand nine-month period, respectively. Additionally, net income in the 2002 nine-month periodincluded cumulative effect income of $34from the cumulative effect offor 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 salesSales for the first quarter of 2003 were $5,112 compared with sales of $4,900 in the first quarter of 2002. The increase of $212, or 4%, was primarily due to the 2002
nine-month period decreased 13% fromacquisitions of Ivex Packaging Corporation (Ivex) and Fairchild Fasteners (Fairchild) which contributed $257 in thecorresponding 2001 period. Lower2003 first quarter; higher volumes in businesses serving the automotive market and for sheet and plate in the U.S and Europe; and increases in realized prices for alumina andaluminum,aluminum. These increases were partially offset by lower volumes due to continued declines indownstream businesses servingthe aerospace, industrial gas turbine, and telecommunications marketsthe 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 businessesas well asthe 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. 13severe winter weather, which hampered building products sales. Cost of goods sold (COGS) for the first quarter of 2003 was $4,073 compared with COGS of $3,968 in the first quarter of 2002. The increase of $105, or 3%, was primarily the result of the acquisitions noted above as well as increased energy costs, partially offset by decreased volumes as previously noted and cost reductions generated through productivity and purchasing cost savings as well as headcount reductions from prior year’s restructuring programs. As a result, COGS as a percentage of sales in the 2003 first quarter was 79.7% versus 81.0% in the 2002
thirdfirst quarter.12
Selling, general administrative and other expenses (S&GA) were $294 in the 2003 first quarter
and nine-month period was 79.8% and 80.3%, respectively, versus 76.7% and 76.6%compared with $273 in the corresponding2001 periods. The higher percentages in2002were 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-monthperiod. Thedecreases wereincrease of $21, or 8%, was primarily due tolower spending, lower employee compensation costs,thedispositionacquisitions ofRASCO,Ivex andlower bad debt expenseFairchild and bad debtrecoveries.recoveries recognized in 2002, partly offset by cost reductions. As a result, S&GA as a percentage of sales was5.1% and 5.3% for5.8% in the 2003 first quarter, up from 5.6% in the 2002thirdfirst quarter.Depreciation, depletion and amortization expense was $285 in the first quarter
and nine-month period, respectively,of 2003 comparedto 5.0% and 5.2%with $259 in the corresponding2001 periods.2002 period. Theprovision for depreciation, depletionincrease of $26, or 10%, was primarily due to the acquisitions of Ivex andamortization decreased by 6%Fairchild.Interest expense was $88 in the 2003 first quarter compared with $75 in the 2002
third quarter and 13% in the 2002 nine-month period compared with the corresponding 2001 periods. These decreases werefirst quarter. The increase of $13, or 17%, was primarilythe 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 relateddue toacquisitions in the 2002 period. In the third quarter of 2002, Alcoa recorded a special charge of $39 ($23 after tax and minority interests), primarilyhigher average debt levels as a result ofthe 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 toacquisitions,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 lowerequity earnings at Elkem.average interest rates.The
decreaseincome tax provision of 30.0% differs from the statutory rate of 35% and the 2002 first quarter rate of 31.5% primarily due to lower taxes on foreign income.Other income was $37 in the 2003 first quarter compared with $55 in the 2002
nine-month period compared with the corresponding 2001 periodfirst quarter. The decrease of $18, or 33%, was mainly due to$76 higher net gains on asset sales recognizeda $37 decrease in2001,other income primarilyattributable 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 $28related to several favorable nonoperatinggains. The effective tax rate of 30%gains recognized in 2002differs from the 2001 rate of 32%and thestatutory rate of 35% due to taxes on foreign income, theunfavorable impact ofceasing goodwill amortization, the saleforeign currency exchange adjustments ofThiokol, and adjustments to prior year taxes.$27, substantially offset by $53 of higher equity income, primarily at Elkem.Minority
