FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2000 Commission File Number 1-3610
ALCOA INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0317820
(State of incorporation) (I.R.S. Employer Identification No.)
201 Isabella Street, Pittsburgh, Pennsylvania 15212-5858
(Address of principal executive offices) (Zip Code)
Office of Investor Relations 412-553-3042
Office of the Secretary 412-553-4707
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
As of July 26, 2000, 866,001,474 shares of common stock, par value $1.00
per share, of the Registrant were outstanding.
A07-20002
PART I - FINANCIAL INFORMATION
Alcoa and subsidiaries
Condensed Consolidated Balance Sheet
(in millions)
(unaudited)
June 30 December 31
ASSETS 2000 1999
-------- --------
Current assets:
Cash and cash equivalents $ 320 $ 237
Short-term investments 76 77
Receivables from customers, less allowances of
$74 in 2000 and $58 in 1999 3,231 2,199
Other receivables 328 165
Inventories (B) 2,842 1,618
Deferred income taxes 284 233
Prepaid expenses and other current assets 341 271
-------- --------
Total current assets 7,422 4,800
-------- --------
Properties, plants and equipment, at cost 22,562 18,436
Less, accumulated depreciation, depletion and
Amortization 9,500 9,303
-------- --------
Net properties, plants and equipment 13,062 9,133
-------- --------
Goodwill, net of accumulated amortization of $257 in
2000 and $221 in 1999 5,005 1,328
Other assets, including assets held for sale (G) 5,343 1,805
-------- --------
Total assets $ 30,832 $ 17,066
======== ========
LIABILITIES
Current liabilities:
Short-term borrowings $ 1,908 $ 343
Accounts payable, trade 1,819 1,219
Accrued compensation and retirement costs 860 582
Taxes, including taxes on income 512 368
Other current liabilities 904 424
Long-term debt due within one year 315 67
-------- --------
Total current liabilities 6,318 3,003
-------- --------
Long-term debt, less amount due within one year 6,095 2,657
Accrued postretirement benefits 2,536 1,720
Other noncurrent liabilities and deferred credits 2,029 1,473
Deferred income taxes 1,369 437
-------- --------
Total liabilities 18,347 9,290
-------- --------
MINORITY INTERESTS 1,445 1,458
-------- --------
CONTINGENT LIABILITIES (C) -- --
SHAREHOLDERS' EQUITY
Preferred stock 56 56
Common stock 925 395
Additional capital 5,921 1,704
Retained earnings 6,592 6,061
Treasury stock, at cost (1,696) (1,260)
Accumulated other comprehensive income (D) (758) (638)
-------- --------
Total shareholders' equity 11,040 6,318
-------- --------
Total liabilities and shareholders' equity $ 30,832 $ 17,066
======== ========
The accompanying notes are an integral part of the financial statements.
Alcoa and subsidiaries
Condensed Statement of Consolidated Income (unaudited)
(in millions, except per share amounts)
Second quarter ended Six months ended
June 30 June 30
------- -------
2000 1999 2000 1999
-------- -------- -------- --------
REVENUES
Sales $ 5,569 $ 4,033 $ 10,100 $ 8,017
Other income (expense) 52 43 93 40
-------- -------- -------- --------
5,621 4,076 10,193 8,057
-------- -------- -------- --------
COSTS AND EXPENSES
Cost of goods sold 4,216 3,140 7,548 6,268
Selling, general administrative
and other expenses 272 203 499 395
Research and development expenses 48 30 87 58
Provision for depreciation,
depletion and amortization 290 221 515 439
Interest expense 95 50 146 102
-------- -------- -------- --------
4,921 3,644 8,795 7,262
-------- -------- -------- --------
EARNINGS
Income before taxes on income 700 432 1,398 795
Provision for taxes on income (E) 238 138 475 254
-------- -------- -------- --------
Income from operations 462 294 923 541
Less: Minority interests' share (85) (54) (191) (80)
-------- -------- -------- --------
NET INCOME $ 377 $ 240 $ 732 $ 461
======== ======== ======== ========
EARNINGS PER SHARE (F)
Basic $ .47 $ .33 $ .95 $ .63
======== ======== ======== ========
Diluted $ .47 $ .32 $ .94 $ .62
======== ======== ======== ========
Dividends paid per common share $ .125 $ .10063 $ .25 $ .20125
======== ======== ======== ========
The accompanying notes are an integral part of the financial statements.
27
Alcoa and subsidiaries
Condensed Statement of Consolidated Cash Flows (unaudited)
(in millions)
Six months ended
June 30
2000 1999
------- -------
CASH FROM OPERATIONS
Net income $ 732 $ 461
Adjustments to reconcile net income to cash from operations:
Depreciation, depletion and amortization 520 431
Change in deferred income taxes 47 (10)
Equity income before additional taxes, net of dividends (17) (7)
Loss on sale or disposal of assets 3 10
Minority interests 190 79
Other 14 (1)
Changes in assets and liabilities, excluding the effects of
acquisitions and divestitures:
(Increase) reduction in receivables (256) 43
(Increase) reduction in inventories (41) 234
(Increase) reduction in prepaid expenses and other (3) 12
current assets
Reduction in accounts payable and accrued expenses (153) (142)
Increase (reduction) in taxes, including taxes on income 161 (65)
Reduction in deferred hedging gains -- (45)
Net change in noncurrent assets and liabilities (91) (88)
------- -------
CASH FROM OPERATIONS 1,106 912
------- -------
FINANCING ACTIVITIES
Net changes in short-term borrowings 1,311 (7)
Common stock issued and treasury stock so sold, excluding
stock issued in acquisitions 152 427
Repurchase of common stock (670) (603)
Dividends paid to shareholders (201) (149)
Dividends paid to minority interests (164) (62)
Net change in commercial paper (1,453) (70)
Additions to long-term debt 1,607 216
Payments on long-term debt 1,358 (283)
------- -------
CASH PROVIDED FROM (USED FOR) FINANCING ACTIVITIES 1,940 (531)
------- -------
INVESTING ACTIVITIES
Capital expenditures (408) (388)
Acquisitions, net of cash acquired (H) (2,534) (16)
Proceeds from the sale of assets 4 31
Net change in short-term investments 1 (24)
Additions to investments (19) (68)
Changes in minority interests 4 (4)
Other (9) (7)
------- -------
CASH USED FOR INVESTING ACTIVITIES (2,961) (476)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (2) (4)
------- -------
Net change in cash and cash equivalents 83 (99)
Cash and cash equivalents at beginning of year 237 342
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 320 $ 243
======= =======
The accompanying notes are an integral part of the financial statements.
