UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarter Ended March 31,June 30, 2004
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 1-3610
ALCOA INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA | 25-0317820 | |
(State of incorporation) | (I.R.S. Employer Identification No.) |
201 Isabella Street, Pittsburgh, Pennsylvania | 15212-5858 | |
(Address of principal executive offices) | (Zip code) |
Investor Relations 212-836-2674
Office of the Secretary 412-553-4707
(Registrant’s telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
As of April 20,July 21, 2004, 869,410,846869,835,743 shares of common stock, par value $1.00 per share, of the Registrant were outstanding.
PART I – FINANCIAL INFORMATION
Item 1. – Financial Statements.
Alcoa and subsidiaries
Condensed Consolidated Balance Sheet (unaudited)
(in millions)
March 31 2004 | December 31 2003 | June 30 2004 | December 31 2003 | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 459 | $ | 576 | $ | 466 | $ | 576 | ||||||||
Receivables from customers, less allowances of $116 in 2004 and $105 in 2003 | 2,854 | 2,521 | ||||||||||||||
Receivables from customers, less allowances of $103 in 2004 and $105 in 2003 | 2,983 | 2,567 | ||||||||||||||
Other receivables | 275 | 350 | 296 | 351 | ||||||||||||
Inventories | 2,816 | 2,524 | 2,855 | 2,560 | ||||||||||||
Deferred income taxes | 240 | 267 | 237 | 267 | ||||||||||||
Prepaid expenses and other current assets | 656 | 502 | 643 | 503 | ||||||||||||
Total current assets | 7,300 | 6,740 | 7,480 | 6,824 | ||||||||||||
Properties, plants, and equipment, at cost | 24,930 | 24,797 | 24,820 | 24,932 | ||||||||||||
Less: accumulated depreciation, depletion, and amortization | 12,459 | 12,240 | 12,580 | 12,348 | ||||||||||||
Net properties, plants, and equipment | 12,471 | 12,557 | 12,240 | 12,584 | ||||||||||||
Goodwill | 6,567 | 6,549 | 6,553 | 6,549 | ||||||||||||
Other assets | 5,563 | 5,316 | 5,369 | 5,323 | ||||||||||||
Assets held for sale | 198 | 549 | 25 | 431 | ||||||||||||
Total assets | $ | 32,099 | $ | 31,711 | $ | 31,667 | $ | 31,711 | ||||||||
LIABILITIES | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Short-term borrowings | $ | 38 | $ | 56 | $ | 54 | $ | 56 | ||||||||
Accounts payable, trade | 2,230 | 1,976 | 2,253 | 1,986 | ||||||||||||
Accrued compensation and retirement costs | 953 | 948 | 1,001 | 954 | ||||||||||||
Taxes, including taxes on income | 680 | 703 | 805 | 705 | ||||||||||||
Other current liabilities | 923 | 878 | 842 | 881 | ||||||||||||
Long-term debt due within one year | 490 | 523 | 498 | 523 | ||||||||||||
Total current liabilities | 5,314 | 5,084 | 5,453 | 5,105 | ||||||||||||
Long-term debt, less amount due within one year | 6,782 | 6,692 | 6,329 | 6,693 | ||||||||||||
Accrued postretirement benefits | 2,213 | 2,220 | 2,199 | 2,220 | ||||||||||||
Other noncurrent liabilities and deferred credits | 3,249 | 3,389 | 3,367 | 3,390 | ||||||||||||
Deferred income taxes | 851 | 804 | 743 | 805 | ||||||||||||
Liabilities of operations held for sale | 39 | 107 | 3 | 83 | ||||||||||||
Total liabilities | 18,448 | 18,296 | 18,094 | 18,296 | ||||||||||||
MINORITY INTERESTS | 1,357 | 1,340 | 1,298 | 1,340 | ||||||||||||
COMMITMENTS AND CONTINGENCIES | ||||||||||||||||
SHAREHOLDERS’ EQUITY | ||||||||||||||||
Preferred stock | 55 | 55 | 55 | 55 | ||||||||||||
Common stock | 925 | 925 | 925 | 925 | ||||||||||||
Additional capital | 5,792 | 5,831 | 5,791 | 5,831 | ||||||||||||
Retained earnings | 8,074 | 7,850 | 8,347 | 7,850 | ||||||||||||
Treasury stock, at cost | (1,986 | ) | (2,017 | ) | (1,971 | ) | (2,017 | ) | ||||||||
Accumulated other comprehensive loss | (566 | ) | (569 | ) | (872 | ) | (569 | ) | ||||||||
Total shareholders’ equity | 12,294 | 12,075 | 12,275 | 12,075 | ||||||||||||
Total liabilities and equity | $ | 32,099 | $ | 31,711 | $ | 31,667 | $ | 31,711 | ||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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Alcoa and subsidiaries
Condensed Statement of Consolidated Income (unaudited)
(in millions, except per-share amounts)
First quarter ended March 31 | Second quarter ended June 30 | Six months ended June 30 | ||||||||||||||||||||||
2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||||||||||||||||
Sales | $ | 5,696 | $ | 5,140 | $ | 6,092 | $ | 5,497 | $ | 11,788 | $ | 10,637 | ||||||||||||
Cost of goods sold | 4,438 | 4,098 | 4,807 | 4,379 | 9,245 | 8,477 | ||||||||||||||||||
Selling, general administrative, and other expenses | 344 | 297 | 319 | 347 | 663 | 644 | ||||||||||||||||||
Research and development expenses | 45 | 50 | 43 | 50 | 88 | 100 | ||||||||||||||||||
Provision for depreciation, depletion, and amortization | 303 | 285 | 301 | 302 | 604 | 587 | ||||||||||||||||||
Restructuring and other charges | (31 | ) | (4 | ) | 5 | 3 | (26 | ) | (1 | ) | ||||||||||||||
Interest expense | 64 | 88 | 69 | 80 | 133 | 168 | ||||||||||||||||||
Other income, net | (22 | ) | (36 | ) | (125 | ) | (57 | ) | (147 | ) | (93 | ) | ||||||||||||
5,141 | 4,778 | 5,419 | 5,104 | 10,560 | 9,882 | |||||||||||||||||||
Income from continuing operations before taxes on income | 555 | 362 | 673 | 393 | 1,228 | 755 | ||||||||||||||||||
Provision for taxes on income | 155 | 108 | 196 | 101 | 351 | 209 | ||||||||||||||||||
Income from continuing operations before minority interests’ share | 400 | 254 | 477 | 292 | 877 | 546 | ||||||||||||||||||
Less: Minority interests’ share | 50 | 59 | 73 | 75 | 123 | 134 | ||||||||||||||||||
Income from continuing operations | 350 | 195 | 404 | 217 | 754 | 412 | ||||||||||||||||||
Income from discontinued operations (D) | 5 | 3 | ||||||||||||||||||||||
(Loss) income from discontinued operations (E) | — | (1 | ) | 5 | 2 | |||||||||||||||||||
Cumulative effect of accounting change | — | (47 | ) | — | — | — | (47 | ) | ||||||||||||||||
NET INCOME | $ | 355 | $ | 151 | $ | 404 | $ | 216 | $ | 759 | $ | 367 | ||||||||||||
EARNINGS (LOSS) PER SHARE | ||||||||||||||||||||||||
Basic: | ||||||||||||||||||||||||
Income from continuing operations | $ | .40 | $ | .23 | $ | .46 | $ | .26 | $ | .87 | $ | .49 | ||||||||||||
Income from discontinued operations | .01 | — | — | — | .01 | — | ||||||||||||||||||
Cumulative effect of accounting change | — | (.06 | ) | — | — | — | (.06 | ) | ||||||||||||||||
Net income | $ | .41 | $ | .17 | $ | .46 | $ | .26 | $ | .88 | $ | .43 | ||||||||||||
Diluted: | ||||||||||||||||||||||||
Income from continuing operations | $ | .40 | $ | .23 | $ | .46 | $ | .26 | $ | .86 | $ | .49 | ||||||||||||
Income from discontinued operations | .01 | — | — | — | .01 | — | ||||||||||||||||||
Cumulative effect of accounting change | — | (.06 | ) | — | — | — | (.06 | ) | ||||||||||||||||
Net income | $ | .41 | $ | .17 | $ | .46 | $ | .26 | $ | .87 | $ | .43 | ||||||||||||
Dividends paid per common share | $ | .15 | $ | .15 | $ | .15 | $ | .15 | $ | .30 | $ | .30 | ||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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Alcoa and subsidiaries
Condensed Statement of Consolidated Cash Flows (unaudited)
(in millions)
Three months ended March 31 | Six months ended June 30 | |||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
CASH FROM OPERATIONS | ||||||||||||||||
Net income | $ | 355 | $ | 151 | $ | 759 | $ | 367 | ||||||||
Adjustments to reconcile net income to cash from operations: | ||||||||||||||||
Depreciation, depletion, and amortization | 305 | 287 | 608 | 592 | ||||||||||||
Change in deferred income taxes | (36 | ) | 6 | (59 | ) | 18 | ||||||||||
Equity income, net of dividends | (13 | ) | (61 | ) | (20 | ) | (23 | ) | ||||||||
Noncash restructuring and other charges | (31 | ) | (4 | ) | (26 | ) | (1 | ) | ||||||||
Net gain on early retirement of debt and interest rate swap settlements (B) | (58 | ) | — | |||||||||||||
Gains from investing activities - sale of assets | (5 | ) | 1 | (8 | ) | (13 | ) | |||||||||
Provision for doubtful accounts | 13 | 2 | 13 | 3 | ||||||||||||
Income from discontinued operations (D) | (5 | ) | (3 | ) | ||||||||||||
Accounting change (L) | — | 47 | ||||||||||||||
Income from discontinued operations (E) | (5 | ) | (2 | ) | ||||||||||||
Accounting change (M) | — | 47 | ||||||||||||||
Minority interests | 50 | 59 | 123 | 134 | ||||||||||||
Other | (17 | ) | 37 | (8 | ) | 15 | ||||||||||
Changes in assets and liabilities, excluding effects of acquisitions and divestitures: | ||||||||||||||||
Increase in receivables | (282 | ) | (271 | ) | (436 | ) | (97 | ) | ||||||||
Increase in inventories | �� | (300 | ) | (95 | ) | |||||||||||
Increase in prepaid expenses and other current assets | (51 | ) | — | |||||||||||||
(Increase) reduction in inventories | (334 | ) | 4 | |||||||||||||
(Increase) reduction in prepaid expenses and other current assets | (123 | ) | 46 | |||||||||||||
Increase (reduction) in accounts payable and accrued expenses | 168 | (55 | ) | 180 | (71 | ) | ||||||||||
Increase (reduction) in taxes, including taxes on income | 31 | (18 | ) | 149 | (122 | ) | ||||||||||
Cash paid on early retirement of debt and interest rate swap settlements (B) | (52 | ) | — | |||||||||||||
Cash received on long-term aluminum supply contract | — | 440 | ||||||||||||||
Net change in noncurrent assets and liabilities | (101 | ) | (90 | ) | (103 | ) | (169 | ) | ||||||||
Reduction in net assets held for sale | (11 | ) | (27 | ) | ||||||||||||
Net change in net assets held for sale | (40 | ) | 32 | |||||||||||||
CASH PROVIDED FROM (USED FOR) CONTINUING OPERATIONS | 70 | (34 | ) | |||||||||||||
CASH PROVIDED FROM CONTINUING OPERATIONS | 560 | 1,200 | ||||||||||||||
CASH PROVIDED FROM DISCONTINUED OPERATIONS | — | 1 | — | 15 | ||||||||||||
CASH FROM OPERATIONS | 70 | (33 | ) | |||||||||||||
CASH PROVIDED FROM OPERATIONS | 560 | 1,215 | ||||||||||||||
FINANCING ACTIVITIES | ||||||||||||||||
Net changes to short-term borrowings | (14 | ) | (1 | ) | (1 | ) | (14 | ) | ||||||||
Common stock issued for stock compensation plans | 47 | 4 | 58 | 20 | ||||||||||||
Repurchase of common stock | (68 | ) | — | (68 | ) | — | ||||||||||
Dividends paid to shareholders | (130 | ) | (127 | ) | (261 | ) | (255 | ) | ||||||||
Dividends paid to minority interests | (39 | ) | (45 | ) | (79 | ) | (85 | ) | ||||||||
Net change in commercial paper | — | 352 | ||||||||||||||
Net change in commercial paper (B) | 1,080 | (423 | ) | |||||||||||||
Additions to long-term debt | 53 | 100 | 88 | 247 | ||||||||||||
Payments on long-term debt | (107 | ) | (94 | ) | ||||||||||||
Payments on long-term debt (B) | (1,379 | ) | (254 | ) | ||||||||||||
CASH (USED FOR) PROVIDED FROM FINANCING ACTIVITIES | (258 | ) | 189 | |||||||||||||
CASH USED FOR FINANCING ACTIVITIES | (562 | ) | (764 | ) | ||||||||||||
INVESTING ACTIVITIES | ||||||||||||||||
Capital expenditures | (193 | ) | (180 | ) | (413 | ) | (401 | ) | ||||||||
Capital expenditures of discontinued operations | — | (1 | ) | — | (2 | ) | ||||||||||
Proceeds from the sale of assets (D) | 309 | 14 | ||||||||||||||
Proceeds from the sale of assets (E) | 355 | 20 | ||||||||||||||
Additions to investments | (37 | ) | (3 | ) | (46 | ) | (4 | ) | ||||||||
Changes in short-term investments | (1 | ) | 44 | 5 | 22 | |||||||||||
Other | (7 | ) | (12 | ) | (7 | ) | (14 | ) | ||||||||
CASH PROVIDED FROM (USED FOR) INVESTING ACTIVITIES | 71 | (138 | ) | |||||||||||||
CASH USED FOR INVESTING ACTIVITIES | (106 | ) | (379 | ) | ||||||||||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH | — | 8 | (2 | ) | 14 | |||||||||||
Net change in cash and cash equivalents | (117 | ) | 26 | (110 | ) | 86 | ||||||||||
Cash and cash equivalents at beginning of year | 576 | 344 | 576 | 344 | ||||||||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 459 | $ | 370 | $ | 466 | $ | 430 | ||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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Notes to the Condensed Consolidated Financial Statements (unaudited)
(dollars in millions, except per-share amounts)
A.Basis of Presentation -The Condensed Consolidated Financial Statements are unaudited. These statements include all adjustments, consisting of only normal recurring adjustments, considered necessary by management to fairly present the results of operations, financial position, and cash flows. The results reported in these Condensed Consolidated Financial Statements are not necessarily indicative of the results that may be expected for the entire year.