interests'interests’ share of income from operationsdecreased 6% and 24%was $59 in the2002 thirdfirst quarterand nine-month period, respectively,of 2003 compared withthe corresponding 2001 periods. The decrease of 6%$41 in the2002 thirdfirst quarterisof 2002. The increase of $18, or 44%, was primarily due tolowerhigher earnings at Alcoa Fujikura Ltd. (AFL), Alcoa Aluminio (Aluminio), and 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).14Segment 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 ====== ====== ====== ======
First quarter ended March 31
2003
2002
Alumina production
3,320
3,112
Third-party alumina shipments
1,794
1,825
Third-party sales
$
449
$
425
Intersegment sales
240
229
Total sales
$
689
$
654
After-tax operating income
$
91
$
65
Third-party sales for the
2002 thirdAlumina and Chemicals segment in the first quarter of 2003 increased3%6% from the2001 third quarter as higher shipments more than2002 first quarter. The increase was primarily due to a 12% increase in realized alumina prices and increased volumes for alumina-based chemicals, partly offset by a4%decline inrealized prices. For the 2002 nine-month period, third-party sales decreased 12% due to lower realized prices. Intersegment sales for the 2002thirdquarter and nine-month period decreased 4% and 13%, respectively, from the corresponding 2001 periods due to lower prices.party alumina shipments.ATOI for this segment
decreased 19% and 44% fromincreased 40% in the2001 third2003 first quarterand nine-month period, respectively. The decreases werecompared with the 2002 first quarter, primarily due to higher realized alumina prices, increased intersegment volumes, higher alumina-based chemicals volumes, improved productivity, and lowerrealized prices. Higher volumes and cost savings in the 2002 third quarter and 2002 nine-month period partlyraw materials costs, somewhat offsetthe negative impact of lower realized prices compared with the corresponding 2001 periods. Volume in the fourth quarterby higher energy costs.Alumina demand is anticipated to remain
flat with third quarterat current levelswhile pricesin the second quarter. Prices are expected totrend downwardshow a slight improvement.II. Primary Metals
First quarter ended March 31
2003
2002
Aluminum production
881
841
Third-party aluminum shipments
453
503
13
Third-party sales
$
732
$
764
Intersegment sales
840
629
Total sales
$
1,572
$
1,393
After-tax operating income
$
166
$
143
Third-party sales for the Primary Metals segment in the 2003 first quarter declined 4% compared with the 2002 first quarter primarily 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%10% decrease inthe 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'sthird-party shipments. Alcoa’s average realized third-party price for ingotdeclined 7%increased 5%, from 66 cents per pound in the2001 third2002 first quarterand 11% fromto 69 cents per pound in the2001 nine-month period.2003 first quarter. Intersegment sales increased 34% primarily due to increased volumes in certain downstream businesses as well as increased realized prices.ATOI for this segment
decreased 19% fromincreased 16% in the2001 third2003 first quarterand 36% fromcompared with the2001 nine-month period.2002 first quarter. Thedecreases were driven by lowerincrease was primarily due to higher realized aluminum prices, increased intersegment volumes, and theabsencerestart ofpower 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 somewhatcapacity at Intalco, partly offset by increasedvolumes and lower tax rates.energy prices.Alcoa has approximately
438,000505,000 mt per year (mtpy) of idle capacity on a base capacity of 3,948,000 mtpy.VolumeIII. Flat-Rolled Products
First quarter ended March 31
2003
2002
Third-party aluminum shipments
434
439
Third-party sales
$
1,152
$
1,156
Intersegment sales
20
15
Total sales
$
1,172
$
1,171
After-tax operating income
$
53
$
61
Third-party sales for the Flat-Rolled Products segment in the
fourth2003 first quarteris anticipated to remainwere essentially flat compared withthird quarter levels, while current LME prices would indicatethe 2002 first quarter. A 12% increase in sheet and plate sales, resulting from increased volumes in both the U.S. and Europe, was offset by lowerrealized pricesvolumes for rigid container sheet.ATOI for this segment decreased 13% in the
fourth quarter. 15III. Flat-Rolled Products Third2003 first quarterended 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 periodcompared with the corresponding2001 periods. Lower shipments and2002 period primarily due to lowermetal pricesvolumes for rigid container sheet andlower 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 toan unfavorable product mix for sheet andplate in the U.S.plate. These decreases were somewhat offset by productivity andEurope 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, whilepurchasing costsavings 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, overallsavings.Overall shipments are expected to