Notes to Condensed Consolidated Financial Statements
(in millions)
A. Common Stock Split - On January 10, 2000, the board of directors declared a
two-for-one common stock split. Alcoa shareholders approved an amendment to
Alcoa's Articles of Incorporation to increase the authorized shares of Alcoa
common stock from 600 million to 1.8 billion at the company's annual meeting on
May 12, 2000. As a result of the stock split, shareholders of record on May 26,
2000 received an additional common share for each share held. The additional
shares were distributed on June 9, 2000. In this report, all per-share amounts
and number of shares have been restated to reflect the stock split.
B. Inventories
June 30 December 31
2000 1999
---------- -------
Finished goods $ 870 $ 363
Work in process 874 550
Bauxite and alumina 319 286
Purchased raw materials 556 267
Operating supplies 223 152
------- -------
$ 2,842 $ 1,618
======= =======
Approximately 69% of total inventories at June 30, 2000 were valued on a
LIFO basis. If valued on an average cost basis, total inventories would have
been $675 and $645 higher at June 30, 2000 and December 31, 1999, respectively.
C. Contingent Liabilities - Various lawsuits, claims and proceedings have been
or may be instituted or asserted against Alcoa, including those pertaining to
environmental, product liability and safety and health matters. While the
amounts claimed might be substantial, the ultimate liability cannot now be
determined because of the considerable uncertainties that exist. Therefore, it
is possible that results of operations or liquidity in a particular period could
be materially affected by certain contingencies. However, based on facts
currently available, management believes that the disposition of matters that
are pending or asserted will not have a materially adverse impact on the
financial position of the company.
Alcoa Aluminio, S.A. (Aluminio) is currently party to a hydroelectric
construction project in Brazil. Total estimated construction costs are $500, of
which the company's share is 24%. In the event that other participants in this
project fail to fulfill their financial responsibilities, Aluminio may be liable
for its pro rata share of the deficiency.
Alcoa of Australia, Ltd. (AofA) is party to a number of natural gas and
electricity contracts that expire between 2001 and 2022. Under these take-or-pay
contracts, AofA is obligated to pay for a minimum amount of natural gas or
electricity even if these commodities are not required for operations.
Commitments related to these contracts total $190 in 2000, $182 in 2001, $179 in
2002, $176 in 2003, $176 in 2004 and $2,222 thereafter. Expenditures under these
contracts totaled $179 in 1999.
D. Comprehensive Income
Second quarter ended Six Months ended
June 30 June 30
------- -------
2000 1999 2000 1999
----- ----- ----- -----
Net income $ 377 $ 240 $ 732 $ 461
Other comprehensive loss, primarily
translation (41) (11) (120) (99)
----- ----- ----- -----
Comprehensive income $ 336 $ 229 $ 612 $ 362
===== ===== ===== =====
E. Income Taxes - The income tax provision for the period is based on the
expected effective tax rate adjusted for the impact of the acquisitions from the
acquisition dates through June 30. The 2000 second quarter rate of 34% differs
from the statutory rate primarily because of taxes on foreign income. The 2000
second quarter rate differs from the 1999 second quarter rate primarily because
of higher income before tax in 2000. The effective tax rate for the year is
currently estimated at 35%.
F. Earnings Per Share - Basic earnings per share (EPS) amounts are computed by
dividing earnings applicable to common stockholders by the average number of
common shares outstanding. Diluted EPS amounts assume the issuance of common
stock for all potentially dilutive equivalents outstanding. Anti-dilutive
outstanding stock options have been excluded from the diluted EPS calculation.
The detail of basic and diluted EPS follow:
Second quarter ended Six months ended
June 30 June 30
------- -------
2000 1999 2000 1999
----- ----- ----- -----
Net income $ 377 $ 240 $ 732 $ 461
Less: Preferred stock dividends - - 1 1
----- ----- ----- -----
Income available to common
stockholders $ 377 $ 240 $ 731 $ 460
Average shares outstanding-basic 797.0 734.2 770.1 734.1
Effect of dilutive securities:
Shares issuable upon exercise of
dilutive outstanding stock options 8.0 8.4 10.1 13.9
----- ----- ----- -----
Average diluted shares outstanding 805.0 742.6 780.2 748.0
Basic EPS $ .47 $ .33 $ .95 $ .63
====== ====== ====== ======
Diluted EPS $ .47 $ .32 $ .94 $ .62
====== ====== ====== ======
In April 2000, Alcoa entered into a forward share repurchase agreement to
partially hedge the equity exposure related to its stock option program. The
contract, which matures in 2002, allows the company to repurchase up to 10
million shares from financial institutions. The company may elect to settle the
contract on a net share basis in lieu of physical settlement. The contract
permits early settlement. As of June 30, 2000, 9,900,000 shares had been
committed to the contract at an average price of $31.90 per share. The effect of
this repurchase agreement has been included in determining diluted EPS.