This Form 10-Q report should be read in conjunction with Alcoa’s annual report on Form 10-K for the year ended December 31, 2003, which includes all disclosures required by accounting principles generally accepted in the United States of America.
B.Debt – In June 2004, Alcoa recognized a net gain of $58 in other income on the early retirement of long-term debt and the associated settlement of interest rate swaps. Alcoa retired $1,200 of debt securities, consisting of the following: $200 of 6.125% Bonds due in 2005, $500 of 7.25% Notes due in 2005, and $500 of 5.875% Notes due in 2006. These debt securities were retired primarily with proceeds from commercial paper borrowings. The net gain of $58 is comprised of the following:
Alcoa previously used interest rate swaps to establish fixed interest rates on anticipated borrowings between June 2005 and June 2006. Due to a change in forecasted borrowing requirements, resulting from the early retirement of debt in June 2004 and a forecasted increase in future operating cash flows resulting from improved market conditions, the anticipated borrowings are no longer probable of occurring in 2005 and 2006. Therefore, Alcoa recognized $33 of gains that had been deferred on previously settled swaps and $44 of cash proceeds which was recorded as a gain to unwind the remaining interest rate swaps.
In connection with this transaction, Alcoa terminated $1,000 notional value of interest rate swaps that resulted in a cash payment by Alcoa of $32. These interest rate swaps were hedging debt maturing in 2007 and 2011. The $32 is reflected as a reduction in the carrying value of debt and it will be recognized as an increase in interest expense over the remaining maturity of the related hedged debt.
C.Stock-Based Compensation – Stock options under the company’s stock incentive plans have been granted at not less than market prices on the dates of grant. Stock option features based on date of original grant are as follows:
Date of original grant | Vesting | Term | Reload feature | |||
2002 and prior | One year | 10 years | One reload over option term | |||
2003 | 3 years (1/3 each year) | 10 years | One reload in 2004 for 1/3 vesting in 2004 | |||
2004 | 3 years (1/3 each year) | 6 years | None |
Alcoa accounts for stock-based compensation in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations using the intrinsic value method, which resulted in no compensation cost for options granted.
Alcoa’s net income and earnings per share would have been reduced to the pro forma amounts shown below if compensation cost had been determined based on the fair value at the grant dates in accordance with Statement of Financial Accounting Standards (SFAS) Nos. 123 and 148, “Accounting for Stock-Based Compensation.”
First quarter ended March 31 | 2004 | 2003 | ||||
Net income, as reported | $ | 355 | $ | 151 | ||
Less: compensation cost determined under the fair value method, net of tax | 8 | 4 | ||||
Pro forma net income | $ | 347 | $ | 147 | ||
Basic earnings per share: | ||||||
As reported | $ | .41 | $ | .17 | ||
Pro forma | .40 | .17 | ||||
Diluted earnings per share: | ||||||
As reported | $ | .41 | $ | .17 | ||
Pro forma | .40 | .17 | ||||
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Second quarter ended June 30 | Six months ended June 30 | |||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||
Net income, as reported | $ | 404 | $ | 216 | $ | 759 | $ | 367 | ||||
Less: compensation cost determined under the fair value method, net of tax | 8 | 4 | 16 | 8 | ||||||||
Pro forma net income | $ | 396 | $ | 212 | $ | 743 | $ | 359 | ||||
Basic earnings per share: | ||||||||||||
As reported | $ | .46 | $ | .26 | $ | .88 | $ | .43 | ||||
Pro forma | .46 | .25 | .86 | .42 | ||||||||
Diluted earnings per share: | ||||||||||||
As reported | $ | .46 | $ | .26 | $ | .87 | $ | .43 | ||||
Pro forma | .45 | .25 | .85 | .42 | ||||||||
In addition to stock option awards described above, beginning in 2004 the company granted stock awards and performance share awards that vest in three years from the date of grant. Compensation expense of $9 (pre-tax) was recognized on these awards in the first quarterhalf of 2004 and was not material.2004.
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C.D. Pension Plans and Other Postretirement Benefits – Effective December 31, 2003, Alcoa adopted SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” This standard requires the disclosure of the components of net periodic benefit cost recognized during interim periods.
Pension benefits | Postretirement benefits | Second quarter ended June 30 | Six months ended June 30 | |||||||||||||||||||||||||||||
First quarter ended March 31 | 2004 | 2003 | 2004 | 2003 | ||||||||||||||||||||||||||||
Service Cost | $ | 51 | $ | 50 | $ | 8 | $ | 8 | ||||||||||||||||||||||||
Interest Cost | 154 | 154 | 55 | 59 | ||||||||||||||||||||||||||||
Pension benefits | 2004 | 2003 | 2004 | 2003 | ||||||||||||||||||||||||||||
Service cost | $ | 52 | $ | 50 | $ | 103 | $ | 100 | ||||||||||||||||||||||||
Interest cost | 155 | 154 | 309 | 308 | ||||||||||||||||||||||||||||
Expected return on plan assets | (180 | ) | (183 | ) | (360 | ) | (366 | ) | ||||||||||||||||||||||||
Amortization of prior service cost | 9 | 9 | 18 | 19 | ||||||||||||||||||||||||||||
Recognized actuarial loss | 15 | 4 | 30 | 8 | ||||||||||||||||||||||||||||
Net periodic benefit cost | $ | 51 | $ | 34 | $ | 100 | $ | 69 | ||||||||||||||||||||||||
Second quarter ended June 30 | Six months ended June 30 | |||||||||||||||||||||||||||||||
Postretirement benefits | 2004 | 2003 | 2004 | 2003 | ||||||||||||||||||||||||||||
Service cost | $ | 8 | $ | 8 | $ | 16 | $ | 16 | ||||||||||||||||||||||||
Interest cost | 55 | 59 | 110 | 118 | ||||||||||||||||||||||||||||
Expected return on plan assets | (180 | ) | (183 | ) | (3 | ) | (3 | ) | (3 | ) | (3 | ) | (6 | ) | (6 | ) | ||||||||||||||||
Amortization of prior service cost (benefit) | 9 | 10 | (2 | ) | (8 | ) | (2 | ) | (8 | ) | (4 | ) | (16 | ) | ||||||||||||||||||
Recognized actuarial loss | 15 | 4 | 12 | 10 | 12 | 10 | 24 | 20 | ||||||||||||||||||||||||
Net periodic benefit cost | $ | 49 | $ | 35 | $ | 70 | $ | 66 | $ | 70 | $ | 66 | $ | 140 | $ | 132 | ||||||||||||||||
The first quarter 2004 net periodic benefit cost for postretirement benefits for the three-month and six-month periods ended June 30, 2004 reflects a reduction of approximately $6 and $12, respectively, related to the recognition of the federal subsidy under Medicare Part D. For further details on the Medicare Part D subsidy, see Note V to the audited financial statements contained in the Annual Report on Form 10-K for the year ended December 31, 2003.
D.E. Discontinued Operations and Assets Held for Sale –In the fourth quarter of 2002, Alcoa performed a portfolio review of its businesses and the markets they serve. As a result of this review, Alcoa committed to a plan to divest certain noncore businesses that did not meet internal growth and return measures. A detailed discussion of Alcoa’s 2002 divestiture plan and changes to the plan in 2003 can be found in Note B to the audited financial statements contained in Alcoa’s Annual Report on Form 10-K for the year ended December 31, 2003. This disclosure provides informationInformation on divestiture activities that occurred in the first quarterhalf of 2004.2004 is provided below.
For the periods presented in the Condensed Consolidated Financial Statements, businesses classified as discontinued operations included Alcoa’s commodity automotive fasteners business, a packaging business in South America, and Alcoa’s packaging equipment business. In January of 2004, Alcoa sold its packaging equipment business to American Industrial Partners for $44 in cash and recognized
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a gain of $10. In February of 2004, Alcoa sold its automotive fasteners business to the Kaminski Holdings group for $17 in cash and notes receivable and recognized an additional loss of $5. The gain and loss from these transactions are recorded in Income from Discontinued Operations in the income statement. In July of 2004, Alcoa sold its flexible packaging business in South America.
The following table details selected financial information for the businesses included within discontinued operations.
First quarter ended March 31 | 2004 | 2003 | ||||||
Sales | $ | 6 | $ | 62 | ||||
Income from operations | — | 4 | ||||||
Gain on sale of businesses | 8 | — | ||||||
Total pretax income | 8 | 4 | ||||||
Provision for taxes | (3 | ) | (1 | ) | ||||
Income from discontinued operations | $ | 5 | $ | 3 | ||||
Second quarter ended June 30 | Six months ended June 30 | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||
Sales | $ | 6 | $ | 56 | $ | 12 | $ | 118 | ||||||
(Loss) income from operations | — | $ | (2 | ) | — | $ | 2 | |||||||
Gain on sale of businesses | — | — | 8 | — | ||||||||||
Total pretax (loss) income | — | $ | (2 | ) | 8 | $ | 2 | |||||||
Provision for taxes | — | 1 | (3 | ) | — | |||||||||
(Loss) income from discontinued operations | $ | — | $ | (1 | ) | $ | 5 | $ | 2 | |||||
For the periods presented in the Condensed Consolidated Financial Statements, businesses classified as assets held for sale included Alcoa’s specialty chemicals business, certain architectural products businesses in North America, an extrusion facility in Europe, certain extrusion facilities in Latin America, and foil facilities in St. Louis, MO and Russellville, AR. In February of 2004, the specialty chemicals business of Alcoa was sold to two private equity firms led by Rhone Capital LLC for an enterprise value of $342, which included the assumption of debt and other unfunded obligations. Alcoa received cash of $248 and recognized a pre-tax, pre-minority interest gain of approximately $44$49 ($5859 after-tax, after-minority interest). The gain is included in Restructuring and Other Charges in the income statement.
In April of 2004, Alcoa sold its St. Louis, MO and Russellville, AR foil facilities, as well as an extrusion facility in Europe. Alcoa received $37 in cash and no material gain or loss was recorded on these transactions.