decline slightlyincrease in the second quarter, with rigid container sheet experiencing seasonal volumesoftening. Aerospace volumes are expected to track declining build rates and automotive volumes areincreases. The commercial transportation market is expected to remainsteady.flat or increase slightly.14
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
First quarter ended March 31
2003
2002
Third-party aluminum shipments
217
221
Third-party sales
$
1,361
$
1,319
Intersegment sales
9
8
Total sales
$
1,370
$
1,327
After-tax operating income
$
29
$
58
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%for the Engineered Products segment increased 3% in the 2003 first quarter compared with the 2002thirdfirst quarterand nine-month period compared to the corresponding 2001 periods,primarily due tolower volumes asthe acquisition of Fairchild at the end of 2002, which contributed $123, considerably offset by volume declines resulting from depressed aerospace and industrial gas turbineand commercial building and construction markets continued to decline, while the commercial transportation market continued to show favorable increases.markets.ATOI for this segment decreased
60% for50% in the 2003 first quarter compared with the 2002thirdfirst quarterand 25% for the 2002 nine-month period versus the corresponding 2001 periods. These decreases resulted fromprimarily due to declining volumesdue to continued weak market conditions forin the aerospace and industrial gasturbines. These declines were partiallyturbine markets and unfavorable mix for certain products, somewhat offset byhigher volumes duecost savings.We anticipate seasonal increases in the residential building and construction market in the second quarter. The automotive market is expected to
continued strength in theremain relatively flat, but is subject to customers’ production schedule changes. The commercial transportation marketproductivity 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 activityis expected tobe reduced, continued build rate declines in theremain flat or increase slightly, while industrial gas turbine marketand seasonal slowdowns in the building and construction market. Aerospace volumes are expected to track declining build rates. Automotive volumes are expected to remain steady. 16declines continue. 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
First quarter ended March 31
2003
2002
Third-party aluminum shipments
36
30
Third-party sales
$
750
$
618
After-tax operating income
$
53
$
28
Third-party sales for the Packaging and Consumer segment increased 21% in the first quarter of 2003 compared with the first quarter of 2002
thirdprimarily as a result of the Ivex acquisition in 2002, which contributed $134.ATOI for this segment increased by $25 in the 2003 first quarter
and nine-month period were up 13% and 2%, respectively,comparedtowith thecorresponding 2001 periods. These increases were2002 first quarter primarily due to the acquisition of Ivex,in the third quarter of 2002,which contributed$88,$8, as well ashigher volumes forpositive results in Latin America primarily due to improved economic conditions.We expect increased demand due to seasonal upturns in both the closures and
packaging design businesses. These increasesconsumer products markets in the2002 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 withinsecond quarter.VI. Other
First quarter ended March 31
2003
2002
Third-party aluminum shipments
52
58
Third-party sales
$
668
$
618
After-tax operating income
$
9
$
7
Third-party sales for the
segment. For this segment, ATOI rose 9%Other group increased 8% in the2002 third2003 first quarterwhile declining 2% in the 2002 nine-month periodcompared with thecomparable 2001 periods. The increase in ATOI in the2002thirdfirst quarterisprimarily due tohigher 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 increasesimprovements in the automotive businesses,which wereaided by the acquisition ofthe remaining 50% interest inEngineered Plastic Components, Inc. in 2002, and stronger demand for light vehicles and heavy trucks. Volumes continued to decline in the telecommunications business and severe winter weather negatively impacted the building products business.ATOI for this group
increased $4in the2002 third2003 first quarterwhile declining $65was $9 compared with $7 in the2002 nine-month period compared with the corresponding 2001 periods.year ago first quarter. The increasein ATOI in the 2002 third quarter is primarilywas due toincreasedhigher volumesand productivity and purchasingcoupled with costimprovementssavings in the automotive businesses,as well as the absence of goodwill amortization that favorably impacted the segmentpartially offset by$7 in the 2002 third quarter. These increases more than offset continuedvolumeand pricedeclinesin the telecommunications business as well as lower volumesand higher raw material costs in the building products business.The decrease in ATOI15