G. Acquisitions - In August 1999, Alcoa and Reynolds Metals Company (Reynolds)
announced they had reached a definitive agreement to merge. On May 3, 2000,
after approval by the U.S. Department of Justice (DOJ) and other regulatory
agencies, Alcoa and Reynolds completed their merger. Under the agreement, Alcoa
issued 2.12 shares post-split of Alcoa common stock for each share of Reynolds.
The exchange resulted in Alcoa issuing approximately 135 million shares at a
value of $33.30 (post-split) to Reynolds stockholders. The transaction was
valued at approximately $5,700, including debt assumed, and has been accounted
for using the purchase method. The total purchase costs of the acquisition will
be allocated to the tangible and intangible assets and liabilities acquired
based on their fair values. The purchase price includes the conversion of
outstanding Reynolds options to Alcoa options as well as other direct costs of
the acquisition. The purchase price allocation is preliminary; the final
allocation of the purchase price will be based upon valuation and other studies
that have not been completed. The preliminary allocation resulted in
total goodwill of approximately $1,300, which will be amortized over a
forty-year period.
As part of the merger agreement, Alcoa agreed to divest the following
Reynolds operations:
- Reynolds' 56% stake in its alumina refinery at Worsley, Australia,
- Reynolds' 50% stake in its alumina refinery at Stade, Germany,
- 100% of Reynolds' alumina refinery at Sherwin, Texas and
- 25% of Reynolds' interest in its aluminum smelter at Longview,
Washington.
Under the agreement, these divestitures must be completed within six months
of the merger date of May 3, 2000 (nine months for Worsley). The Unaudited
Condensed Consolidated Financial Statements have been prepared in accordance
with EITF 87-11 "Allocation of Purchase Price to Assets to be Sold." Under EITF
87-11, the net assets to be divested have been reported as assets held for sale
in the Condensed Consolidated Balance Sheet, and the results of operations from
these assets have not been included in the Condensed Statement of Consolidated
Income.
On March 14, 2000, Alcoa and Cordant Technologies Inc. (Cordant) announced
a definitive agreement under which Alcoa would acquire all outstanding shares of
Cordant, a technology-based company serving global aerospace and industrial
markets. In addition, on April 13, 2000, Alcoa announced plans to commence a
cash tender offer for all outstanding shares of Howmet International Inc.
(Howmet). The offer for Howmet shares was part of Alcoa's acquisition of
Cordant, which owned approximately 85% of Howmet. On May 25, 2000 and June 20,
2000, after approval by the DOJ and other regulatory agencies, Alcoa completed
the acquisition of Cordant and Howmet, respectively. Under the agreement and
tender offer, Alcoa paid $57 for each outstanding share of Cordant common stock
and $21 for each outstanding share of Howmet common stock. The total value of
the transaction was approximately $3,300, including the assumption of debt. This
transaction will be accounted for using the purchase method. The purchase price
includes the conversion of outstanding Cordant and Howmet options to Alcoa
options as well as other direct costs of the acquisition. The purchase price
allocation is preliminary; the final allocation is subject to valuation and
other studies that have not been completed. The preliminary allocation resulted
in total goodwill of approximately $2,400, which will be amortized over periods
not to exceed forty years.
The following presents pro forma information assuming that the acquisition
of 100% of Reynolds and Cordant had occurred at the beginning of each respective
year. Adjustments that have been included to arrive at the pro forma totals
primarily include those related to acquisition financing, the amortization of
goodwill, the elimination of transactions between Alcoa, Reynolds, and Cordant,
and additional depreciation related to the increase in basis that resulted from
the transaction. Tax effects from the pro forma adjustments noted above also
have been included at the 35% statutory rate.
Six months ended
June 30
-------
2000 1999
------- -------
Sales $12,882 $11,327
Net Income 777 438
Basic EPS $ 0.90 $ 0.50
======= =======
Diluted EPS $ 0.89 $ 0.49
======= =======
The pro forma results are not necessarily indicative of what actually would
have occurred if the transaction had been in effect for the entire periods
presented, are not intended to be a projection of future results, and do not
reflect any cost savings that might be achieved from the combined operations.
Debt increased $4,475 as a result of the Reynolds and Cordant acquisitions.
$1,220 of debt was assumed in the acquisition of Reynolds, while $826 of debt
was assumed in the acquisition of Cordant. The Cordant acquisition price of
$2,429, including the acquisition of the remaining shares of Howmet, was
financed with debt.
Alcoa completed a number of other acquisitions in 1999 and 2000. None of
these transactions had a material impact on Alcoa's financial statements.
H. Cash Flow Information - The details of cash payments related to
acquisitions follow.
Six months ended
June 30, 2000
Fair value of assets $ 14,283
Liabilities (7,002)
Stock issued (4,649)
--------
Cash paid 2,632
Less: cash acquired (98)
--------
Net cash paid for acquisitions $ 2,534
========
I. Recently Issued Accounting Standards - In June 1998, the Financial Accounting
Standards Board issued SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities." The standard requires that entities value all derivative
instruments at fair value and record the instruments on the balance sheet. The
standard also significantly changes the requirements for hedge accounting. In
June 1999, the FASB approved a delay in the effective date of this standard
until January 2001, and in June 2000, the FASB amended the standard to provide
guidance on its implementation. The company believes that the adoption of the
standard as amended will have a material impact on its balance sheet. Upon
adoption, Alcoa's commodity, foreign exchange and interest rate derivative
contracts as well as certain underlying exposures will be recorded on the
balance sheet at fair value. Management is currently assessing the details of
the standard and is preparing a plan of implementation.
