PECHINEY
HALF-YEAR REPORT - JUNE 30, 2003
PECHINEY
Limited Company with assets of 1 259 997 440,75 euros
Head office : 7, Place du Chancelier Adenauer, 75116 Paris
R.C.S. Paris 562 095 166
Half-year report - June 30, 2003
Half-yearly Consolidated Financial Statements
Consolidated Statements of Income(unaudited) |
(in millions of euros) | Notes | Six months ended June 30, 2003 | Six months ended June 30, 2002 (restated) |
Net sales | 8 | 5,446 | 6,211 |
Other operating revenues | 81 | 71 | |
Cost of goods sold (excluding depreciation) | (4,857) | (5,515) | |
Selling, general and administrative expense | (292) | (305) | |
Research and development expense | (48) | (44) | |
Depreciation and amortization | (192) | (177) | |
Earnings from operations | 8 | 138 | 241 |
Restructuring expense and long-lived asset writedowns | (60) | (53) | |
Other income (expense) | 5 | (16) | (22) |
Income from operations | 62 | 166 | |
Financial expense, net | (24) | (22) | |
Income before income taxes | 38 | 144 | |
Income tax (expense) benefit | 6 | (15) | (59) |
Net income from consolidated companies | 23 | 85 | |
Equity in net earnings of affiliates | 5 | 4 | |
Minority interests | (3) | - | |
Net income before goodwill | 25 | 89 | |
Goodwill amortization | (14) | (17) | |
Exceptional goodwill amortization | - | (31) | |
Net income (loss) | 11 | 41 | |
Net income per common share "A" (in euros) | |||
- Basic earnings per share | 0.14 | 0.51 | |
- Diluted earnings per share | 0.20 | 0.52 |
See Notes to the Half-yearly Consolidated Financial Statements.
Consolidated balance sheets(unaudited) |
(in millions of euros) | Notes | June 30,2003 | December 31, 2002 |
ASSETS | |||
Non current assets | |||
Property, plant and equipment, net | 8 | 2,927 | 2,832 |
Goodwill, net | 8 | 625 | 637 |
Other intangible assets, net | 8 | 135 | 163 |
Investments in equity affiliates | 285 | 285 | |
Long-term investments | 100 | 139 | |
Deferred income taxes | 495 | 505 | |
Other long-term assets | 298 | 279 | |
4,865 | 4,840 | ||
Current assets | |||
Inventories, net | 1,453 | 1,525 | |
Accounts receivable - trade | 1,414 | 1,281 | |
Deferred income taxes | 46 | 51 | |
Other receivables and prepaid expenses | 80 | 101 | |
Marketable securities | 54 | 153 | |
Cash | 297 | 283 | |
3,344 | 3,394 | ||
Total assets | 8,209 | 8,234 |
(in millions of euros) | June 30,2003 | December 31, 2002 | |
LIABILITIES AND SHAREHOLDERS' EQUITY | |||
Shareholders' equity | |||
Capital stock | 1,260 | 1,258 | |
Share premium | 790 | 790 | |
Retained earnings | 1.242 | 1,297 | |
Cumulative translation adjustment | (234) | (151) | |
Treasury shares | (181) | (180) | |
2,877 | 3,014 | ||
Minority interests | 147 | 149 | |
Shareholders' equity and minority interests | 3,024 | 3,163 | |
Long-term provisions | |||
Deferred income taxes | 184 | 195 | |
Other long-term provisions | 1,162 | 1,142 | |
1,346 | 1,337 | ||
Long-term debt | 1,328 | 1,465 | |
Current liabilities | |||
Accounts payable - trade | 1,576 | 1,456 | |
Other payables and accrued liabilities | 378 | 384 | |
Current portion of long term-debt | 185 | 39 | |
Short-term bank loans | 372 | 390 | |
2,511 | 2,269 | ||
Total liabilities and shareholders' equity | 8,209 | 8,234 |
See Notes to the Half-yearly Consolidated Financial Statements.