We anticipate seasonal increases 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 theresidential building and construction marketandin thetelecommunicationssecond quarter. Automotive market activity is expected to remaindepressed. Automotive volumes are expectedrelatively flat, but is subject toremain steady. 17customers’ production schedule changes. We expect continued depressed business conditions in the telecommunications market. Reconciliation of
ATOIAfter-Tax Operating Income (ATOI) to Consolidated Net IncomeItems 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;discontinued operations; accountingchange;changes for asset retirement obligations in 2003 and goodwill in 2002; 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
forfrom the 2002thirdfirst quartercompared withto thecorresponding 2001 period2003 first quarter consisted of: an increase inspecial itemsinterest expense of$25 (after tax, before$8 due to higher average debt levels resulting from acquisitions; an increase of $18 in minorityinterests) primarily relatedinterests’ share of income due tosmelter production curtailmentshigher earnings at AFL, Aluminio and AWAC; a cumulative effect charge of $47 for the accounting change for asset retirement obligations under SFAS No. 143 in 2003 versus cumulative effect income of $34 recognized in 2002 for the2002 third quarter,change in accounting for goodwill under SFAS No. 142; and an increase of$23$12 in other primarily due tointracompany profit eliminations,an increase in equity earnings at Elkem, offset by foreign currency translation adjustments.Liquidity and Capital Resources
Cash from Operations
Cash used for operations for the
impact2003 first quarter totaled $30 compared with cash provided from operations ofLIFO adjustments, and differences between estimated tax rates used$237 in thesegments2002 first quarter. The decrease of $267 resulted primarily from an increase in working capital requirements, as increases in receivables and inventories were thecorporate effective tax rate,result of increased sales for the comparable periods.Financing Activities
Financing activities provided $186 of cash in the 2003 first quarter compared with cash provided of $205 in the 2002 first quarter. The decrease of $19 is primarily due to dividends paid to minority interests of $45 in the 2003 first quarter and $49 higher net borrowings in the 2002 first quarter, partially offset by
favorable currency translation adjustments.the absence of stock repurchases in 2003.In April 2003, Alcoa refinanced its $2,000 revolving-credit agreement that was to expire in April 2003 into a $2,000 revolving-credit agreement that expires in April 2004. Additionally, Alcoa refinanced its $1,000 revolving-credit agreement that was to expire in August 2003 into a $1,000 revolving-credit agreement that expires in April 2008.
On April 15, 2003, Standard and Poor’s (S&P) announced that it had placed on watch for possible credit downgrades the ratings of thirteen U.S. companies, including Alcoa, reflecting concerns about their exposure to unfunded postretirement benefit liabilities, including defined benefit pension and retiree medical liabilities. The
significant changesS&P announcement indicated that the majority of the reviews are expected to be resolved within the next few weeks.16
Investing Activities
Cash used for investing activities was $138 in the
reconciling items between ATOI and consolidated net income for2003 first quarter compared with cash used of $380 in the 2002nine-month period compared with the corresponding 2001 period consisted of: afirst quarter. The decrease of$26$242 ininterest expensecash used for investing activities was primarily due tolower average effective interest rates;adecrease of $43reduction inminority 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;capital expenditures, fewer acquisitions and an increaseof $69inother 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 18to 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.short-term investments.Environmental Matters
19Alcoa 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
7167 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’s significant sites where the final outcome cannot be determined or the potential costs in the future cannot be estimated.Massena, NY. Alcoa has been conducting investigations and studies of the Grasse River, adjacent to