In December 1999, the staff of the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial
Statements." SAB 101 outlines the basic criteria that must be met to recognize
revenue, and provides guidelines for disclosure related to revenue recognition
policies. This guidance is required to be implemented in the fourth quarter of
2000. The company is currently reviewing this guidance in order to determine the
impact of its provisions, if any, on the consolidated financial statements.
J. Reclassifications - Certain amounts have been reclassified to
conform to current year presentation.
K. Segment Information - Alcoa is primarily a producer of aluminum products. Its
segments are organized by product on a worldwide basis. Alcoa's management
reporting system evaluates performance based on a number of factors; however,
the primary measure of performance is the after-tax operating profit (ATOI) of
each segment. Non-operating items such as interest income, interest expense,
foreign exchange gains/losses, the effects of LIFO accounting and minority
interest are excluded from segment profit. In addition, certain expenses such as
corporate general administrative expenses, depreciation and amortization on
corporate assets, and certain special items are not included in segment results.
Alcoa's products are used primarily by transportation (including aerospace,
automotive, rail and shipping), packaging, building and construction, and
industrial customers worldwide. Alcoa's businesses that do not fall into these
categories are listed as Other. In the 2000 second quarter as a result of recent
acquisition activity, Alcoa changed its internal management reporting structure
to add a Packaging and Consumer Products segment. Alcoa's closures, PET bottle
and packaging machinery businesses were moved from the Other group to this
segment. Previously reported data from the 1999 second quarter and six-month
periods have been restated in the schedules below to reflect this change.
Reynolds' packaging and consumer businesses were also added to the new Packaging
and Consumer Products segment. Other Reynolds and Cordant businesses were added
to the appropriate existing segments. For more information on the segments, see
Management's Discussion and Analysis beginning on page 13.
The following details sales and ATOI for each reportable segment for the
three-month and six-month periods ended June 30, 2000 and 1999, as well as
restated quarterly amounts for 1999 and 2000.
Segment Information: Alumina Flat- Engin- Pack-
& Chem- Primary Rolled eered aging &
Second quarter ended icals Metals Products Products Consumer Other Total
June 30, 2000 Sales:
Third-party sales $ 515 $ 852 $1,394 $1,296 $ 524 $ 988 $5,569
Intersegment sales 832 29 -- -- 1,150
------ ------ ------ ------ ------ ------ ------
274 15
------ ------
Total sales $ 789 $1,684 $1,423 $1,311 $ 524 $ 988 $6,719
====== ====== ====== ====== ====== ====== ======
After-tax operating
income $ 140 $ 225 $ 74 $ 62 $ 35 $ 46 $ 582
====== ====== ====== ====== ====== ====== ======
Second quarter ended
June 30, 1999 Sales:
Third-party sales $ 456 $ 519 $1,258 $ 939 $ 209 $ 652 $4,033
Intersegment sales 221 714 11 3 -- -- 949
------- ------ ------ ------ ------ ------ ------
Total sales $ 677 $1,233 $1,269 $ 942 $ 209 $ 652 $4,982
======= ====== ====== ====== ====== ====== ======
After-tax operating
income $ 62 $ 106 $ 72 $ 61 $ 25 $ 45 $ 371
======= ====== ====== ====== ====== ====== ======
Segment Information: Alumina Flat- Engin- Pack-
& Chem- Primary Rolled eered aging &
Six months ended icals Metals Products Products Consumer Other Total
June 30, 2000
Sales:
Third-party sales $1,055 $1,463 $2,798 $2,349 $ 727 $1,708 $10,100
Intersegment sales 524 1,682 42 28 - - 2,276
------- ------ ------ ------ ------ ------ ------
Total sales $1,579 $3,145 $2,840 $2,377 $ 727 $1,708 $12,376
======= ====== ====== ====== ====== ====== ======
After-tax operating
income $ 295 $ 452 $ 147 $ 115 $ 52 $ 79 $ 1,140
======= ====== ====== ====== ====== ====== ======
Six months ended June 30, 1999 Sales:
Third-party sales $ 876 $1,053 $2,528 $1,881 $ 405 $1,269 $8,012
Intersegment sales 452 1,454 26 6 -- -- 1,938
------ ------ ------ ------ ------ ------ ------
Total sales $1,328 $2,507 $2,554 $1,887 $ 405 $1,269 $9,950
======= ====== ====== ====== ====== ====== ======
After-tax operating
income $ 122 $ 203 $ 137 $ 106 $ 38 $ 60 $ 666
====== ====== ====== ====== ====== ====== ======
The following table reconciles segment information to consolidated totals.
Second quarter ended Six months ended
June 30 June 30
------- -------
2000 1999 2000 1999
------- ------- ------- -------
Total after-tax operating income $ 582 $ 371 $ 1,140 $ 666
Elimination of intersegment (profit)
loss (5) (10) (25) (19)
Unallocated amounts (net of tax):
Interest income 19 8 26 13
Interest expense (69) (32) (102) (66)
Minority interest (85) (54) (191) (80)
Corporate expense (51) (41) (107) (76)
Other (14) (2) (9) 23
------- ------- ------- -------
Consolidated net income $ 377 $ 240 $ 732 $ 461
======= ======= ======= =======
Segment assets: June 30 December 31
2000 1999
---------- -------
Alumina and chemicals $ 2,922 $ 3,250
Primary metals 6,783 5,098
Flat-rolled products 3,611 3,395
Engineered products 6,488 2,387
Packaging and consumer 1,555 745
Other 2,979 1,664
------- -------
Total Segment Assets $24,338 $16,539
======= =======
The total segment assets above do not include unallocated purchase accounting
adjustments or assets to be divested.