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The major classes of assets and liabilities of operations held for sale in the balance sheet are as follows:
March 31, 2004 | December 31, 2003 | June 30, 2004 | December 31, 2003 | |||||||||
Assets: | ||||||||||||
Receivables | $ | 69 | $ | 153 | $ | 5 | $ | 106 | ||||
Inventories | 55 | 142 | 5 | 106 | ||||||||
Properties, plants, and equipment, net | 57 | 208 | 15 | 181 | ||||||||
Goodwill | — | — | ||||||||||
Other assets | 17 | 46 | — | 38 | ||||||||
Total assets held for sale | $ | 198 | $ | 549 | $ | 25 | $ | 431 | ||||
Liabilities: | ||||||||||||
Accounts payable and accrued expenses | 16 | 28 | 3 | 12 | ||||||||
Other liabilities | 23 | 79 | — | 71 | ||||||||
Total liabilities of operations held for sale | $ | 39 | $ | 107 | $ | 3 | $ | 83 | ||||
The changes in assets and liabilities of operations held for sale at March 31,June 30, 2004 compared with December 31, 2003 are due to the divestitures of Alcoa’s packaging equipment, automotive fasteners, and specialty chemicals businesses, duringas well as the first quartersale of the St. Louis and Russellville foil facilities and an extrusion plant in Europe in 2004. The divestiture program is essentially complete, with the exception of certain Latin American extrusion facilities that remain in assets held for sale.
E.F. Restructuring and Other Charges – In the first half of 2004, Alcoa recorded income of $26 for restructuring and other charges, consisting of income of $31 in the first quarter and expense of $5 in the second quarter. In the second quarter of 2004, Alcoa recorded restructuring and other charges of
7
$5 ($4 after tax and minority interests), consisting of charges of $14 for employee termination and severance costs associated with 2,700 salaried and hourly employees (primarily in Mexico and the U.S.), as the company continued to focus on reducing costs, partially offset by income of $6 associated with net gains on divested businesses and asset sales, and income of $3 resulting from adjustments to prior year employee termination and severance cost reserves. As of June 30, 2004, 1,660 of the 2,700 employees had been terminated. In the first quarter of 2004, Alcoa recorded income of $31 ($50 after tax and minority interests) for restructurings, consisting of a $44 gain on the sale of the specialty chemicals business of $44 and charges of $13 for employee termination and severance costs associated with 380 salaried and hourly employees (primarily in the U.S. and U.K.), as the company continued to focus on reducing costs.. As of March 31,June 30, 2004, 210250 of the 380 employees had been terminated and approximately $6terminated. Approximately $12 of cash payments were made against the reserves.reserves in the first half of 2004. All layoffs are expected to be completed in 2004. Restructuring and other charges are not reflected in the segment results.
During 2003, Alcoa recorded income of $26 ($25 after tax and minority interests) for restructuring and other charges. The income recognized was comprised of the following components: $45 of charges for employee termination and severance costs associated with approximately 1,600 hourly and salaried employees (located primarily in Europe, the U.S., and Brazil), as the company continued to focus on cost reductions in businesses that continued to be impacted by market declines; $20 of charges related to a reduction in the estimated fair values of businesses included in assets held for sale; and $91 of income comprised of $53 primarily associated with the sale of the Latin America PET business, and $38 resulting from adjustments to prior year employee termination and severance cost reserves (in conjunction with the $38 reserve adjustment, there was a change in the number of employees to be terminated under the 2002 restructuring program from 8,500 to 6,700 employees). As of March 31,June 30, 2004, approximately 1,2701,530 of the 1,600 employees associated with the 2003 restructuring program had been terminated.
During 2002, Alcoa recorded charges of $425 ($280 after tax and minority interests) for restructurings associated with the curtailment of aluminum production at three smelters, as well as restructuring operations for those businesses experiencing negligible growth due to continued market declines and the decision to divest certain businesses that have failed to meet internal growth and return measures. The 2002 charges were comprised of $296 for asset write-downs, consisting of $113 of goodwill on businesses to be divested, as well as $183 for structures, machinery, and equipment; $105 for employee termination and severance costs related to approximately 6,700 hourly and salaried employees at over 70 locations, primarily in Mexico, Europe, and the U.S.; and charges of $31 for exit costs, primarilyprincipally for remediation and demolition costs, as well as lease termination costs. As of March 31,June 30, 2004, approximately 6,4506,490 of the 6,700 employees associated with the 2002 restructuring program had been terminated.
7
Activity and reserve balances for restructuring charges are as follows:
Asset write-downs | Employee termination and severance costs | Other | Total | Asset write-downs | Employee termination and severance costs | Other | Total | |||||||||||||||||||||||||
Reserve balances at December 31, 2002 | $ | 63 | $ | 166 | $ | 27 | $ | 256 | $ | 63 | $ | 166 | $ | 27 | $ | 256 | ||||||||||||||||
2003: | ||||||||||||||||||||||||||||||||
Cash payments | (16 | ) | (120 | ) | (17 | ) | (153 | ) | (16 | ) | (120 | ) | (17 | ) | (153 | ) | ||||||||||||||||
2003 restructuring charges | — | 45 | — | 45 | — | 45 | — | 45 | ||||||||||||||||||||||||
Additions to 2002 restructuring charges | 20 | — | — | 20 | 20 | — | — | 20 | ||||||||||||||||||||||||
Reversals of 2002 restructuring charges | (53 | ) | (38 | ) | — | (91 | ) | (53 | ) | (38 | ) | — | (91 | ) | ||||||||||||||||||
Noncash additions/reversals to the reserves in 2003 | 24 | — | — | 24 | 24 | — | — | 24 | ||||||||||||||||||||||||
Reserve balances at December 31, 2003 | $ | 38 | $ | 53 | $ | 10 | $ | 101 | $ | 38 | $ | 53 | $ | 10 | $ | 101 | ||||||||||||||||
2004: | ||||||||||||||||||||||||||||||||
Cash payments | (1 | ) | (20 | ) | (2 | ) | (23 | ) | (1 | ) | (35 | ) | (2 | ) | (38 | ) | ||||||||||||||||
2004 restructuring charges | — | 13 | (44 | ) | (31 | ) | — | 27 | (50 | ) | (23 | ) | ||||||||||||||||||||
2004 restructuring charges not impacting reserve balances | — | — | 44 | 44 | ||||||||||||||||||||||||||||
Net gains on sales of assets not impacting reserve balances | — | — | 50 | 50 | ||||||||||||||||||||||||||||
Reversals of 2003 restructuring charges | — | (3 | ) | — | (3 | ) | ||||||||||||||||||||||||||
Reserve balances at March 31, 2004 | $ | 37 | $ | 46 | $ | 8 | $ | 91 | ||||||||||||||||||||||||
Reserve balances at June 30, 2004 | $ | 37 | $ | 42 | $ | 8 | $ | 87 | ||||||||||||||||||||||||
For further details on the restructurings, see Note D to the audited financial statements contained in the Annual Report on Form 10-K for the year ended December 31, 2003.
8
F.G. Inventories
March 31 2004 | December 31 2003 | June 30 2004 | December 31 2003 | |||||||||
Finished goods | $ | 864 | $ | 742 | $ | 880 | $ | 763 | ||||
Work in process | 878 | 788 | 915 | 791 | ||||||||
Bauxite and alumina | 386 | 337 | 389 | 337 | ||||||||
Purchased raw materials | 473 | 448 | 463 | 459 | ||||||||
Operating supplies | 215 | 209 | 208 | 210 | ||||||||
$ | 2,816 | $ | 2,524 | $ | 2,855 | $ | 2,560 | |||||
Approximately 45% of total inventories at March 31,June 30, 2004, was valued on a LIFO basis. If valued on an average cost basis, total inventories would have been $556$585 and $558 higher at March 31,June 30, 2004 and December 31, 2003, respectively.
G.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 power construction projects in Brazil for purposes of increasing its energy self-sufficiency and providing a long-term, low-cost source of power for its facilities.
The completed and committed hydroelectric construction projects that Aluminio participates in are outlined in the following tables.
Completed projects | Date completed | Investment participation | Share of output | Debt guarantee | Debt guarantee through 2013 | Date completed | Investment participation | Share of output | Debt guarantee | Debt guarantee through 2013 | ||||||||||||||||||
Machadinho | 2002 | 27.23 | % | 22.62 | % | 35.53 | % | $ | 106 | 2002 | 27.23 | % | 22.62 | % | 35.53 | % | $ | 106 | ||||||||||
8
Aluminio committed to taking a share of the output of the completed Machadinho project for 30 years at cost (including cost of financing the project). In the event that other participants in this project fail to fulfill their financial responsibilities, Aluminio may be required to fund a portion of the deficiency. In accordance with the agreement, if Aluminio funds any such deficiency, its participation and share of the output from the project will increase proportionately.
Committed projects | Scheduled completion date | Share of output | Investment participation | Total estimated project costs | Aluminio’s share of project costs | Performance bond guarantee | Scheduled completion date | Share of output | Investment participation | Total estimated project costs | Aluminio’s share of project costs | Performance bond guarantee | ||||||||||||||||||||||
Barra Grande | 2006 | 42.20 | % | 42.20 | % | $ | 471 | $ | 199 | $ | 5 | 2006 | 42.20 | % | 42.20 | % | $ | 471 | $ | 199 | $ | 5 | ||||||||||||
Serra do Facao | 2006 | 39.50 | % | 39.50 | % | $ | 223 | $ | 88 | $ | 4 | 2008 | 39.50 | % | 39.50 | % | $ | 223 | $ | 88 | $ | 4 | ||||||||||||
Pai-Quere | 2008 | 35.00 | % | 35.00 | % | $ | 273 | $ | 96 | $ | 2 | 2008 | 35.00 | % | 35.00 | % | $ | 273 | $ | 96 | $ | 2 | ||||||||||||
Estreito | 2009 | 19.08 | % | 19.08 | % | $ | 589 | $ | 112 | $ | 10 | 2009 | 19.08 | % | 19.08 | % | $ | 589 | $ | 112 | $ | 10 | ||||||||||||
These projects were committed to during 2001 and 2002, and the Barra Grande project commenced construction in 2002. As of the firstsecond quarter of 2004, approximately 30% of the long-term financing for the Barra Grande project was obtained, of which Aluminio guaranteed 42.20% based on its investment participation. The plans for financing the other projects have not yet been finalized. It is anticipated that a portion of the project costs will be financed with third parties. Aluminio may be required to provide guarantees of project financing or commit to additional investments as these projects progress.
9
During 2003, the participants in the Santa Isabel project formally requested the return of the performance bond related to the license to construct the hydroelectric project. This project has been terminated.
Aluminio accounts for the Machadinho and Barra Grande hydroelectric projects on the equity method. Its total investment in these projects was $142$111 and $136 at March 31,June 30, 2004 and December 31, 2003, respectively. There have been no significant investments made in any of the other projects.
For additional information on commitments and contingencies related to environmental matters, see Part I, Item 2 of this Form 10-Q.
H.I. Comprehensive Income
First quarter ended March 31 | 2004 | 2003 | ||||||||||||||||||||||
Second quarter ended June 30 | Six months ended June 30 | |||||||||||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||||||||||
Net income | $ | 355 | $ | 151 | $ | 404 | $ | 216 | $ | 759 | $ | 367 | ||||||||||||
Changes in other comprehensive income (loss), net of tax: | ||||||||||||||||||||||||
Unrealized gains on available-for-sale securities | 34 | 19 | ||||||||||||||||||||||
Unrealized (losses) gains on available-for-sale securities | (160 | ) | 27 | (126 | ) | 46 | ||||||||||||||||||
Minimum pension liability | — | (2 | ) | — | — | — | (2 | ) | ||||||||||||||||
Unrealized translation adjustments | (157 | ) | 283 | (168 | ) | 373 | ||||||||||||||||||
Unrecognized gains (losses) on derivatives | ||||||||||||||||||||||||
Net change from periodic revaluations | 101 | 29 | 43 | 71 | ||||||||||||||||||||
Net amount reclassified to income (1) | (90 | ) | (12 | ) | (52 | ) | (34 | ) | ||||||||||||||||
Unrealized translation adjustments | (11 | ) | 90 | |||||||||||||||||||||
Unrecognized (losses) gains on derivatives | (20 | ) | 20 | |||||||||||||||||||||
Net unrecognized gains (losses) on derivatives | 11 | 17 | (9 | ) | 37 | |||||||||||||||||||
Comprehensive income | $ | 358 | $ | 278 | $ | 98 | $ | 543 | $ | 456 | $ | 821 | ||||||||||||
(1) | Includes $77 associated with interest rate swap settlements in June 2004. See Note B. |
I.J. Earnings Per Share – The information used to compute basic and diluted EPS on income from continuing operations follows: (shares in millions)
First quarter ended March 31 | 2004 | 2003 | ||||||||||||||||
Second quarter ended June 30 | Six months ended June 30 | |||||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||||
Income from continuing operations | $ | 350 | $ | 195 | $ | 404 | $ | 217 | $ | 754 | $ | 412 | ||||||
Less: preferred stock dividends | — | — | — | — | 1 | 1 | ||||||||||||
Income from continuing operations available to common shareholders | $ | 350 | $ | 195 | $ | 404 | $ | 217 | $ | 753 | $ | 411 | ||||||
Average shares outstanding – basic | 869 | 845 | 870 | 845 | 870 | 845 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||||
Shares issuable upon exercise of dilutive stock options | 10 | 1 | 7 | 2 | 8 | 2 | ||||||||||||
Average shares outstanding – diluted | 879 | 846 | 877 | 847 | 878 | 847 | ||||||||||||
Options to purchase 4558 million and 8266 million shares of common stock at average exercise prices of $39.00$38.00 and $33.00$36.00 were outstanding as of March 31,June 30, 2004 and 2003, respectively, but were not included in the computation of diluted EPS because the option exercise price was greater than the average market price of the common shares.