Consolidated Statements of Cash Flows(unaudited) |
(in millions of euros) | Six months ended June 30,2003 | Six months ended June 30,2002 (restated) |
CASH FLOWS FROM OPERATING ACTIVITIES | ||
Net income (loss) | 11 | 41 |
Minority interests | 3 | 0 |
Equity in net earnings of affiliates | (5) | (4) |
Depreciation and amortization | 206 | 225 |
Net gain on disposal of long-lived assets | (1) | (4) |
Long-lived assets writedown | 2 | 38 |
Restructuring provision | 52 | 12 |
Deferred income tax expense (benefit) | (12) | 4 |
Other non-cash expense, net | 68 | 23 |
Gross operating cash flow | 324 | 335 |
Changes in assets and liabilities exclusive of effects of | ||
acquisitions, divestitures and translation adjustments: | ||
- (Increase) decrease in inventories | 35 | 115 |
- (Increase) decrease in trade receivables | (97) | (4) |
- Increase (decrease) in trade payables | 55 | 52 |
- Restructuring expenditures | (18) | (15) |
- Other changes | (31) | (95) |
Net cash provided by operating activities | 268 | 388 |
CASH FLOWS FROM INVESTING ACTIVITIES | ||
Additions to property, plant and equipment | (286) | (216) |
Increase in long-term investments | (3) | (28) |
Increase in long-term receivables | (27) | (1) |
Other (increase) decrease of long-lived assets | 0 | (17) |
Proceeds from sales of other investments, net of cash businesses sold | 5 | 9 |
Other proceeds from sales of long-term assets | 5 | 5 |
Receipts from other long-term receivables | 0 | 1 |
Net cash used in investing activities | (306) | (247) |
CASH FLOWS FROM FINANCING ACTIVITIES | ||
Additions to long-term debt | 54 | 598 |
Increase (decrease) in other financial debt | (34) | (649) |
Purchase of Pechiney shares | (1) | (7) |
Share capital increase in Pechiney | 0 | 35 |
Dividends paid: | ||
- by Pechiney | (79) | (80) |
- to minority interests in subsidiaries | (8) | (18) |
Net cash (used in) provided by financing activities | (68) | (121) |
Net effect of foreign currency translation on cash | 21 | 42 |
Net increase (decrease) in cash and cash equivalents | (85) | 62 |
Cash and cash equivalents at beginning of period | 436 | 434 |
Cash and cash equivalents at end of the period | 351 | 496 |
SUPPLEMENTAL DISCLOSURES | ||
Cash payments during the period for: | ||
- Interest | (33) | (28) |
- Income taxes | (44) | (73) |
See Notes to the Half-yearly Consolidated Financial Statements.
Consolidated Statement of Shareholder's Equity(unaudited) |
Six months ended June 30,2003 and Year ended December 31,2002
(in millions of euros Except per share amounts) | Number of shares |
Capital stock | Treasury shares |
Share Premium |
Retained earnings (restated) | Cumulative translation adjustment | Shareholders' equity (restated) |
Common Shares "A" | 80,435,146 | ||||||
Preferred Shares "B" | 1,091,044 | ||||||
Balance as of December 31, 2001 | 81,626,190 | 1,245 | (140) | 767 | 1,478 | 50 | 3,400 |
Net income | (55) | (55) | |||||
Translation adjustment | (201) | (201) | |||||
Exercise of stock options | 32,216 | 1 | 1 | ||||
Increase in capital | 855,277 | 13 | 22 | 35 | |||
Purchase of Pechiney shares | (40) | (40) | |||||
Cash dividends: | |||||||
. Common shares "A" | (78) | (78) | |||||
. Preferred shares "B" (b) | (2) | (2) | |||||
Precompte and other changes | (46) | (46) | |||||
Common Shares "A" | 81,422,639 | ||||||
Preferred Shares "B" | 1,091,044 | ||||||
Balance as of December 31, 2002 | 82,513,683 | 1,258 | (180) | 790 | 1,297 | (151) | 3,014 |
Net income | 11 | 11 | |||||
Translation adjustment | (83) | (83) | |||||
Exercise of stock options | |||||||
Conversion of Preferred shares B into Common Shares A | 109,100 | 2 | (2) | - | |||
Purchase of Pechiney shares (a) | (1) | (1) | |||||
Cash dividends: | |||||||
. Common shares "A" | (76) | (76) | |||||
. Preferred shares "B" (b) | (2) | (2) | |||||
Cumulative effect of adoption of SFAS 143 | 36 | 36 | |||||
Precompte and other changes | (22) | (22) | |||||
Common Shares "A" | 82,622,783 | ||||||
Preferred Shares "B" | - | ||||||
Balance as of June 30, 2003 | 82,622,783 | 1,260 | (181) | 790 | 1,242 | (234) | 2,877 |
See Notes to the Half-yearly Consolidated Financial Statements.