Alcoa'sAlcoa’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 draftfinal Analysis of Alternatives Report to the EPA based on theseadditionalevaluations 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 thatseveralrational, scientific analysis supports a remedy involving the containment ofthosesediments in place via natural or man-made processes. Based on the current assessment of the EPA decision-making process, Alcoa has concluded that the selection of the $2 alternative, based on natural recovery only, is remote. Alcoa continues to believe that alternatives involving the largest amounts of sediment removal should not be selected for the Grasse River remedy. Therefore, Alcoa believesthethat alternatives that should reasonably beselected are those rangingconsidered for selection range frommonitoredengineered capping and natural recovery($2)of $30 to a combination of moderate dredging, capping andcapping ($90). Anatural recovery of $90. Accordingly, Alcoa has recorded a reserve of$2 has been recorded for any probable losses,$30, representing the low end of the range of possible alternatives, as no one of the alternatives is more likely to be selected than any other.PortionsThe EPA’s ultimate selection of a remedy could result in additional liability. However, as the process continues, it allows for input that can influence the scope and cost of theSt. Lawrence River system adjacent to a former Reynolds plant are also contaminated with PCB, and during 2001, Alcoa substantially completed a dredgingremedyforthat will be selected by theSt. Lawrence River. Further analysisEPA in its issuance of thecondition 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 itsformal Record of Decision (ROD)selecting. Alcoa may be required to record a subsequent reserve adjustment at thefinal remedial approach fortime thesite, whichROD isfully 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 20of 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.issued.Sherwin, TX. In connection with the sale of the Sherwin alumina refinery in Texas, which was required to be divested as part of the Reynolds merger in 2000, Alcoa has agreed to retain responsibility for the remediation of then existing environmental conditions, as well as a pro rata share of the final closure of the active waste disposal areas, which remain in use.
Alcoa'sAlcoa’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 the17
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,foregoing, it is possible thatAlcoa'sAlcoa’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'sAlcoa’s remediation reserve balance at
September 30,March 31, 2003 and December 31, 2002 was$407$419 (of which$68$69 was classified as a current liability) and $436, respectively, 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 the2002 third2003 first quarter were$16.approximately $4. They include expenditures currently mandated, as well as those not required by any regulatory authority or third party. The reserve balance was reduced by approximately $13 in the 2003 first quarter, primarily for adjustments based on recent assessments of remaining work required at certain sites.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.
Liquidity18
Item 3. Quantitative and
Capital Resources Cash from Operations Cash fromQualitative Disclosures about Market RiskIn 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, weather derivatives, or to any material extent in other nonexchange commodity trading activities.
Commodity Price Risks – Alcoa is a leading global producer of aluminum ingot and aluminum fabricated products. As a condition of sale, customers often require Alcoa to enter into long-term fixed-price commitments. These commitments expose Alcoa to the
2002 nine-month periodrisk 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 March 31, 2003, these contracts totaled
$1,009, comparedapproximately 643,000 mt with$1,728a fair value loss of approximately $23 (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 March 31, 2003, these contracts totaled 140,000 mt with a fair value gain of $4 (pre-tax). These contracts act to fix a portion of the sales price related to these sales contracts.
Alcoa purchases natural gas to meet its production requirements. These purchases expose the company to the risk of higher natural gas prices. To hedge this risk, Alcoa enters into long positions, principally using futures and options. Alcoa follows a stable pattern of purchasing natural gas; therefore, it is highly likely that anticipated natural gas purchases will occur. The fair value of the contracts for natural gas was a gain of approximately $44 (pre-tax) at March 31, 2003.