9
J.K. Other Income, Net
First quarter ended March 31 | 2004 | 2003 | ||||||
Equity income | $ | 26 | $ | 56 | ||||
Interest income | 10 | 8 | ||||||
Foreign exchange losses | (3 | ) | (26 | ) | ||||
Gains (losses) on sales of assets | 5 | (1 | ) | |||||
Other expense, primarily litigation settlement | (16 | ) | (1 | ) | ||||
$ | 22 | $ | 36 | |||||
Second quarter ended June 30 | Six months ended June 30 | ||||||||||||||
2004 | 2003 | 2004 | 2003 | ||||||||||||
Equity income | $ | 45 | $ | 28 | $ | 71 | $ | 84 | |||||||
Interest income | 9 | 10 | 19 | 18 | |||||||||||
Foreign exchange gains (losses) | 1 | (11 | ) | (2 | ) | (37 | ) | ||||||||
Gains on sales of assets | 3 | 14 | 8 | 13 | |||||||||||
Net gain on early retirement of debt and interest rate swap settlements (B) | 58 | — | 58 | — | |||||||||||
Other income (expense) | 9 | 16 | (7 | ) | 15 | ||||||||||
$ | 125 | $ | 57 | $ | 147 | $ | 93 | ||||||||
10
Other expenseincome (expense) for the 2004 six-month period included a charge of $20 recognized in the first quarter of 2004 includes a charge of $20 related to tentative settlements reached in the El Campo litigation matter. For additional information, see Part II, Item 1 of this Form 10-Q.
K.L. Income Taxes – The effective tax rate of 27.9%28.6% for the 2004 first quartersix-month period differs from the statutory rate of 35% and the 2003 first quartersix-month rate of 29.8% primarily27.7% principally due to the sale of the specialty chemicals business in 2004 and lower taxes on foreign income.
L.M. Cumulative Effect of Accounting Change – Effective January 1, 2003, Alcoa adopted SFAS No. 143, “Accounting for Asset Retirement Obligations.” Under this standard, Alcoa recognized additional liabilities for asset retirement obligations (AROs), consisting primarily of costs associated with spent pot lining disposal, bauxite residue disposal, mine reclamation, and landfills. These costs reflect the legal obligations associated with the normal operation of Alcoa’s bauxite mining, alumina refining, and aluminum smelting facilities. There were no material changes to the ARO balances during the firstsecond quarter of 2004. Additionally, Alcoa capitalized asset retirement costs by increasing the carrying amount of related long-lived assets, primarilyprincipally machinery and equipment, and recorded associated accumulated depreciation from the time the original assets were placed into service. The cumulative effect adjustment recognized upon adoption of this standard was $47, consisting primarilyprincipally of costs to establish assets and liabilities related to spent pot lining for pots currently in operation.
M.N. Segment Information - The following details sales and after-tax operating income (ATOI) for each reportable segment for the three-month and six-month periods ended March 31,June 30, 2004 and 2003. For more information on segments, see Management’s Discussion and Analysis andNote P to the segment disclosures includedaudited financial statements contained in Alcoa’sthe Annual Report on Form 10-K for the year ended December 31, 2003.
First quarter ended March 31, 2004 | Alumina and Chemicals | Primary Metals | Flat-Rolled Products | Engineered Products | Packaging and Consumer | Other | Total | |||||||||||||||||||||||||||||||||||
Alumina and Chemicals | Primary Metals | Flat-Rolled Products | Engineered Products | Packaging and Consumer | Other | Total | ||||||||||||||||||||||||||||||||||||
Second quarter ended June 30, 2004 | ||||||||||||||||||||||||||||||||||||||||||
Sales: | ||||||||||||||||||||||||||||||||||||||||||
Third-party sales | $ | 486 | $ | 959 | $ | 1,490 | $ | 1,598 | $ | 843 | $ | 716 | $ | 6,092 | ||||||||||||||||||||||||||||
Intersegment sales | 349 | 1,129 | 23 | 5 | — | — | 1,506 | |||||||||||||||||||||||||||||||||||
Total sales | $ | 835 | $ | 2,088 | $ | 1,513 | $ | 1,603 | $ | 843 | $ | 716 | $ | 7,598 | ||||||||||||||||||||||||||||
ATOI | $ | 159 | $ | 230 | $ | 59 | $ | 78 | $ | 54 | $ | 30 | $ | 610 | ||||||||||||||||||||||||||||
Second quarter ended June 30, 2003 | ||||||||||||||||||||||||||||||||||||||||||
Sales: | ||||||||||||||||||||||||||||||||||||||||||
Third-party sales | $ | 463 | $ | 878 | $ | 1,450 | $ | 1,523 | $ | 744 | $ | 638 | $ | 5,696 | $ | 491 | $ | 805 | $ | 1,200 | $ | 1,455 | $ | 836 | $ | 710 | $ | 5,497 | ||||||||||||||
Intersegment sales | 338 | 1,038 | 23 | 4 | — | — | 1,403 | 248 | 690 | 15 | 5 | — | — | 958 | ||||||||||||||||||||||||||||
Total sales | $ | 801 | $ | 1,916 | $ | 1,473 | $ | 1,527 | $ | 744 | $ | 638 | $ | 7,099 | $ | 739 | $ | 1,495 | $ | 1,215 | $ | 1,460 | $ | 836 | $ | 710 | $ | 6,455 | ||||||||||||||
ATOI | $ | 127 | $ | 192 | $ | 66 | $ | 62 | $ | 35 | $ | 18 | $ | 500 | $ | 89 | $ | 162 | $ | 56 | $ | 46 | $ | 57 | $ | 17 | $ | 427 | ||||||||||||||
First quarter ended March 31, 2003 | ||||||||||||||||||||||||||||||||||||||||||
Alumina and Chemicals | Primary Metals | Flat-Rolled Products | Engineered Products | Packaging and Consumer | Other | Total | ||||||||||||||||||||||||||||||||||||
Six months ended June 30, 2004 | ||||||||||||||||||||||||||||||||||||||||||
Sales: | ||||||||||||||||||||||||||||||||||||||||||
Third-party sales | $ | 449 | $ | 732 | $ | 1,152 | $ | 1,390 | $ | 749 | $ | 668 | $ | 5,140 | $ | 949 | $ | 1,837 | $ | 2,940 | $ | 3,121 | $ | 1,587 | $ | 1,354 | $ | 11,788 | ||||||||||||||
Intersegment sales | 240 | 840 | 20 | 9 | — | — | 1,109 | 687 | 2,167 | 46 | 9 | — | — | 2,909 | ||||||||||||||||||||||||||||
Total sales | $ | 689 | $ | 1,572 | $ | 1,172 | $ | 1,399 | $ | 749 | $ | 668 | $ | 6,249 | $ | 1,636 | $ | 4,004 | $ | 2,986 | $ | 3,130 | $ | 1,587 | $ | 1,354 | $ | 14,697 | ||||||||||||||
ATOI | $ | 91 | $ | 166 | $ | 53 | $ | 29 | $ | 53 | $ | 9 | $ | 401 | $ | 286 | $ | 422 | $ | 125 | $ | 140 | $ | 89 | $ | 48 | $ | 1,110 | ||||||||||||||
Six months ended June 30, 2003 | ||||||||||||||||||||||||||||||||||||||||||
Sales: | ||||||||||||||||||||||||||||||||||||||||||
Third-party sales | $ | 940 | $ | 1,537 | $ | 2,352 | $ | 2,845 | $ | 1,585 | $ | 1,378 | $ | 10,637 | ||||||||||||||||||||||||||||
Intersegment sales | 488 | 1,530 | 35 | 14 | — | — | 2,067 | |||||||||||||||||||||||||||||||||||
Total sales | $ | 1,428 | $ | 3,067 | $ | 2,387 | $ | 2,859 | $ | 1,585 | $ | 1,378 | $ | 12,704 | ||||||||||||||||||||||||||||
ATOI | $ | 180 | $ | 328 | $ | 109 | $ | 75 | $ | 110 | $ | 26 | $ | 828 | ||||||||||||||||||||||||||||
1011
The following reconciles segment information to consolidated totals.
First quarter ended March 31 | 2004 | 2003 | ||||||||||||||||||||||
Second quarter ended June 30 | Six months ended June 30 | |||||||||||||||||||||||
�� | 2004 | 2003 | 2004 | 2003 | ||||||||||||||||||||
Total ATOI | $ | 500 | $ | 401 | $ | 610 | $ | 427 | $ | 1,110 | $ | 828 | ||||||||||||
Impact of intersegment profit adjustments | 23 | 7 | 8 | (4 | ) | 31 | 3 | |||||||||||||||||
Unallocated amounts (net of tax): | ||||||||||||||||||||||||
Interest income | 7 | 5 | 5 | 6 | 12 | 11 | ||||||||||||||||||
Interest expense | (41 | ) | (57 | ) | (45 | ) | (52 | ) | (86 | ) | (109 | ) | ||||||||||||
Minority interests | (50 | ) | (59 | ) | (73 | ) | (75 | ) | (123 | ) | (134 | ) | ||||||||||||
Corporate expense | (74 | ) | (57 | ) | (63 | ) | (81 | ) | (137 | ) | (138 | ) | ||||||||||||
Restructuring and other charges (E) | 31 | 4 | ||||||||||||||||||||||
Discontinued operations (D) | 5 | 3 | ||||||||||||||||||||||
Accounting change (L) | — | (47 | ) | |||||||||||||||||||||
Restructuring and other charges (F) | (4 | ) | (2 | ) | 27 | 2 | ||||||||||||||||||
Discontinued operations (E) | — | (1 | ) | 5 | 2 | |||||||||||||||||||
Accounting change (M) | — | — | — | (47 | ) | |||||||||||||||||||
Other | (46 | ) | (49 | ) | (34 | ) | (2 | ) | (80 | ) | (51 | ) | ||||||||||||
Consolidated net income | $ | 355 | $ | 151 | $ | 404 | $ | 216 | $ | 759 | $ | 367 | ||||||||||||
The significant changes in the reconciling items between ATOI and consolidated net income for the 2004 second quarter and six-month period compared with the corresponding 2003 periods consisted of:
Additionally, corporate expense decreased in the second quarter of 2004 due to a decrease in deferred compensation costs.
The following table represents segment assets.
June 30 2004 | December 31 2003 | |||||
Alumina and Chemicals | $ | 3,119 | $ | 3,077 | ||
Primary Metals | 7,724 | 7,398 | ||||
Flat-Rolled Products | 3,639 | 3,380 | ||||
Engineered Products | 6,527 | 6,362 | ||||
Packaging and Consumer | 3,118 | 3,099 | ||||
Other | 1,826 | 1,752 | ||||
Total segment assets | $ | 25,953 | $ | 25,068 | ||
The increase in segment assets within the Flat-Rolled Products segment is due to higher customer receivables and increased inventories resulting from stronger volumes and prices in 2004.
N .O. Reclassifications - Certain amounts have been reclassified to conform to current year presentation.
11P. Subsequent Event - On July 26, 2004, Alcoa announced that 400 employees at its Wenatchee, WA smelter will lose their jobs as a result of the rejection of a proposed labor contract by the Aluminum Trade Council of Wenatchee. The impact of the layoff is expected to result in an after-tax charge of approximately $13 in the third quarter of 2004. The Wenatchee facility has been idled since July of 2001.
12
Report of Independent AccountantsRegistered Public Accounting Firm *
To the Shareholders and Board of Directors of
Alcoa Inc.
We have reviewed the accompanying unaudited condensed consolidated balance sheet of Alcoa and its subsidiaries (Alcoa) as of March 31,June 30, 2004, and the related unaudited condensed statements of consolidated income for each of the three-month and six-month periods ended June 30, 2004 and 2003, and the unaudited condensed statement of consolidated cash flows for the three-monthsix-month periods ended March 31,June 30, 2004 and 2003. These interim financial statements are the responsibility of Alcoa’s management.