L. Subsequent Event - On July 20, 2000, Alcoa issued $1,500 of callable notes.
Of these notes, $1,000 mature in 10 years and carry a coupon rate of 7.375%, and
$500 mature in 5 years and carry a coupon rate of 7.25%. A total of $1,487 of
existing short-term debt was reclassified in the balance sheet at June 30, 2000
as a result of this transaction.
--------------------------------
In the opinion of the Company, the financial statements and summarized
financial data in this Form 10-Q report include all adjustments, including
those of a normal recurring nature, necessary to fairly state the results
for the periods. This Form 10-Q report should be read in conjunction with
the Company's annual report on Form 10-K for the year ended December 31,
1999.
The financial information required in this Form 10-Q by Rule 10-01 of
Regulation S-X has been subject to a review by PricewaterhouseCoopers LLP,
the Company's independent certified public accountants, as described in
their report on page 12.
Independent Accountant's Review Report
To the Shareholders and Board of Directors
Alcoa Inc. (Alcoa)
We have reviewed the unaudited condensed consolidated balance sheet of
Alcoa and subsidiaries as of June 30, 2000, the unaudited condensed
statements of consolidated income for the three-month and six-month periods
ended June 30, 2000 and 1999, and the unaudited condensed statement of
consolidated cash flows for the six-month periods ended June 30, 2000 and
1999, which are included in Alcoa's Form 10-Q for the period ended June 30,
2000. These financial statements are the responsibility of Alcoa's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with auditing standards generally accepted in the
United States, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred
to above for them to be in conformity with accounting principles generally
accepted in the United States.
We have previously audited, in accordance with audit standards generally
accepted in the United States, the consolidated balance sheet of Alcoa and
subsidiaries as of December 31, 1999, and the related statements of
consolidated income, shareholders' equity, and cash flows for the year then
ended (not presented herein). In our report dated January 10, 2000, except
for Note V, for which the date is February 11, 2000, 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, 1999, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which
it has been derived.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
July 10, 2000
Except for note L, for which the date is July 20, 2000.
Management's Discussion and Analysis of the
Results of Operations and Financial Condition.
(dollars in millions, except 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. 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.
Results of Operations
Principal income and operating data follow.
Second quarter ended Six months ended
June 30 June 30
------- -------
2000 1999 2000 1999
--- ------ --- ------ --- ------ --- ----
Sales $ 5,569 $ 4,033 $10,100 $ 8,017
Net income 377 240 732 461
Basic earnings per common share $ .47 $ .33 $ .95 $ .63
Diluted earnings per common share $ .47 $ .32 $ .94 $ .62
Shipments of aluminum products (mt) 1,361 1,117 2,494 2,249
Shipments of alumina (mt) 1,801 1,836 3,634 3,500
Alcoa'a average realized ingot price $ .74 $ .64 $ .76 $ .63
Average 3-month LME price $ .68 $ .60 $ .72 $ .58
-------------------------
Earnings Summary
Alcoa reported that 2000 second quarter revenues rose 38% from the 1999 second
quarter to $5,569, and revenues for the first half of 2000 increased 26% from
the 1999 six-month period to $10,100. The increase in revenues for both periods
was due to higher overall aluminum and alumina prices, as well as higher
shipment volumes due to acquisitions. Cost reductions positively impacted the
2000 second quarter and year-to-date results, as net income increased to $377
for the quarter and $732 year-to-date, 57% above the 1999 second quarter and 59%
over the 1999 first half.
Annualized return on shareholders' equity was 17.0% as of June 30, 2000,
compared with 14.8% for the 1999 period. The increase was due to rising earnings
in 2000, which outpaced the increase in shareholders' equity balances resulting
primarily from the recent acquisitions.
Segment Information
I. Alumina and Chemicals
Second quarter ended Six months ended
June 30 June 30
------- -------
2000 1999 2000 1999
------ ------ ------ ------
Alumina production 3,495 3,306 6,972 6,518
Third-party alumina shipments 1,801 1,836 3,634 3,500
Third-party sales $ 515 $ 456 $1,055 $ 876
Intersegment sales 274 221 524 452
------ ------ ------ ------
Total sales $ 789 $ 677 $1,579 $1,328
====== ====== ====== ======
After-tax operating income $ 140 $ 62 $ 295 $ 122
====== ====== ====== ======
This segment's activities include the mining of bauxite, which is then refined
into alumina. The alumina is then sold to internal and external customers
worldwide, or processed into industrial chemical products. Alcoa's Australian
alumina operations are a significant component of this segment. This segment
does not include the Reynolds alumina assets to be divested. The majority of the
third-party sales from this segment are derived from alumina.
Third-party sales for this segment increased 13% from the 1999 second
quarter, though shipments decreased 2%. Higher realized prices for alumina, 18%
over the 1999 second quarter, drove these increases. For the six-month period
ending June 30, third-party sales increased 20% over the same 1999 period. This
was due to 4% higher shipments and higher prices.
After-tax operating income (ATOI) for this segment increased 126% to $140
for the 2000 second quarter and 142% to $295 for the six-month period. The
increases were primarily due to higher prices as well as improved overall cost
performance. Second quarter 2000 conversion costs decreased $29 after tax versus
the 1999 second quarter. These savings were primarily generated through
productivity growth and purchasing efficiencies.