(a) | During the first half of 2003, Pechiney purchased on the stock market 48,700 shares « A » for euros 1,1 millions; this operation has been authorized by the Annual General Meeting held April 3,2003. |
(b) | Preferred Shares « B » entitled their holders to a preferred dividend of 9.5% of par value. |
Notes to the Half-yearly Consolidated Financial Statements(unaudited) |
Note 1 - Basis of Presentation
Accounting principles
The half-yearly consolidated financial statements are prepared in accordance with accounting principles defined in Regulation 99-02 of the "Comité de réglementation comptable" (CRC) and in the recommendation 99-R-01 of the "Conseil National de la Comptabilité" (CNC) relating to interim financial statements. Accordingly:
a) | The interim financial statements are prepared in accordance with the accounting policies applied for the preparation of the annual financial statements under accounting principles generally accepted in France, adapted to the specific features of interim financial reporting mentioned in (b) below; |
b) | The income tax expense for the interim period is computed using the average effective rate estimated for the year; tax attributable to infrequent or unusual items is not included for the determination of the effective tax rate and is reported in the interim period in which the infrequent or unusual items occur; estimates are more frequently used for the preparation of interim financial statements than for that of annual financial statements, due to the fact that, in accordance with generally accepted accounting principles, certain procedures are only required to be performed annually; |
c) | The accounting principles applied by the Group do not differ from those described in the annual report at December 31, 2002, except for the adoption, effective January 1, 2003 of SFAS 143, "Accounting for asset retirement obligations". SFAS 143 requires that legal obligations associated with the retirement of long-lived assets and resulting from normal activities, be recognized as liabilities, at fair value, when incurred. These asset retirement costs are capitalized by increasing the carrying amount of the related asset and are depreciated over the useful life of the asset. For the Group, the main change relates to the cost of disposal of spent pot lining of aluminum pots in operation, which is now recognized as a liability and capitalized from the time the lining is placed into service. As a consequence, since January 1, 2003, the cost of replacing pot lining, which was previously charged to income, has also been capitalized and depreciated over the useful life of the lining, including for pots in operation at January 1, 2003. The cumulative effect at January 1, 2003 is an increase of net property plant and equipment, environmental reserves and minority interest by respectively€ 90, 30 and 3 million and a decrease of net deferred tax assets by€ 21 million resulting in a positive net effect of€ 36 million, recorded as an increase of shareholders' equity at January 1, 2003. The effect of the change on the results for the first half of 2003 is a decrease in Earnings from Operations of the Primary Aluminum sector by€ 2 million. The effect on the net income for the first half of 2003 is nil. |
d) | The interim financial statements do not include all disclosures included in the annual financial statements. |
The reconciliation tables between the interim consolidated financial statements, prepared in accordance with accounting principles generally accepted in France, and financial statements prepared in accordance with accounting principles generally accepted in the United States (US GAAP) are presented in note 9.
Restatement
As disclosed in its previously-issued financial statements, the Group consolidated its wholly owned subsidiary, Pechiney Far East, effective January 1, 2002. Prior to January 1, 2002, the Group's interest in Pechiney Far East was accounted for as an unconsolidated subsidiary at historical cost. Subsequent to the filing of the annual report on Form 20-F for the year ended December 31, 2002, it was determined that all controlled subsidiaries, including Pechiney Far East, should have been consolidated prior to 2002 for purposes of complying with the requirements of the United States Securities and Exchange Commission (the "SEC"). The financial statements for 2002 have been restated to eliminate the cumulative net income recorded upon the initial consolidation of Pechiney Far East as of January 1, 2002. Using the criteria in Staff Accounting Bulletin 99 "Materiality", the Group concluded that after the consolidation of Pechiney Far East, the effect of consolidating the other subsidiaries that were omitted from consolidation was not material to the financial statements.