We conducted our review in accordance with the standards established byof the American Institute of Certified Public Accountants.Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditingthe standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying unaudited condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We previously audited in accordance with auditingthe standards generally accepted inof the United States of America,Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Alcoa as of December 31, 2003, and the related statements of consolidated income, shareholders’ equity and of cash flows for the year then ended (not presented herein), and in our report dated January 8, 2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2003 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
As discussed in Note LM to the unaudited condensed consolidated financial statements, Alcoa changed its method of accounting for asset retirement obligations effective January 1, 2003.
/s/ PricewaterhouseCoopers LLP |
Pittsburgh, Pennsylvania |
July 7, 2004 |
April 6, 2004
* | This report should not be considered a “report” within the meaning of Sections 7 and 11 of the 1933 Act and the independent accountant’s liability under Section 11 does not extend to it. |
1213
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(dollars in millions, except per share amounts and ingot prices; shipments in thousands of metric tons [mt])
Certain statements in this report under this caption and elsewhere relate to future events and expectations and, as such, constitute forward-looking statements. Forward-looking statements include those containing such words as “anticipates,” “believes,” “estimates,” “expects,” “hopes,” “targets,” “should,” “will,” “will likely result,” “forecast,” “outlook,” “projects” or similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of Alcoa to be different from those expressed or implied in the forward-looking statements. For a discussion of some of the specific factors that may cause such a difference, see Note GH to the Condensed Consolidated Financial Statements; the disclosures included below under Segment Information, Environmental Matters, and Quantitative and Qualitative Disclosures about Market Risks; and Alcoa’s Form 10-K, Part I, Item 1, for the year ended December 31, 2003.
Results of Operations
Selected Financial Data:
First quarter ended March 31 | 2004 | 2003 | ||||||||||||||||||
Second quarter ended June 30 | Six months ended June 30 | |||||||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||||||
Sales | $ | 5,696 | $ | 5,140 | $ | 6,092 | $ | 5,497 | $ | 11,788 | $ | 10,637 | ||||||||
Income from continuing operations | 350 | 195 | 404 | 217 | 754 | 412 | ||||||||||||||
Cumulative effect of accounting change | — | (47 | ) | — | — | — | (47 | ) | ||||||||||||
Net income | $ | 355 | $ | 151 | $ | 404 | $ | 216 | $ | 759 | $ | 367 | ||||||||
Earnings per common share: | ||||||||||||||||||||
Diluted – Income from continuing operations | $ | .40 | $ | .23 | $ | .46 | $ | .26 | $ | .86 | $ | .49 | ||||||||
Diluted – Net income | $ | .41 | $ | .17 | $ | .46 | $ | .26 | $ | .87 | $ | .43 | ||||||||
Shipments of aluminum products (mt) | 1,312 | 1,198 | 1,287 | 1,231 | 2,559 | 2,399 | ||||||||||||||
Shipments of alumina (mt) | 1,718 | 1,794 | 1,796 | 1,939 | 3,514 | 3,733 | ||||||||||||||
Alcoa’s average realized ingot price | $ | .79 | $ | .69 | $ | .85 | $ | .68 | $ | .83 | $ | .69 | ||||||||
Average 3-month LME price | $ | .76 | $ | .63 | $ | .77 | $ | .63 | $ | .76 | $ | .63 | ||||||||
Alcoa’s income from continuing operations infor the 2004 firstsecond quarter and six-month period of 2004 was $350,$404, or 4046 cents per diluted share, an increase of 79% over 2003 first quarter income of $195,and $754, or 2386 cents per share. An increase in realized prices drove profitabilityshare, respectively. Income from continuing operations increased 86% and 83% in the 2004 firstsecond quarter and six-month period, as compared to the corresponding 2003 periods. Results in 2004 were favorably impacted by higher realized prices, as alumina prices rose 33% and 28% and aluminum prices climbed 25% and 20% in the 2004 second quarter and six-month period, respectively, compared with the corresponding 2003 first quarter, as prices for alumina and aluminum rose 18% and 14%, respectively.periods. The 2004 results were also favorably impacted by higher volumes in the Primary Metals,Engineered Products and Flat-Rolled Products segments, as demand in the commercial transportation, building and Engineered Products segments, ongoingconstruction, aerospace, packaging, and industrial markets improved; continued cost reductions throughoutreductions; and benefits from the company,restructuring of debt, which consisted of the early repayment of debt and asettlement of interest rate swaps. The 2004 six-month period was also favorably impacted by the gain on the sale of the specialty chemicals business. Partially offsetting thesebusiness that was sold in the first quarter of 2004. These positive contributions were partially offset by higher energy costs, the impact of the weakeneda weaker U.S. dollar against other currencies, increased environmental reserves, and higher raw material costs. The 2004 six-month period was also unfavorably impacted by litigation settlements lower equity earnings, and restructuring charges primarily for employee layoffs.
Net income in the first quarter of 2004.
Net income for the 2004 second quarter and six-month period was $355,$404, or 4146 cents per share, compared with net income of $151,and $759, or 1787 cents per share, respectively, as compared to $216, or 26 cents per share, and $367, or 43 cents per share, for corresponding periods in the 2003 first quarter.2003. The 2003 results included a cumulative effect charge of $47, or 6 cents per share, for the accounting change for asset retirement obligations under Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations.”
Sales for the first2004 second quarter of 2004 were $5,696, an increase of $556,and six-month period increased $595, or 11%, overand $1,151, or 11%, respectively compared with corresponding 2003 first quarter sales of $5,140.periods. The increase in realized prices for alumina and aluminum, as well as higher volumes in businesses serving the primary metals, packaging, (can sheet), aerospace, building and construction, and commercial transportation, and industrial markets accounted for approximately two-thirds ofhelped to drive the increase in sales. The rise in sales was also aided by the favorable impact of foreign currency exchange movements and the consolidation of KAAL Australia (Alcoa acquired the remaining 50% interest from Kobe Steel Ltd. in October 2003.). Partially offsetting these increases was a decline in third-party volumes for alumina due to higher internal demand, lower volumes for AFL automotive, andwere the impact of divestitures, primarilyprincipally the specialty chemicals business and Latin American PET businesses, and lower volumes in the Latin America PETAFL automotive business.
14
Cost of goods sold (COGS) as a percentage of sales was 77.9% in78.9% for the first2004 second quarter ofand 78.4% for the 2004 six-month period, compared with 79.7% for thein both 2003 first quarter. Highercorresponding periods. The decreases resulted from higher realized prices and accumulated cost savings
13
resulting from procurement savings, productivity improvements, and headcount reductions from prior restructuring programs,programs. These positive contributions more than offset higher raw material costs, increased energy costs, an increase of $42 in environmental reserves, and the unfavorable impact of foreign currency exchange movements.
Selling, general administrative, and other expenses (SG&A) were $344,for the 2004 second quarter decreased $28, or 6.0% of sales, in 20048%, compared with $297, or 5.8% of sales, in 2003. The increase of $47, or 0.2% as a percentage of sales, was primarilythe 2003 second quarter due to higher bad debt expense related to an alumina customer bankruptcy,a reduction in deferred compensation costs and cost savings, which were partially offset by the unfavorable impact of foreign currency exchange movements. SG&A expenses increased $19, or 3%, in the 2004 six-month period compared to the 2003 corresponding period due to unfavorable foreign currency exchange movements, expense associated with stock awards granted in 2004, and increasedthe bankruptcy of an alumina customer, which were partially offset by a reduction in deferred compensation and employee benefit costs.
The provision for depreciation, depletion, and amortization was $303relatively flat in the 2004 second quarter as compared with $285to the second quarter of 2003. The provision increased by $17, or 3%, in the 2004 six-month period over the corresponding 2003 an increase of $18, or 6%. The increase wasperiod primarily due to unfavorable foreign currency exchange movements.
Restructuring and other charges resulted in expense of $5 in the 2004 second quarter and income of $26 in the 2004 six-month period, compared with an expense of $3 in the second quarter of 2003 and income of $1 in the 2003 six-month period. In the second quarter of 2004, a charge of $14 was recorded for employee termination and severance costs associated with 2,700 salaried and hourly employees (primarily in Mexico and the U.S.). Partially offsetting this charge were income of $6 associated with net gains on divested businesses and asset sales, and income of $3 resulting from adjustments to prior year employee termination and severance cost reserves. As of June 30, 2004, 1,660 of the 2,700 employees had been terminated. In the first quarter of 2004, income of $31 in 2004 compared with income of $4 in 2003. The income recognized in 2004 was comprisedrecorded for restructuring and other charges, consisting of a gain of $44 on the sale of the specialty chemicals business, which was somewhat offset by restructuring charges of $13 for employee termination and severance costs associated with 380 salaried and hourly employees (primarily in the U.S. and U.K.), as the company continued to focus on reducing costs.. As of March 31,June 30, 2004, 210250 of the 380 employees had been terminated and approximately $6terminated. Approximately $12 of cash payments were made against the reserves.reserves in the first half of 2004. All layoffs are expected to be completed in 2004. Income of $4 recognized in 2003 was related to reversals of 2002 restructuring charges. Restructuring and other charges are not included in the segment results.
The pretaxpre-tax impact of allocating these amounts to the segment results would have been as follows:
First quarter ended March 31 | 2004 | 2003 | |||||||||||||||||||||
Second quarter ended June 30 | Six months ended June 30 | ||||||||||||||||||||||
2004 | 2003 | 2004 | 2003 | ||||||||||||||||||||
Alumina and Chemicals | $ | 44 | $ | — | $ | 6 | $ | — | $ | 50 | $ | — | |||||||||||
Primary Metals | (5 | ) | 1 | — | (7 | ) | (5 | ) | (6 | ) | |||||||||||||
Flat-Rolled Products | — | — | (1 | ) | (10 | ) | (1 | ) | (10 | ) | |||||||||||||
Engineered Products | (3 | ) | 2 | (5 | ) | (29 | ) | (8 | ) | (27 | ) | ||||||||||||
Packaging and Consumer | (2 | ) | — | (5 | ) | 43 | (7 | ) | 43 | ||||||||||||||
Other | — | 1 | (1 | ) | — | (1 | ) | 1 | |||||||||||||||
Segment total | 34 | 4 | (6 | ) | (3 | ) | 28 | 1 | |||||||||||||||
Corporate | (3 | ) | — | 1 | — | (2 | ) | — | |||||||||||||||
Total restructuring and other charges | $ | 31 | $ | 4 | $ | (5 | ) | $ | (3 | ) | $ | 26 | $ | 1 | |||||||||
Interest expense for the 2004 firstsecond quarter was $64 compared with $88 inand six-month period decreased $11, or 14%, and $35, or 21%, from the corresponding 2003 first quarter.periods. The decrease of $24, or 27%, was primarily due to lower average debt levels and lower average effective interest rates.
Other income was $22for the 2004 second quarter and six-month period increased $68, or 119%, and $54, or 58%, over the corresponding 2003 periods. The increase in the 2004 compared with $36 in 2003. The decrease of $14, or 39%, was primarilysecond quarter is due to a decreasethe gain of $30 in$58 recognized on the restructuring of debt, $17 of higher equity income, primarily at Elkem, as well as a charge for settlementand $12 of an environmental litigation matter, partiallyfavorable foreign currency exchange movements. These were somewhat offset by an increase in the cash surrender value ofexpenses related to employee life insurance and higher net gains on asset sales (principally office space) recognized in 2003.
15
The 2004 six-month increase resulted from the gain recognized on the restructuring of debt and $35 of favorable foreign currency exchange movements, of $23.partially offset by $13 lower equity income and $20 associated with litigation settlements in 2004.
The effective tax rate of 27.9%28.6% for the 2004 first quartersix-month period differs from the statutory rate of 35% and the 2003 first quartersix-month rate of 29.8% primarily27.7% principally due to the sale of the specialty chemicals business in 2004 and lower taxes on foreign income.
Minority interests’ share of income from operations fordecreased $2, or 3%, and $11, or 8%, in the 2004 firstsecond quarter was $50and six-month period, respectively, as compared with $59 in 2003.to 2003 corresponding periods. The decrease of $9, or 15%, was primarilydecreases were due to Alcoa’s acquisition of the minority interest in Alcoa Aluminio in August 2003 as well as the impact of the sale of the specialty chemicals business, partlyand a tax benefit for international tax legislation enacted in 2003. These were partially offset by increased earnings at Alcoa World Alumina and Chemicals. The 2004 six-month period was also favorably impacted by the sale of the specialty chemicals business.