II. Primary Metals
Second quarter ended Six months ended
June 30 June 30
------- -------
2000 1999 2000 1999
------ ------ ------ ------
Aluminum production 881 708 1,591 1,411
Third-party aluminum shipments 493 354 832 724
Third-party sales $ 852 $ 519 $1,463 $1,053
Intersegment sales 832 714 1,682 1,454
------ ------ ------ ------
Total sales $1,684 $1,233 $3,145 $2,507
====== ====== ====== ======
After-tax operating income $ 225 $ 106 $ 452 $ 203
====== ====== ====== ======
This group's primary focus is Alcoa's worldwide smelter system. Primary Metals
receives alumina from the alumina and chemicals segment and produces aluminum
ingot to be used by other Alcoa segments, as well as sold to outside customers.
Results from internal hedging contracts and from marking to market certain
aluminum commodity contracts are also included in this segment. The smelting
operations of Reynolds have been added to this segment. The sale of ingot
represents over 90% of this segment's third-party sales. Revenues from the sale
of powder and scrap are also included here.
In the 1999 fourth quarter, Alcoa changed its internal reporting system to
include the results of aluminum hedging in the Primary Metals segment.
Previously these results were reported as reconciling items between segment ATOI
and net income. Segment results for the 1999 second quarter and six-month period
have been restated to reflect this change.
In January 2000, Alcoa announced that it was restarting approximately
200,000 mt of primary aluminum capacity. The restarted capacity will be in
production by the end of 2000. In July 2000, Alcoa announced that it will
temporarily curtail all production at its 121,000 metric ton per year (mtpy)
primary aluminum smelter in Troutdale, Oregon, a former Reynolds facility which
had been operating at an 80,000 mtpy level. Curtailment will begin immediately.
After the scheduled curtailment and restart of capacity, Alcoa will have
approximately 370,000 mtpy of idle capacity.
Third-party ingot sales for the second quarter rose 64% from the 1999
second quarter on a 39% increase in shipments, due to the addition of Reynolds'
smelters. Excluding the locations recently acquired, third-party sales increased
12% quarter-to-quarter and 13% year-to-year, as higher prices more than offset a
decline in shipments of 2% quarter-to-quarter and 3% year-to-year. Alcoa's
average realized third-party price for ingot rose 16% to 74 cents per pound from
the 1999 to the 2000 second quarter and 20% to 76 cents from the 1999 to the
2000 six-month period, reflecting the increase in market prices over last year.
Intersegment sales also rose 17% in the 2000 second quarter and 16% in the 1999
six-month period as a result of these higher prices.
Primary metals second quarter and six-month ATOI rose 112% from the 1999
second quarter and 123% from the 1999 six-month period, respectively, as higher
ingot prices and the impact of acquired Reynolds facilities beginning in May
lifted ATOI. Also contributing were mark to market gains of $7 for the quarter
and $6 year-to-date after tax. Partially offsetting these positive factors were
lower shipments from the locations other than those recently acquired from
Reynolds, both in the second quarter and in the six-month period. Higher energy
costs for these locations also impacted earnings, reducing ATOI $12 for the
quarter and $17 for the six-month period.
III. Flat-Rolled Products
Second quarter ended Six months ended
June 30 June 30
------- -------
2000 1999 2000 1999
------ ------ ------ ------
Third-party aluminum shipments 504 496 1,011 983
Third-party sales $1,394 $1,258 $2,798 $2,528
Intersegment sales 29 11 42 26
------ ------ ------ ------
Total sales $1,423 $1,269 $2,840 $2,554
====== ====== ====== ======
After-tax operating income $ 74 $ 72 $ 147 $ 137
====== ====== ====== ======
This segment's primary business is the production and sale of aluminum plate,
sheet, and foil. This segment includes the aggregation of rigid container sheet
(RCS), which is used to produce aluminum beverage cans, and sheet and plate used
in the aerospace and distributor markets. Approximately one-half of the
third-party sales from this segment are derived from sheet and plate and
one-third are from RCS.
Third-party flat-rolled product sales for the second quarter rose 11% over
the prior year quarter, driven by slightly higher overall shipments and 8%
higher prices. Year-to-date sales increased 10% over the prior year period due
to increases in shipments and prices of 3% and 7%, respectively. For RCS,
third-party sales were up 13% for the quarter and 10% year-to-date versus the
comparable 1999 periods due again to higher prices -- 10% for the quarter and 9%
year-to-date. For the 2000 six-month period, sheet and plate third-party sales
were up 12% over the 1999 period due equally to rising shipment volumes and
prices.
Flat-rolled products' ATOI of $74 for the second quarter and $147 year-
to-date were 3% and 7% higher, respectively, than the corresponding 1999
periods. RCS ATOI improved 20% for the quarter and 30% for the year due to
productivity improvements. Sheet and plate ATOI decreased 4% for the quarter
while increasing 4% for the six-month period. After tax cost reductions of $12
for the quarter and $27 year-to-date and continued improvement in Brazilian
results were offset by lower European ATOI from a less profitable product mix
and overall flat U.S. results.
IV. Engineered Products
Second quarter ended Six months ended
June 30 June 30
------- -------
2000 1999 2000 1999
------ ------ ------ ------
Third-party aluminum shipments 282 249 548 507
Third-party sales $1,296 $ 939 $2,349 $1,881
Intersegment Sales 15 3 28 6
------ ------ ------ ------
Total sales $1,311 $ 942 $2,377 $1,887
====== ====== ====== ======
After-tax operating income $ 62 $ 61 $ 115 $ 106
====== ====== ====== ======
Products produced by this segment include hard and soft alloy extrusions,
including Alcoa's architectural extrusion businesses, super-alloy castings,
steel and aluminum fasteners, forgings and wheels. These products are used
primarily by transportation and distribution customers worldwide. This segment
includes the Reynolds' wheels business acquired in May 2000, as well as the Huck
(fasteners) and Howmet (super-alloy castings) businesses added in June 2000 as
part of the Cordant acquisition, and Excel Extrusions acquired from Noranda
Aluminum in January 2000.