The restatement of financial statements is prohibited under generally accepted accounting principles in France (French GAAP) after the date of the annual shareholders meeting which approved them. However, the SEC's rules and practices require the Company's French GAAP financial statements to be restated in the Form 20-F to reflect the consolidation of Pechiney Far East prior to 2002. This results in restated financial statements for 2002, which differ from those approved by the shareholders meeting and from those filed with the Commission des Opérations de Bourse ("COB").
The effect of restating 2002 income statement data filed with the SEC on the income statement for the six months ended June 30, 2002 is presented in the table below.
Six months ended June 30, 2002 | Net Sales | Earnings from Operations | Other income (expense) | Net Income (Loss) | Earnings per Share- Basic | Earnings per Share- Diluted |
Previously reported | 6,211 | 241 | (17) | 46 | 0,57 | 0,58 |
Adjustment | - | - | (5) | (5) | (0,06) | (0,06) |
As restated | 6,211 | 241 | (22) | 41 | 0.51 | 0.52 |
The restatement described above has a similar effect on the Group's US GAAP financial information.
Note 2 - Seasonal variations
Certain activities of the Group may be affected by material seasonal variations. In addition, changes in the price of aluminum and in the US dollar-euro exchange rate may result in significant fluctuations of interim results. As a consequence, interim operating results are not necessarily indicative of the results that may be expected for the year ended December 31, 2003.
Note 3 - Subsequent events
On July 8, 2003, the Group signed an agreement with the other shareholders of the Aluminium Dunkerque smelter in order to buy-out their shares as of December 30,2003. This agreement anticipates the exercise of the sale options that had been granted by the Group in June 1990.
This transaction will deal with all of the shares and subordinated loans owned by the financial partners, which will be bought for around € 250 million. The consolidation of Aluminium Dunkerque will lead to the Group taking over an estimated year-end debt of around € 135 million.
Note 4 - Changes in the Group Structure
In January 2003, the Group consolidated its 100 percent ownership interest in Electrification Charpente Levage Australie, Danaflex, Envaril and Cebalsol. In April 2003, the Group consolidated its 100 percent ownership interest in Avenir Print Service and its 95 percent ownership interest in Techpack Asia.
Note 5 - Other (Expense) Income
(in millions of euros) | Six months ended June 30, 2003 | Six months ended June 30, 2002 (restated) |
- Gain (loss) on divestitures and writedowns of financial assets | 4 | (4) |
- Expenses relating to retirees | (15) | (13) |
- Other | (5) | (5) |
(16) | (22) |
Note 6 - Income Taxes
Income tax (expense) benefit:
(in millions of euros) | Six months ended June 30,2003 | Six months ended June 30,2002 |
Current income taxes | (26) | (54) |
Deferred income taxes | 12 | (4) |
(14) | (58) | |
Withholding taxes | (1) | (1) |
Income Tax (Expense) Benefit | (15) | (59) |
Note 7 - Contingent Liabilities
No significant change occurred in the first half of 2003 in relation to the contingent liabilities reported in the notes to the consolidated financial statements at December 31, 2002, except for the agreement relating to Aluminium Dunkerque mentioned in note 3 above.
Management believes that all known litigation is adequately provided for and that liabilities related to such litigation should not materially affect the Group's financial position or results of operations.
Note 8 - Segment and Geographic Information
A - Operational Segments
The activities of Pechiney are organized into three industrial sectors and an International Trade division, which form the four operating segments of the Group, and a Holdings division. The Primary Aluminum sector produces aluminum, alumina, bauxite and ferroalloys and licenses aluminum related technology. The Aluminum Conversion sector includes the divisions converting aluminum into laminated or extruded products. The Packaging sector includes the divisions producing flexible plastic packaging, tubes, aerosols and a large range of other packaging for the food, healthcare and beauty markets. The International Trade division is engaged in metal sales.
Segment performance is evaluated principally on earnings from operations, which is calculated as income (loss) from operations, less long-lived asset writedowns, restructuring expense and other income (expense).
The accounting principles applied in the determination of segment earnings from operations are identical to those described in Note 1 with the exception of the interest cost and return on plan assets relating to the North American defined benefit pension plans and medical and life insurance schemes for the Packaging segment, which are recorded under Holdings. Segment assets do not include deferred tax assets of companies included in the French and U.S. tax groups, which are recorded in Holdings.