14
Segment Information
I. Alumina and Chemicals
First quarter ended March 31 | 2004 | 2003 | ||||||||||||||||
Second quarter ended June 30 | Six months ended June 30 | |||||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||||
Alumina production (mt) | 3,575 | 3,320 | 3,600 | 3,478 | 7,175 | 6,798 | ||||||||||||
Third-party alumina shipments (mt) | 1,718 | 1,794 | 1,796 | 1,939 | 3,514 | 3,733 | ||||||||||||
Third-party sales | $ | 463 | $ | 449 | $ | 486 | $ | 491 | $ | 949 | $ | 940 | ||||||
Intersegment sales | 338 | 240 | 349 | 248 | 687 | 488 | ||||||||||||
Total sales | $ | 801 | $ | 689 | $ | 835 | $ | 739 | $ | 1,636 | $ | 1,428 | ||||||
After-tax operating income (ATOI) | $ | 127 | $ | 91 | $ | 159 | $ | 89 | $ | 286 | $ | 180 | ||||||
Third-party sales for the Alumina and Chemicals segment increased 3%were relatively flat in the first2004 second quarter of 2004and six-month period, compared with the first quarter ofcorresponding 2003 as 18% higherperiods. An increase in realized prices more thanof 33% in the 2004 second quarter and 28% in the 2004 six-month period was offset a decline inby lower third-party alumina volumes and the impactloss of revenue due to the sale of the specialty chemicals business in February of 2004.
Intersegment sales increased 41% in both the 2004 second quarter and in the 2004 six-month period as a result of higher realized prices and increased internal demand as a result of lowerthe expiration of contracts on required third partythird-party purchases. Production increased primarilyprincipally at the Point Comfort, TX refinery, after startup of additional capacity during 2003, and at the Jamaica refinery, after the planned expansion which was completed at the end of 2003.
ATOI for this segment rose 40%79% in the 2004 firstsecond quarter and 59% in the 2004 six-month period compared with the 2003 first quartercorresponding periods, due to higher realized prices, and higher total volumes, somewhat offset by the loss of profit associated with the sale of the chemicals business, unfavorable foreign currency exchange movements and higher bad debt expense related to an alumina customer bankruptcy.increased raw materials costs.
Alumina demand is expectedLME-based pricing continues to remain strongbe favorable in the secondthird quarter of 2004 but2004. Weakening of the availability of product for non-contract sales remains limited.U.S. dollar would negatively impact segment results.
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II. Primary Metals
First quarter ended March 31 | 2004 | 2003 | ||||||||||||||||
Second quarter ended June 30 | Six months ended June 30 | |||||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||||
Aluminum production (mt) | 867 | 881 | 863 | 883 | 1,730 | 1,764 | ||||||||||||
Third-party aluminum shipments (mt) | 469 | 453 | 472 | 495 | 941 | 948 | ||||||||||||
Alcoa’s average realized price per pound for aluminum ingot | $ | .79 | $ | .69 | $ | .85 | $ | .68 | $ | .83 | $ | .69 | ||||||
Third-party sales | $ | 878 | $ | 732 | $ | 959 | $ | 805 | $ | 1,837 | $ | 1,537 | ||||||
Intersegment sales | 1,038 | 840 | 1,129 | 690 | 2,167 | 1,530 | ||||||||||||
Total sales | $ | 1,916 | $ | 1,572 | $ | 2,088 | $ | 1,495 | $ | 4,004 | $ | 3,067 | ||||||
ATOI | $ | 192 | $ | 166 | $ | 230 | $ | 162 | $ | 422 | $ | 328 | ||||||
Third-party sales for the Primary Metals segment increased 19% in the second quarter of 2004 and 20% in the first2004 six-month period, compared with the corresponding periods of 2003, due to 25% higher realized prices in the second quarter of 2004 compared with the first quarter of 2003 primarily due to 14%and 20% higher realized prices as well as higherfor the 2004 six-month period, partially offset by lower third-party volumes. Intersegment sales increased 24%64% in the second quarter of 2004 and 42% in the 2004 six-month period primarily due to the increase in realized prices as well as increased volumes due to strengthening in the downstream aluminum businesses.
ATOI for this segment increased 16%42% in the 2004 second quarter and 29% in the 2004 six-month period due to higher realized prices and higher total volumes, somewhat offset by higher costs for energy, raw materials, and employee benefits, and the impact of unfavorable foreign currency exchange movements.
After the recently announced capacity curtailment at the Becancour smelter due to an employee strike, and the removal of a line at the Wenatchee smelter, Alcoa has approximately 562,000719,000 mt per year (mtpy) of idle capacity on a base capacity of 4,020,0003,977,000 mtpy.
InAluminum prices are expected to continue to be strong in the second quarter of 2004, it is anticipated that the recent increase in aluminum prices will improve profitability in this segment, overcoming likely increases inthird quarter. Higher alumina and energy prices.costs are expected to negatively impact results. Aloca will continue its program of metal purchases to optimize the selling of value-added products. In addition, the production cuts at the Becancour aluminum smelter are expected to negatively impact results by 1.5 cents to 2 cents per share per month. The impact of the Wenatchee layoffs is expected to result in a charge of $13 in the third quarter.
15
III. Flat-Rolled Products
First quarter ended March 31 | 2004 | 2003 | ||||||||||||||||
Second quarter ended June 30 | Six months ended June 30 | |||||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||||
Third-party aluminum shipments (mt) | 515 | 434 | 517 | 453 | 1,032 | 887 | ||||||||||||
Third-party sales | $ | 1,450 | $ | 1,152 | $ | 1,490 | $ | 1,200 | $ | 2,940 | $ | 2,352 | ||||||
Intersegment sales | 23 | 20 | 23 | 15 | 46 | 35 | ||||||||||||
Total sales | $ | 1,473 | $ | 1,172 | $ | 1,513 | $ | 1,215 | $ | 2,986 | $ | 2,387 | ||||||
ATOI | $ | 66 | $ | 53 | $ | 59 | $ | 56 | $ | 125 | $ | 109 | ||||||
Third-party sales for the Flat-Rolled Products segment increased 26%24% in the 2004 firstsecond quarter and 25% in the 2004 six-month period, as compared withto the 2003 first quarter primarily due tosame periods in 2003. The increase resulted from the acquisition of the remaining 50% interest in KAAL Australia (can sheet rolling mills) in October of 2003, which contributed $120;higher prices, and higher volumes for rigid container sheet (RCS)due to improved demand in the commercial transportation, aerospace, automotive, packaging, building and sheetconstruction, and plate; higher prices; and the favorable impact of foreign currency exchange movements in Europe.industrial products markets.
ATOI for this segment increased 25% primarily5% in the second quarter of 2004 and 15% for the 2004 six-month period due to higher volumes; favorable pricing; higher shipments for RCS; favorable mix,mix; improved productivity in the sheet and plate business; favorable foreign currency exchange movements in Europe; and the contribution of KAAL Australia to ATOI,Australia. These positive contributions were somewhat offset by higher costs for employee benefits, energy, raw materials, and plant maintenance costs for sheet and platea hot mill interruption at the Kitts Green facility in the U.S.U.K. and temporary throughput issues at the Tennessee can sheet facility.
Seasonal volume increases in17
In the third quarter of 2004, higher demand is anticipated for the can sheet business due to seasonal volume increases. A marginal increase is also projected in industrial markets, while slight seasonal declines are expected in Europe and in the second quarter of 2004, somewhat offset by persistent high energy costs. Industrial marketsautomotive sector (seasonal shutdowns and platform build rate reduction). Additionally, full production has resumed at the Kitts Green facility. Continued throughput issues at the Tennessee can sheet facility could negatively impact margins, and summer maintenance outages are anticipated to remain strong.expected at the North American rolling mills.
IV. Engineered Products
First quarter ended March 31 | 2004 | 2003 | ||||||||||||||||
Second quarter ended June 30 | Six months ended June 30 | |||||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||||
Third-party aluminum shipments (mt) | 234 | 223 | 239 | 221 | 473 | 444 | ||||||||||||
Third-party sales | $ | 1,523 | $ | 1,390 | $ | 1,598 | $ | 1,455 | $ | 3,121 | $ | 2,845 | ||||||
Intersegment sales | 4 | 9 | 5 | 5 | 9 | 14 | ||||||||||||
Total sales | $ | 1,527 | $ | 1,399 | $ | 1,603 | $ | 1,460 | $ | 3,130 | $ | 2,859 | ||||||
ATOI | $ | 62 | $ | 29 | $ | 78 | $ | 46 | $ | 140 | $ | 75 | ||||||
Third-party sales for the Engineered Products segment increased 10% in both the 2004 firstsecond quarter and six-month period, as compared with theto 2003 first quartercorresponding periods, principally due to the favorable impact of foreign currency exchange movements in Europe, as well as higher volumes across mostin the businesses in this segment, serving the commercial transportation, aerospace, automotive, industrial products, and building and construction, and industrial products markets.
ATOI for this segment increased 114% primarily70% in the second quarter of 2004 and 87% in the 2004 six-month period. The increase in the second quarter of 2004 was principally due to increased volumes as previously noted,productivity, as well as cost reductions throughout the segment resulting from productivity and purchasing cost savings,higher volumes as a result of improved yields, and headcount reductions. Additionally,market conditions. The increase in the first quarter2004 six-month period is the result of 2004, the segment results reflectedhigher volumes, increased productivity, and higher contributions as a result of the acquisition of Fairchild Fasteners.Fasteners, and was slightly offset by increased raw material costs and pricing pressures.
InLower demand is projected in the secondthird quarter of 2004 for engineered products due to seasonal softening in Europe and seasonal shutdowns and a reduction in platform build rates in the commercialautomotive market. This will be somewhat mitigated by improvements in building and construction due to seasonality. Commercial transportation market is expected to remain strong. We also anticipate energy costs to remain high.maintain second quarter strength.
16
V. Packaging and Consumer
First quarter ended March 31 | 2004 | 2003 | ||||||||||||||||
Second quarter ended June 30 | Six months ended June 30 | |||||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||||
Third-party aluminum shipments (mt) | 38 | 36 | 41 | 42 | 79 | 78 | ||||||||||||
Third-party sales | $ | 744 | $ | 749 | $ | 843 | $ | 836 | $ | 1,587 | $ | 1,585 | ||||||
Intersegment sales | — | — | — | — | — | — | ||||||||||||
Total sales | $ | 744 | $ | 749 | $ | 843 | $ | 836 | $ | 1,587 | $ | 1,585 | ||||||
ATOI | $ | 35 | $ | 53 | $ | 54 | $ | 57 | $ | 89 | $ | 110 | ||||||
Third-party sales for the Packaging and Consumer segment were relatively flat in the 2004 firstsecond quarter and six-month period, compared with the 2003 first quarter.corresponding periods. Higher volumes in the closures, foodservice,consumer products, thermoformed plastics, and packaging graphics and design businesses and the favorable impact of foreign currency exchange movements in the closures business, were offset by thea decline in sales due to the divestiture of the Latin America PET business in 2003.
ATOI for this segment declined 34% primarily due5% in the second quarter of 2004 and 19% in the 2004 six-month period compared to 2003 corresponding periods. The decreases were the result of higher resin costs and the divestitures of the Latin America PET business and Latasa (a Latin America aluminum can business in which Alcoa had an equity interest), as well as higher. The resin costs.price increases were offset by volume improvement in the closures, consumer products, thermoformed plastics, and packaging graphics and design businesses, but these improvements were not sufficient to overcome the loss of ATOI associated with the Latin American businesses.
Demand18
An increase in demand for both consumer products andis anticipated in the third quarter of 2004 as a result of seasonality, but a reduction in closures demand is projected to offset the strength in consumer products. Resin prices are expected to remain high and, in some cases, increase induring the second quarter duequarter. Additionally, an outage at an Alcoa resin facility will drive the need to seasonality. Persistently high resin costs will continue to pressure margins.make additional higher cost third-party purchases.
VI. Other
First quarter ended March 31 | 2004 | 2003 | ||||||||||||||||
Third-party aluminum shipments (mt) | 56 | 52 | ||||||||||||||||
Second quarter ended June 30 | Six months ended June 30 | |||||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||||
Third-party aluminum shipments (mt) * | 18 | 20 | 34 | 42 | ||||||||||||||
Third-party sales | $ | 638 | $ | 668 | $ | 716 | $ | 710 | $ | 1,354 | $ | 1,378 | ||||||
Intersegment sales | — | — | — | — | — | — | ||||||||||||
Total sales | $ | 638 | $ | 668 | $ | 716 | $ | 710 | $ | 1,354 | $ | 1,378 | ||||||
ATOI | $ | 18 | $ | 9 | $ | 30 | $ | 17 | $ | 48 | $ | 26 | ||||||
* | Third party aluminum shipments for previously reported periods have been properly adjusted to reflect international selling company activity. |
Third-party sales for the Other group declined 4%remained relatively flat in the 2004 firstsecond quarter and six-month period compared with the 2003 first quarter primarilycorresponding periods, principally due to volume increases in the residential building products business and the telecommunications business, which were offset by lower volumes at AFL automotive, as this business continued to rebalance its customer base, as well asbase. The 2004 six-month period was also negatively affected by the disposition of distribution facilities in Europe. These declines were somewhat offset by
ATOI for this group increased 76% in the 2004 second quarter and 85% in the 2004 six-month period, compared to corresponding 2003 periods, due to increased volumes in the residential building products business attributed to better weather conditions, and higher volumes in the telecommunications business, and the automotive parts business.