Alcoa purchases certain other commodities, such as electricity and fuel oil, for its operations and may enter into futures and options contracts to eliminate volatility in the
corresponding 2001 period.prices of such products. None of these contracts were material at March 31, 2003.Financial Risk
Currencies– Alcoa is subject to significant exposure from fluctuations in foreign currencies. Foreign currency exchange contracts are used to hedge the variability in cash flows from the forecasted payment or receipt of currencies other than the functional currency. These contracts cover periods commensurate with known or expected exposures, generally within three years. The
decreasefair value of$719, or 42%, resulted primarily fromthese contracts was adecreasegain of$575approximately $79 (pre-tax) at March 31, 2003.Certain contracts, which are included in
netthe $79 above, are used to offset a portion of the impact of exchange and interest rate changes on foreign currency denominated debt. The fair value of these contracts was a19
gain of approximately $25 (pre-tax) at March 31, 2003. Changes in the fair value of these contracts are included in other income
after non-cash adjustments, withon theremaining $144 decrease primarily dueCondensed Statement of Consolidated Income and offset a portion of the impact of the exchange differences on the debt.Interest Rates – Alcoa uses interest rate swaps to
higher tax payments.help maintain a reasonable balance between fixed- and floating-rate debt and to manage overall financing costs. The company has entered into pay floating, receive fixed interest rate swaps to change the interest rate risk exposure of its outstanding debt. The fair value of these swaps was a gain of approximately $13 (pre-tax) at March 31, 2003. The decrease inadjustments 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 thefair value since December 31, 2002nine-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 periodis primarily due tothe following: a change of $2,315 in short-term borrowings due to repayments of short-termhedges on outstanding debtin the 2001 nine-month periodthat werefunded bysettled early.Material Limitations – The disclosures with respect to commodity prices, interest rates, and foreign exchange risk do not take into account the
proceeds from the sales of operations required to be divested from the Reynolds merger, the sale of Thiokolunderlying anticipated purchase obligations and theissuance of additional debt; a decrease of $507 related to common stock issued for stock plans; a decrease in share repurchases ofunderlying transactional foreign exchange exposures. If thecompany'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 borrowingsunderlying items wereused 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 notincluded in thereview. In October 2002, Standard 21& Poor's lowered Alcoa's long-term corporateanalysis, 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
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 $1,531loss in the2002 nine-month period, compared with cash provided from investing activitiesevent of$1,494 innonperformance by counterparties on thecorresponding 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,above instruments, as well asproceeds from the salecredit or performance risk with respect to its hedged customers’ commitments. Although nonperformance is possible, Alcoa does not anticipate nonperformance by any ofThiokol, which returned $2,485 in the 2001 period.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,$469 morevarious master netting arrangements are in place with counterparties to facilitate settlement ofcash 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 Reportgains and losses onForm 10-K for the year ended December 31, 2001. Management believes that the application ofthesepolicies 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. 22contracts. 20
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Alcoa'sAlcoa’s Chief Executive Officer and Chief Financial Officer have evaluated the
company'scompany’s disclosure controls and procedures as ofOctober 21, 2002,April 17, 2003, 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
OctoberApril 17, 2003.21
2002. 23PART II
-– OTHER INFORMATIONITEMItem 1. Legal Proceedings.
In May through September of 2002, eleven lawsuits wereOn December 26, 2001, three citizens groups filed
against Reynolds and Alcoaan action in the U.S. District Courtof Wharton County, Texas, two of which have since been dismissed. Infor thesame timeframe, an additional lawsuit was filed in the United States District Court, SouthernWestern District of TexasVictoria Division.against Alcoa. Thelawsuits seek to recover damages relatinggroups alleged that activities conducted in the mid-1980s at the Alcoa power plant in Rockdale, Texas triggered various requirements under the Clean Air Act and the Texas Clean Air Act and that the plant did not comply with those requirements. The groups also alleged that the plant violated opacity limits. On January 29, 2002, the company filed its answer to thepresencecomplaint denying the allegations. In addition, on January 9, 2002, the Texas Natural Resource Conservation Commission (TNRCC) issued a Notice oftrichloroethyleneEnforcement and EPA Region VI issued a Notice of Violation against Alcoa. Both notices allege that activities conducted in thegroundwater near a former Reynolds extrusion facilitymid-1980s at the Alcoa power plant inEl Campo, Texas. Additional defendants included in some ofRockdale, Texas triggered requirements under thelawsuits are the current operators to whom Reynolds sold the facility in 1997, Bon L. Campo Limited Partnership (Bon L. Campo)Clean Air Act andTredegar 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 bythe TexasCommission of Environmental Quality (TCEQ, formerly TNRCC) to identifyClean Air Act and thesource 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,plant did not comply with those requirements. On June 24, 2002, the U.S. Department of Justice (DOJ)notified IPC, Inc. (IPC),a wholly owned subsidiary of Ivex,the EPA, the TNRCC (now known as the Texas Commission on Environmental Quality (“TCEQ”)) andConsolidated 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 hasAlcoa agreed tofurther discussionsresolve the Texas and federal allegations with theDOJ. As previously reported in Alcoa's Form 10-Qpermitting of reduced emission limits for thequarter 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. Reynoldspower plant and thecurrent ownerpayment of a civil penalty of $1.5 million, as well as supplemental environmental mitigation projects of $2.5 million. Under the agreement, Alcoa will have up to 12 months to decide whether to: (1) install clean coal technology-circulating fluidized bed boilers to replace the existing boilers; (2) install best available control technology on the existing units; or (3) permanently shut down the existing units without replacements. EPA, DOJ, TCEQ, the citizens groups and Alcoa have agreed on consent decree language. The consent decree was executed by Alcoa on March 27, 2003 and lodged with the court in mid-April.Item 4. Submission of Matters to a Vote of Security Holders.