(in millions of euros) | Primary | Aluminum | Packaging | International | Holdings | Total |
Aluminum | Conversion | Trade | ||||
Six months ended June 30, 2003 | ||||||
Net sales | 933 | 1,277 | 1,108 | 2,128 | - | 5,446 |
Earnings from operations | 79 | 29 | 52 | 28 | (50) | 138 |
Restructuring expense, long-lived assets writedowns | (60) | |||||
Other income (expense) | (16) | |||||
Income (loss) from operations | 62 | |||||
Financial expense, net | (24) | |||||
Income (loss) before income taxes | 38 | |||||
Assets (excluding cash and Marketable securities) | 2,430 | 1,970 | 2,198 | 656 | 604 | 7,858 |
Cash and Marketable securities | 351 | |||||
Total assets | 8,209 | |||||
Acquisitions of property, plant and equipment | 117 | 43 | 122 | 2 | 2 | 286 |
Depreciation and amortization excluding long-lived assets writedowns and goodwill amortization | (76) | (50) | (60) | (1) | (5) | (192) |
(in millions of euros) |
| |||||
Primary | Aluminum | Packaging | International | Holdings | Total | |
Aluminum | Conversion | Trade | (restated) | |||
Six months ended June 30, 2002 | ||||||
Net sales | 976 | 1,381 | 1,229 | 2,625 | - | 6,211 |
Earnings from operations | 162 | 13 | 73 | 37 | (44) | 241 |
Restructuring expense, long-lived assets writedowns | (53) | |||||
Other income (expense) | (22) | |||||
Income (loss) from operations | 166 | |||||
Financial expense, net | (22) | |||||
Income (loss) before income taxes | 144 | |||||
Assets (excluding cash and Marketable securities) | 2,276 | 2,059 | 2,281 | 691 | 696 | 8,003 |
Cash and Marketable securities | 496 | |||||
Total assets | 8,499 | |||||
Acquisitions of property, plant and equipment | 46 | 76 | 93 | 0 | 1 | 216 |
Depreciation and amortization excluding long-lived assets writedowns and goodwill amortization | (53) | (53) | (68) | (1) | (2) | (177) |
B - Geographic Information (by country of production)
(in millions of euros) | Net sales | Long-lived assets |
First half-year 2003 | ||
France | 2,357 | 1,319 |
United States of America | 1,411 | 1,064 |
Australia | 160 | 416 |
Other | 1,518 | 888 |
Total | 5,446 | 3,687 |
First half-year 2002 | ||
France | 2,616 | 1,360 |
United States of America | 1,880 | 1,232 |
Australia | 187 | 438 |
Other | 1,528 | 709 |
Total | 6,211 | 3,739 |
Note 9 - Reconciliation of net income and shareholders' equity with USGAAP
For the six months ended June 30, 2003 and 2002, differences between the accounting principles used by the Group to prepare its half-yearly consolidated financial statements and US GAAP are described below.
a) Net income
(in millions of euros) | Six months ended June 30, 2003 | Six months ended June 30, 2002 (restated) | |
Net income (loss) as reported in the consolidated income statement | 11 | 41 | |
Derivative instruments and hedging activities | 6 | 32 | |
Goodwill amortization | 14 | 48 | |
Income under US GAAP, before effect of change in accounting principles | 31 | 121 | |
Cumulative effect of change in accounting for goodwill as of January 1, 2002 | - | (31) | |
Cumulative effect of change in accounting for asset retirement obligations as of January 2003 (*) | 36 | - | |
Net income (loss) under US GAAP | 67 | 90 | |
(*) #9; | The accounting standard SFAS143 « Accounting for Asset Retirement Obligations » was adopted in French GAAP and US GAAP financial statements. In the US GAAP financial statements, the cumulative effect at January 1, 2003 is an improvement in net income by€36 million, presented on a line "Cumulative effect of accounting change" in the income statement. |
b) Shareholders' equity
(in millions of euros) | June 30, 2003 | December 31, 2002 |
Shareholders' equity as reported in the consolidated balance sheet | 2,877 | 3,014 |
Derivative instruments and hedging activities | 44 | 15 |
Goodwill amortization | 34 | 21 |
Additional minimum pension liability | (135) | (141) |
Shareholders' equity under US GAAP | 2,820 | 2,909 |