ATOI for this group doubled from the prior year quarter primarily due to increased volumes and cost savings, in the telecommunications and the automotive parts businesses, as well as higher equity income from Integris Metals, Inc. (a metals distribution joint venture in which Alcoa has a 50% equity interest),. These were somewhat offset by volume declines atlower volumes in the AFL automotive andbusiness. The 2004 six-month period was also negatively impacted by higher raw materials costs in the residential building products business.
We anticipateIn the third quarter of 2004, seasonal improvementincreases in the residential building products business in the second quarter. Automotive marketsand construction are expected to maintain first quarter strength.be more than offset by declines in automotive revenues resulting from seasonal shutdowns and platform build rate reductions.
Reconciliation of ATOI to Consolidated Net Income
Items required to reconcile ATOI to consolidated net income include: corporate adjustments to eliminate any remaining profit or loss between segments; interest income and expense; minority interests; corporate expense, comprised of the general administrative and selling expenses of operating the corporate headquarters and other global administrative facilities along with depreciation on corporate-owned assets; restructuring and other charges; discontinued operations; the accounting change for asset retirement obligations in 2003; and other, which includes the impact of LIFO, differences between estimated tax rates used in the segments and the corporate effective tax rate, and other nonoperating items such as foreign currency translation gains/losses.
1719
The following reconciles segment information to consolidated totals.
First quarter ended March 31 | 2004 | 2003 | ||||||||||||||||||||||
Second quarter ended June 30 | Six months ended June 30 | |||||||||||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||||||||||
Total ATOI | $ | 500 | $ | 401 | $ | 610 | $ | 427 | $ | 1,110 | $ | 828 | ||||||||||||
Impact of intersegment profit adjustments | 23 | 7 | 8 | (4 | ) | 31 | 3 | |||||||||||||||||
Unallocated amounts (net of tax): | ||||||||||||||||||||||||
Interest income | 7 | 5 | 5 | 6 | 12 | 11 | ||||||||||||||||||
Interest expense | (41 | ) | (57 | ) | (45 | ) | (52 | ) | (86 | ) | (109 | ) | ||||||||||||
Minority interests | (50 | ) | (59 | ) | (73 | ) | (75 | ) | (123 | ) | (134 | ) | ||||||||||||
Corporate expense | (74 | ) | (57 | ) | (63 | ) | (81 | ) | (137 | ) | (138 | ) | ||||||||||||
Restructuring and other charges | 31 | 4 | (4 | ) | (2 | ) | 27 | 2 | ||||||||||||||||
Discontinued operations | 5 | 3 | — | (1 | ) | 5 | 2 | |||||||||||||||||
Accounting change | — | (47 | ) | — | — | — | (47 | ) | ||||||||||||||||
Other | (46 | ) | (49 | ) | (34 | ) | (2 | ) | (80 | ) | (51 | ) | ||||||||||||
Consolidated net income | $ | 355 | $ | 151 | $ | 404 | $ | 216 | $ | 759 | $ | 367 | ||||||||||||
The significant changes in the reconciling items between ATOI and consolidated net income for the 2004 firstsecond quarter and six-month period compared with the corresponding 2003 first quarterperiods consisted of of:
Additionally, corporate expense decreased in the second quarter of 2004 due to a decrease in deferred compensation costs.
Liquidity and Capital Resources
Cash from Operations
Cash from operations was $70$560 in the first quarter of 2004 six-month period compared with $(33)$1,215 in the first quartersame period of 2003. The increasedecrease of $103$655 is primarilyprincipally due to higher earnings after adjustments for noncash items.net increases in inventories, receivables, and payables of $426 and the absence of a $440 advance payment received in 2003 against a long-term aluminum supply contract, partially offset by the increase in net income.
Financing Activities
Cash used for financing activities was $258$562 in the 2004 first quartersix-month period compared with cash providedused of $189$764 in the 2003 first quarter.six-month period. The change of $447$202 is primarily due to the repurchase of common stock as well ashigher net debt repayments in 2003 than in 2004.
In June 2004, Alcoa completed the early retirement of $68$1,200 of debt securities, consisting of the following: $200 of 6.125% Bonds due in 2004 compared with net borrowings2005, $500 of $3577.25% Notes due in 2003. Debt repayments2005, and $500 of 5.875% Notes due in 20042006. These debt securities were fundedretired primarily with proceeds from the divestitures of businesses.commercial paper borrowings.
On April 23, 2004 Alcoa will refinancerefinanced its $2,000 revolving-credit agreement that was to expire in April 2004 into a new $1,000 revolving-credit agreement that will expire in April 2005, with an option to extend the maturity date of any borrowings outstanding on the April 2005 expiration date for one year. Additionally, Alcoa will refinancerefinanced its $1,000 revolving-credit agreement that was to expire in April 2005 into a new agreement that will expire in April 2009.
20
Investing Activities
Cash provided fromused for investing activities was $71$106 in the 2004 first quartersix-month period compared with cash used of $138$379 in the 2003 first quarter.same period in 2003. The change of $209$273 was primarily due to proceeds received from the divestitures of Alcoa’s specialty chemicals, packaging equipment, and automotive fasteners businesses, as well as foil facilities, and a European extrusion facility. This was somewhat offset by cash used to acquire 44 million additional shares of Chalco to maintain Alcoa’s 8% ownership interest.
Environmental Matters
Alcoa continues to participate in environmental assessments and cleanups at a number of locations. These include approximately 30 owned or operating facilities and adjoining properties, approximately 39 previously owned or operating facilities and adjoining properties and approximately 67 Superfund and other waste sites. A liability is recorded for environmental remediation costs or damages when a cleanup program becomes probable and the costs or damages can be reasonably estimated.
As assessments and cleanups proceed, the liability is adjusted based on progress made in determining the extent of remedial actions and related costs and damages. The liability can change
18
substantially due to factors such as the nature and extent of contamination, changes in remedial requirements, and technological changes. Therefore, it is not possible to determine the outcomes or to estimate with any degree of accuracy the potential costs for certain of these matters.
The following discussion provides additional details regarding the current status of Alcoa’s significant sites where the final outcome cannot be determined or the potential costs in the future cannot be estimated.
Massena, NY. Alcoa has been conducting investigations and studies of the Grasse River, adjacent to Alcoa’s Massena, New York plant site, under order from the U.S. Environmental Protection Agency (EPA) issued under the Comprehensive Environmental Response, Compensation and Liability Act, also known as Superfund. Sediments and fish in the river contain varying levels of polychlorinated biphenyl (PCB).
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 June 2002, Alcoa submitted a finalan Analysis of Alternatives Report based on these evaluations and included additionalthat detailed a variety of remedial alternatives required by the EPA. The range ofwith estimated costs associated with the remedial alternatives evaluated in the 2002 report is betweenranging from $2 andto $525. Alcoa believes that rational, scientific analysis supports a remedy involving the containment of sediments in place via natural or man-made processes. Based on an assessment of the EPA decision-making process at the end of 2002, Alcoa concluded thatBecause the selection of the $2 alternative based on natural recovery only,(natural recovery) was remote. considered remote, Alcoa adjusted the reserve for the Grasse River in 2002 to $30 representing the low end of the range of possible alternatives, as no single alternative could be identified as more probable than the others.
In June of 2003, based on river observations during the spring of 2003, the EPA requested that Alcoa gather additional field data to assess the potential for sediment erosion from winter river ice formation and breakup. Alcoa has collectedThe results of these additional studies, submitted in a significant portion of the additional data and is in the process of data analysis and determining how this phenomenon should be factored into the range of remedial alternatives being considered. It is anticipated that a report of findings will be issued to the EPA in April of 2004, suggest that this phenomenon has the secondpotential to occur approximately every 10 years and may impact sediments in certain portions of the river under all remedial scenarios. The EPA informed Alcoa that a final remedial decision for the river could not be made without substantially more information, including river pilot studies on the effects of ice formation and breakup on each of the remedial techniques. The EPA requested that Alcoa consider a Remedial Options Study to gather this information. The scope of this study includes sediment removal and capping, the installation of an ice control structure, and significant monitoring.
In May of 2004, Alcoa agreed to perform the study at an estimated cost of $35. Most of the work should be completed by the fourth quarter of 2004. Subsequent to this submittal,2005. The findings will be incorporated into a revised Analysis of Alternatives Report, which is expected to be submitted in 2006. This information will be submitted atused by the EPA to propose a date to be determined.remedy for the entire river.
Alcoa continuesadjusted the reserves this quarter to believe that alternatives involvinginclude the largest amounts of sediment removal should not be selected$35 for the Grasse River remedy. Therefore, Alcoa believes that alternatives that should reasonably be considered for selection range from engineered capping and natural recovery ofRemedial Options Study. This is in addition to the $30 to a combination of moderate dredging, capping and natural recovery of $90. Accordingly, Alcoa adjusted the reserve for the Grasse River to $30 at the end of 2002, representing the low endpreviously reserved. Currently, none of the rangeexisting alternatives in the 2002 Analysis of possible alternatives, as no oneAlternatives Report is more probable than the others and the results of the alternatives is more likelyRemedial Options Study are necessary to be selected than any other.revise the scope and estimated cost of many of the current alternatives.
The EPA’s ultimate selection of a remedy could result in additional liability. However, as the process continues, it allows for input that can influence the scope and cost of the remedy that will be selected by the EPA in its issuance of the formal Record of Decision (ROD). Alcoa may be required to record a subsequent reserve adjustment at the time the RODEPA’s Record of Decision is issued.
Sherwin, TX. In connection with the sale of the Sherwin alumina refinery in Texas, which was required to be divested as part of the Reynolds merger in 2000, Alcoa has agreed to retain responsibility for
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the remediation of then existing environmental conditions, as well as a pro rata share of the final closure of the active waste disposal areas, which remain in use. Alcoa’s share of the closure costs is proportional to the total period of operation of the active waste disposal areas. Alcoa estimated its liability for the active disposal areas by making certain assumptions about the period of operation, the amount of material placed in the area prior to closure, and the appropriate technology, engineering, and regulatory status applicable to final closure. The most probable cost for remediation has been reserved. It is reasonably possible that an additional liability, not expected to exceed $75, may be incurred if actual experience varies from the original assumptions used.
Based on the foregoing, it is possible that Alcoa’s results of operations, in a particular period, could be materially affected by matters relating to these sites. However, based on facts currently available, management believes that adequate reserves have been provided and that the disposition of these matters will not have a materially adverse effect on the financial position or liquidity of the company.
Alcoa’s remediation reserve balance at March 31,June 30, 2004 was $416 and $395 at December 31, 2003 was $387 and $395 (of which $65 was classified as a current liability in both periods), 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 the 2004 first quartersix-month period were approximately $7.
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$17. They include expenditures currently mandated, as well as those not required by any regulatory authority or third party. The reserve balance was reducedincreased by $1, net$38 in the 2004 primarilysix-month period, principally due to the additional reserve recorded for adjustments based on recent assessments of remaining work required at certain sites.the Grasse River site.
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.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
In addition to the risks inherent in its operations, Alcoa is exposed to financial, market, political and economic risks. The following discussion provides additional detail regarding Alcoa’s exposure to the risks of changing commodity prices, foreign exchange rates, and interest rates.
Derivatives
Alcoa’s commodity and derivative activities are subject to the management, direction, and control of the Strategic Risk Management Committee (SRMC). The SRMC is composed of the chief executive officer, the chief financial officer, and other officers and employees that the chief executive officer selects. The SRMC reports to the Board of Directors on the scope of its derivative activities.
All of the aluminum and other commodity contracts, as well as various types of derivatives, are held for purposes other than trading. They are used primarilyprincipally to mitigate uncertainty and volatility, and to cover underlying exposures. The company is not involved in energy-trading activities, weather derivatives, or other nonexchange commodity trading activities.