Including acquisitions engineered products second quarter results showed
increases of 38% in third-party revenues and 13% in shipments over the second
three months of 1999. Year-to-date third-party revenues and shipments improved
by 25% and 8%, respectively. Excluding these recent acquisitions, third-party
sales increased 7% in the second quarter and 9% in the six-month period versus
the corresponding 1999 periods, though volumes remained stable.
Approximately two-thirds of the revenues from this segment are derived from
the sale of extrusions. Second quarter and year-to-date third-party sales of
soft alloy extrusions were up 25% and 19%, respectively, from the corresponding
1999 periods. Volume increases of 11% quarter-to-quarter and 7% year-to-year, as
well as higher average prices drove this improvement. Hard alloy revenues for
the quarter were flat, as higher prices offset a 6% decline in shipments. For
the six-month period, third-party sales were down 8% on 11% lower shipments as
compared with the 1999 period.
In the 2000 second quarter, sales of wheels increased 69% over the 1999
second quarter on 77% higher volumes. For the year-to-date period, revenues from
wheels increased 59% over the 2000 period on a 58% increase in shipment volumes.
Almost 26% of second quarter revenues and 33% of shipments are attributable to
the Reynolds' wheels business. Excluding these, revenues increased 26% over the
1999 second quarter and 36% over the 1999 six-month period, while shipments
increased 19% quarter-over-quarter and 28% year-over-year.
ATOI for the segment was $62 in the 2000 second quarter and $115 in the
2000 six-month period, up 2% and 8%, respectively, over the corresponding 1999
periods. Cost savings related to purchased materials of $5 in the 2000 quarter
and $18 year-to-date contributed to these increases.
V. Packaging and Consumer
Second quarter ended Six months ended
June 30 June 30
------- -------
2000 1999 2000 1999
---- ---- ---- ----
Third-party aluminum shipments 32 3 34 5
Third-party sales $524 $209 $727 $405
After-tax operating income $ 35 $ 25 $ 52 $ 38
==== ==== ==== ====
This segment includes closures, closure and packaging machinery, Aluminio's PET
bottle businesses in Latin America, as well as the packaging and consumer
businesses of Reynolds acquired in the 2000 second quarter. Alcoa's closures,
packaging and PET bottle businesses were previously included in the Other
category.
Second quarter third-party sales for this segment rose 151%, due primarily
to the acquisition of the Reynolds' packaging and consumer businesses in May
2000, as well as the acquisition of MCG Closures Limited (MCG) in April 2000.
Excluding these recent acquisitions, third-party sales rose 9% versus the 1999
second quarter and 6% versus the 1999 six-month period. Sales by Aluminio's
packaging operations in Brazil, which were negatively impacted by the 1999
currency devaluation and recession, grew by 10% quarter over quarter and 16%
year over year. Closures sales were up 3% and 2% for the second quarter and the
six-month period, respectively, versus 1999 periods, due primarily to the MCG
acquisition.
Segment ATOI was $35 in the 2000 second quarter and $52 in the 2000
six-month period, up 40% and 37% over the respective 1999 periods. This increase
was primarily due to the acquisitions noted earlier, offset by higher raw
materials costs for the closures and PET bottle businesses.
VI. Other
Second quarter ended Six months ended
June 30 June 30
------- -------
2000 1999 2000 1999
--- ------ --- ------ --- ------ --- ----
Third-party aluminum shipments 50 15 69 30
Third-party sales $ 988 $ 652 $ 1,708 $ 1,269
After-tax operating income $ 46 $ 45 $ 79 $ 60
========= ========= ========= =======
This group includes Alcoa businesses that do not fit into the categories noted
above. Among others, this includes Alcoa Fujikura, Ltd. (AFL), which produces
fiber optic cable and services for the telecommunications industry and
electrical components for the automotive industry, Thiokol Propulsion (Thiokol),
a producer of solid rocket propulsion systems, Reynolds' metal distribution
business (RASCO), and Alcoa's residential building products operations. Thiokol
and RASCO were added in the 2000 second quarter as parts of the Cordant and
Reynolds acquisitions, respectively. Packaging, closures and packaging machinery
businesses which were previously reported in this group are now included in the
Packaging and Consumer segment.
Third-party revenues for this group were $988 in the 2000 second quarter
and $1,708 in the 2000 six-month period, up 52% and 35% from the respective 1999
periods. After excluding Thiokol and RASCO, these growth rates adjust to 17% for
both quarter over quarter and year over year.
AFL revenues increased 19% in the 2000 second quarter and 16% in the first
six months of 2000 over the corresponding 1999 periods. These increases were due
in large part to growth in telecommunications sales of 95% quarter-to-quarter
and 77% year-to-year, a significant portion of which were from acquisitions made
since second quarter 1999. Revenues from the sale of residential building
products decreased 5% from the 1999 second quarter on 6% lower shipment volume,
leaving revenue growth for the six-month period flat on 4% lower shipments.
Sales by Alcoa's automotive operations benefited from the acquisition, in the
1999 third quarter, of the remaining 50% of the A-CMI joint venture with Hayes
Lemmerz International. After excluding the second quarter 2000 acquisitions,
A-CMI, which was accounted for as an equity holding in 1999, contributed 29% of
the overall revenue growth in this category quarter over quarter and 32% year
over year.
ATOI for this category in the 2000 second quarter was $46, up 2% from the
1999 second quarter, and was $79 for the 2000 six-month period, up 32% from the
1999 six-month period. Increases in ATOI for the 2000 quarter versus the 1999
second quarter were due to the addition of Thiokol and RASCO, offset by
increases in feedstock costs for the building products business of $7 after tax.