At the annual meeting of Alcoa shareholders held on April 11, 2003, the shareholders:
re-elected Kathryn S. Fuller, Judith M. Gueron and Ernesto Zedillo as Directors of Alcoa for a three-year term expiring in 2006;defeated a shareholder proposal relating to pay disparity (votes cast “against” represented 91.20% of thebusiness and the manufacturervotes cast, or 69.11% of themetal are working jointlyshares outstanding); andapproved a shareholder proposal relating toidentify the issues and find resolutions. All customers have been notifiedseverance agreements (votes cast “for” represented 64.65% of theissue, inspection protocols have been put into place andvotes cast, or 49.08% of theUnited 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 amountshares outstanding).Election of
any possible loss cannot be estimated.Directors:
Director
Votes Cast For
Votes Withheld
Kathryn S. Fuller
711,406,771
21,867,779
Judith M. Gueron
661,788,583
71,485,967
Ernesto Zedillo
660,053,229
73,221,321
22
Shareholder Proposals:
Votes Cast
Abstain
Broker
Non-Votes
For
Against
(1)
Relating to pay disparity
56,366,473
583,915,455
13,904,094
79,088,528
(2)
Relating to severance agreements
414,709,090
226,736,517
12,738,490
79,090,453
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
(a) Exhibits
12.
Computation of Ratio of Earnings to Fixed Charges
15.
Letter regarding unaudited interim financial information
99.
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K. None were filed during the first quarter of 2003. During the second quarter of 2003 through April 24, 2003, Alcoa furnished the following reports on Form 8-K to the Securities and Exchange Commission, reporting information under Item 12:
(1) a Form 8-K dated April 7, 2003, reporting its earnings for the first quarter of 2003; and
(2) a Form 8-K dated April 24, 2003, reporting the release of its 2002 Sustainability Report. 23
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
ALCOA INC.
April 25, 2003
By:
/s/ RICHARD B. KELSON
Date
Richard B. Kelson
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
April 25, 2003
By:
/s/ CHARLES D. MCLANE,JR.
Date
Charles D. McLane, Jr.
Vice President – Alcoa Business
Support Services and Controller
(Chief Accounting Officer)
24
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.
1. I have reviewed this quarterly report on Form 10-Q of Alcoa Inc.;
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 the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’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 the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, 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 the registrant’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. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’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 the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’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 the registrant’s internal controls; and
6. The registrant’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) 27April 25, 2003
/s/ ALAIN J. P. BELDA
Title:
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
25
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.
1. I have reviewed this quarterly report on Form 10-Q of Alcoa Inc.;
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 the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’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 the registrants and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, 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 the registrant’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. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’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 the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’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 the registrant’s internal controls; and
6. The registrant’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) 28April 25, 2003
/s/ RICHARD B. KELSON
Title:
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
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EXHIBITS
12. Computation of Ratio of Earnings to Fixed Charges 15. Letter regarding unaudited interim financial information 29
12. | Computation of Ratio of Earnings to Fixed Charges | |
15. | Letter regarding unaudited interim financial information | |
99. | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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