Commodity Price Risks - Alcoa is the world’s leading producer of aluminum ingot and fabricated products. As a condition of sale, customers often require Alcoa to enter into forward-dated, fixed-price commitments. These commitments expose Alcoa to the risk of fluctuating aluminum prices between the time the order is committed and the time the order is shipped.
Alcoa’s aluminum commodity risk management policy is to manage, through the use of futures contracts, the aluminum price risk associated with a portion of its fixed-price firm commitments. At March 31,June 30, 2004, these contracts totaled approximately 607,000793,000 mt with a fair value gain of approximately $108$99 (pre-tax).
Alcoa purchases natural gas, fuel oil, and electricity to meet its production requirements. These purchases expose the company to the risk of higher prices. To hedge a portion of this risk, Alcoa enters into long positions, principally using futures contracts. Alcoa follows a stable pattern of purchasing these commodities; therefore, it is highly likely that anticipated purchases will occur. The fair value of these contracts was a gain of approximately $82$81 (pre-tax) at March 31,June 30, 2004.
Financial Risk
Currencies- Alcoa is subject to exposure from fluctuations in foreign currencies. Foreign currency exchange contracts may be used from time to time to hedge the variability in cash flows from the forecasted payment or receipt of currencies other than the functional currency. These contracts cover periods commensurate with known or expected exposures, generally within three years. The fair value of these contracts was a loss of approximately $10$3 (pre-tax) at March 31,June 30, 2004.
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Interest Rates- Alcoa uses interest rate swaps to help maintain a strategic balance between fixed- and floating-rate debt and to manage overall financing costs. The company has entered into pay floating, receive fixed interest rate swaps to change the interest rate risk exposure of its outstanding debt. The fair value of these swaps was a gainloss of approximately $45$145 (pre-tax) at March 31,June 30, 2004.
Alcoa also usespreviously used interest rate swaps to establish fixed interest rates on anticipated borrowings between June 2005 and June 2006. TheDue to a change in forecasted borrowing requirements, resulting from the early retirement of debt in June 2004 and a forecasted increase in future operating cash flows resulting from improved market conditions, it is no longer probable that the anticipated borrowings have a high probabilitywill occur in 2005 and 2006. Therefore, Alcoa recognized $33 of occurrence becausegains that had been deferred on previously settled swaps and $44 of additional gains to unwind the proceeds will be used to fund debt maturities and anticipated capital expenditures. Alcoa has $1,000 ofremaining interest rate swaps outstanding that will establish fixed interest rates on anticipated borrowingsswaps. These gains were recorded in other income. See Note B in Part I, Item I for additional information.
Embedded Derivatives - During the second quarter of $5002004, Alcoa entered into a long-term power supply contract. The power contract provides for increased pricing if the LME exceeds a certain price. This pricing feature in the contract is considered an embedded derivative and is marked to market through earnings. The impact to earnings in the second quarter of debt through 2016 and $500 of debt through 2036. The fair value of these swaps2004 was a loss of approximately $47 (pre-tax) at March 31, 2004.not material.
Material Limitations - The disclosures with respect to commodity prices, interest rates, and foreign exchange risk do not take into account the underlying commitments or anticipated transactions. If the underlying items were included in the analysis, the gains or losses on the futures contracts may be offset. Actual results will be determined by a number of factors that are not under Alcoa’s control and could vary significantly from those factors disclosed.
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Alcoa is exposed to credit loss in the event of nonperformance by counterparties on the above instruments, as well as credit or performance risk with respect to its hedged customers’ commitments. Although nonperformance is possible, Alcoa does not anticipate nonperformance by any of these parties. Futures contracts are with creditworthy counterparties and are further supported by cash, treasury bills, or irrevocable letters of credit issued by carefully chosen banks. In addition, various master netting arrangements are in place with counterparties to facilitate settlement of gains and losses on these contracts.
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Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
(a) | Evaluation of Disclosure Controls and Procedures |
Alcoa’s Chief Executive Officer and Chief Financial Officer have evaluated the company’s disclosure controls and procedures as of the end of the period covered by this report, and they have concluded that these controls and procedures are effective.
(b) Changes in Internal Control Over Financial Reporting
(b) | Changes in Internal Control Over Financial Reporting |
There have been no significant changes in internal control over financial reporting that occurred during the quarter ended March 31,June 30, 2004, that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
As previously reported, in May through October2001 and 2002, eleventwo companion lawsuits were filed againstin the Court of Lafayette County, Arkansas on behalf of nearly 400 current or former residents of the City of Stamps, Arkansas, the City of Stamps, and former employees of Red River Aluminum, Inc. (RRA), a dross processor. The 2001 action was transferred to Miller County, Arkansas. The suits name 12 defendants (including Alumax Inc., Reynolds Metals Company and Alcoa inInc.) that sent dross to RRA for processing. Plaintiffs have filed claims for personal injuries and property damage and have alleged that the District Court of Wharton County, Texas, five of which have since been dismissed. In the same timeframe, another lawsuit was filed in the United States District Court, Southern District of Texas, Victoria Division, but was later dismissed. The cases were originally removed to federal court, but all were remanded back to state court in Wharton County and consolidated. The lawsuits seek to recover damagesdefendants violated Arkansas environmental statutes relating to the presence of trichloroethylene (TCE)alleged contamination associated with RRA’s operations in the groundwater near a former Reynolds extrusion facility in El Campo, Texas. Additional defendants included in some of the lawsuits are the current owners to whom Reynolds sold the facility in 1997, Bon L. Campo Limited Partnership (Bon L. Campo) and Tredegar Corporation, a former plant owner from 1968-71, Whittaker Corporation, 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.Stamps. The only significant personal injury claim2001 action was settled in 2003. Reynolds ownedMay 2004. The cost of the settlement was previously reserved for and operatedwas not material to Alcoa. The 2002 action was dismissed, without prejudice, at the facility from 1971 to 1997 and sold it to Bon L. Campo beforerequest of plaintiffs in June 2004.
As previously reported, in July 1999, Alcoa acquired Reynolds. Reynolds andAluminio S.A. received notice that an administrative proceeding was commenced by Brazil’s Secretary of Economic Law of the Ministry of Justice against Brazilian producers of primary aluminum, including Alcoa are currently participatingAluminio. The suit alleges collusive action in the Voluntary Cleanup Program underpricing of primary aluminum in violation of Brazilian antitrust law. Alcoa Aluminio has presented its defense and has been awaiting the supervisiondecision of the Texas Commission on Environmental QualitySecretary of Economic Law. If the Secretary of Economic Law determines that the antitrust law was violated, then the action may be further prosecuted by the Administrative Council of Economic Defense (known as CADE). Brazilian law provides for civil and investigatingcriminal sanctions for violations of antitrust law, including fines ranging from 1% to 30% of a company’s revenue during the area to determinelast fiscal year. On July 6, 2004, the sourceOffice of Economic Law of the contamination. DuringMinistry of Justice decided not to pursue the first quarter of 2004, Alcoa reached tentative settlements totaling approximately $24 with all 240case in light of the property owners/residents inlack of evidence of infringement of the El Campo litigation. Included in the settlement amount is the construction of water lines into the community whichantitrust law. This decision will be tied intoreferred to the city water system thus making it possibleCADE for the residents to discontinue using wells.review.
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Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.
(c) | Issuer Purchases of Equity Securities: |
Period | Total Number of Shares | Average Price Paid Per | Total Number of Shares Purchased as Part of Publicly Announced Repurchase Plans or Programs (b) | Maximum Number (or Approximate of Shares that May | |||||
January 1 - January 31, 2004 | 674,679 | $ | 36.49 | — | 32,311,636 | ||||
February 1 - February 29, 2004 | 998,718 | 37.82 | 900,000 | 31,411,636 | |||||
March 1 - March 31, 2004 | 1,013,749 | 38.08 | 877,354 | 30,534,282 | |||||
Total for quarter ended March 31, 2004 | 2,687,146 | 37.58 | 1,777,354 | 30,534,282 | |||||
April 1 – April 30, 2004 | 2,712 | 35.23 | — | 30,534,282 | |||||
May 1 – May 31, 2004 | — | — | — | 30,534,282 | |||||
June 1 – June 30, 2004 | 23,654 | 32.11 | — | 30,534,282 | |||||
Total for quarter ended June 30, 2004 | 26,366 | 37.53 | — | 30,534,282 | |||||
(a) | This column includes (i) purchases under Alcoa’s publicly announced share repurchase program described in (b) below and (ii) the deemed surrender to the company by plan participants of shares of common stock to satisfy the exercise price related to the exercise of employee stock options, in each case to the extent applicable during the period indicated. |
(b) | Alcoa’s share repurchase program was approved by Alcoa’s Board of Directors and publicly announced on July 13, 2001. The program authorizes the repurchase of up to 50 million shares of Alcoa common stock from time to time, directly or through brokers or agents, and has no expiration date. |
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Item 4. Submission of Matters to a Vote of Security Holders.
Period | Total of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate of Shares that May Yet Be Purchased Under the Plans or Programs | ||||
January 1 - January 31, 2004 | — | — | — | 32,311,636 | ||||
February 1 - February 29, 2004 | 900,000 | 37.86 | 900,000 | 31,411,636 | ||||
March 1 - March 31, 2004 | 877,354 | 38.09 | 877,354 | 30,534,282 | ||||
Total | 1,777,354 | 1,777,354 | ||||||
(a) | The 2004 annual meeting of shareholders of Alcoa Inc. was held on April 30, 2004. |
(b) | All four nominees named in Alcoa’s 2004 proxy statement were elected to serve as Directors for a three-year term expiring in 2007. |
(c) | The matters voted upon at the meeting and the votes cast with respect to such matters are as follows: |
Alcoa’s share repurchase program was approved by Alcoa’s BoardElection of Directors and publicly announced on July 13, 2001. The program authorizes the repurchase of up to 50 million shares of Alcoa common stock from time to time, directly or through brokers or agents, and has no expiration date.
Nominee | Votes Cast For | Votes Withheld | ||
Alain Belda | 720,015,883 | 31,044,132 | ||
Carlos Ghosn | 725,151,451 | 25,908,564 | ||
Henry B. Schacht | 711,349,539 | 39,710,476 | ||
Franklin A. Thomas | 723,313,698 | 27,746,317 |
Proposals | Votes Cast | |||||||
For | Against | Abstain | Broker Non -Votes | |||||
Approval of the 2004 Alcoa Stock Incentive Plan | 535,871,861 | 117,378,929 | 11,833,072 | 85,976,153 | ||||
Shareholder Proposals | ||||||||
Relating to pay disparity | 80,748,695 | 562,842,510 | 21,522,765 | 85,946,045 | ||||
Relating to change in control severance plan | 126,582,171 | 521,179,315 | 17,349,083 | 85,949,446 |
Item 6. Exhibits and Reports on Form 8-K.
(a) | Exhibits |
10. Agreements signed by Alcoa Inc. on April 12, 2004 with G.J. Pizzey
12. Computation of Ratio of Earnings to Fixed Charges
15. Letter regarding unaudited interim financial information
31. Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32. Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
10a. | 364-Day Revolving Credit Agreement, dated as of April 23, 2004 | |
10b. | Five-Year Revolving Credit Agreement, dated as of April 23, 2004 | |
10c. | 2004 Alcoa Stock Incentive Plan | |
12. | Computation of Ratio of Earnings to Fixed Charges | |
15. | Letter regarding unaudited interim financial information | |
31. | Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32. | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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(b) | Reports on Form 8-K during the |
Alcoa furnished to the Commission the following reports on Form 8-K under Item 12:8-K:
(1) | a Form 8-K dated |
(2) | a Form 8-K dated |
(3) | a Form 8-K dated |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Alcoa Inc. | ||||
| By | /s/ RICHARD B. KELSON | ||
Date | Richard B. Kelson | |||
Executive Vice President and | ||||
Chief Financial Officer | ||||
(Principal Financial Officer) | ||||
| By | /s/ CHARLES D. MCLANE, JR. | ||
Date | Charles D. McLane, Jr. | |||
Vice President - Corporate Controller | ||||
(Principal Accounting Officer) |
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EXHIBITS
10. Agreements signed by Alcoa Inc. on April 12, 2004 with G. J. Pizzey
10(a). | 364-Day Revolving Credit Agreement, dated as of April 23, 2004 | |
10(b). | Five-Year Revolving Credit Agreement, dated as of April 23, 2004 | |
10(c). | 2004 Alcoa Stock Incentive Plan | |
12. | Computation of Ratio of Earnings to Fixed Charges | |
15. | Letter regarding unaudited interim financial information | |
31. | Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32. | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
12. Computation of Ratio of Earnings to Fixed Charges
15. Letter regarding unaudited interim financial information
31. Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32. Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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