For the 2000 year-to-date period, productivity improvements of $16 after tax
along with strong growth at AFL, drove ATOI results higher.
Reconciliation of ATOI to Consolidated Net Income
Items required to reconcile ATOI to consolidated net income include: corporate
adjustments to eliminate any remaining profit or loss between segments; the
after-tax impact of interest income and expense at the statutory rate; minority
interest; 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; and other, which
includes the impact of LIFO, differences between estimated tax rates used in
each segment and the corporate effective tax rate, and other non-operating items
such as foreign exchange.
Intersegment profit eliminations for the 2000 six-month period exceeded the
1999 period due to overall higher prices for alumina and aluminum. Interest
expense increased because of higher debt related to recent acquisitions.
Minority interest increased quarter over quarter and year over year due to
higher income at AofA, AFL, and Aluminio. Corporate expense increased from the
1999 second quarter and six-month period due to acquisitions. Other decreased in
the 2000 second quarter as compared to the 1999 second quarter due to a negative
swing in foreign exchange losses, offset by higher equity income. Other
decreased in the 2000 six-month period versus the corresponding 1999 period due
to the above mentioned items and because the estimated tax rates used in the
segments in the 2000 first quarter were closer to the actual effective rate for
the corporation as a whole than in the 1999 first quarter.
Costs and Other
Cost of Goods Sold - Cost of goods sold increased $1,076 and $1,280 from the
prior year second quarter and six-month period, respectively. The increase
reflects higher volumes including those related to acquisitions, partially
offset by improved cost performance. Cost of goods sold as a percentage of sales
in the 2000 second quarter was 76.0% versus 77.9% in the 1999 second quarter,
and in the 2000 six-month period was 74.7% versus 78.2% in the 1999 period. The
lower ratios in 2000 are due to higher revenues resulting from higher prices for
alumina and aluminum, higher aluminum volumes and improved cost performance.
Selling, General Administrative, and Other Expenses - Selling, general
administrative, and other (SG&A) expenses were up $69 from the 1999 second
quarter and $104 from the 1999 six-month period, predominantly due to
acquisitions. SG&A as a percentage of revenue was 4.9% in 2000 year-to-date,
unchanged from the 1999 period.
Interest Expense - Interest expense was up $45, or 90%, from the 1999 second
quarter, and $44, or 43%, for the 1999 six-month period, due to higher interest
rates and higher debt levels as a consequence of the recent acquisitions.
On July 20, 2000, Alcoa issued $1,500 of callable notes. Of these notes,
$1,000 mature in 10 years and carry a coupon rate of 7.375%, and $500 mature in
5 years and carry a coupon rate of 7.25%.
Income Taxes - The income tax provision for the period is based on the expected
effective tax rate adjusted for the impact of acquisitions from the acquisition
dates through June 30. The 2000 second quarter rate of 34% differs from the
statutory rate primarily because of taxes on foreign income. The 2000 rate
differs from the 1999 second quarter rate primarily because of higher income
before tax in 2000. The effective tax rate for the year is currently estimated
at 35%.
Other Income/Foreign Currency - Other income (expense) increased to $52 in the
2000 second quarter and $93 in the 2000 six-month period from $43 and $40 in the
comparable 1999 periods. Quarterly and year-to-date results benefited from
higher equity and interest income, gains on sales of assets, proceeds from the
demutualization of Met Life, and from acquisitions. The positive items were
partially offset by higher exchange losses. Mark-to-market gains for the 2000
six-month period were $7 versus $6 in the prior year period.
Minority Interests - Minority interests' share of income from operations
increased 57% from the 1999 second quarter and 139% from the 1999 first half to
$85 and $191, respectively. The increase was due primarily to earnings growth at
AofA and AFL, and a turnaround at Aluminio, which reported income in the 2000
first half versus a net loss in the 1999 period.
Risk Factors
In addition to the risks inherent in its operations, Alcoa is exposed to
financial, market, political and economic risks. The following discussion, which
provides additional detail regarding Alcoa's exposure to the risks of changing
commodity prices, foreign exchange rates and interest rates, includes
forward-looking statements that involve risk and uncertainties. Actual results
could differ materially from those projected in these forward-looking
statements.
Commodity Price Risks - Alcoa is a leading global producer of aluminum ingot and
aluminum fabricated products. As a condition of sale, customers often require
Alcoa to commit to fixed-price contracts that sometimes extend a number of years
into the future. Customers will likely require Alcoa to enter into similar
arrangements in the future. These contracts expose Alcoa to the risk of
fluctuating aluminum prices between the time the order is accepted and the time
that the order ships.
In order to fulfill some of the orders noted above, Alcoa might be required
to purchase aluminum to supplement its internal production. These purchases
expose the company to the risk of higher aluminum prices. To hedge this risk,
Alcoa enters into long positions, principally using futures and options. Alcoa
follows a stable pattern of purchasing metal; therefore, it is highly likely
that anticipated metal requirements will be met. At June 30, 2000 and 1999,
these contracts totaled approximately 454,000 and 548,000 mt, respectively.
These contracts act to fix the purchase price for these metal purchase
requirements, thereby reducing Alcoa's risk to rising metal prices.
The futures and options contracts noted above are with creditworthy
counterparties and are further supported by cash, treasury bills or irrevocable
letters of credit issued by carefully chosen banks.
The expiration dates of the options and the delivery dates of the futures
contracts noted above do not always coincide exactly with the dates on which
Alcoa is required to purchase metal to meet its contractual commitments with
customers. Accordingly, some of the futures and options positions will be rolled
forward. This may result in significant cash inflows if the hedging contracts
are "in-the-money" at the time they are rolled forward. Conversely, there could
be significant cash outflows if metal prices fall below the price of contracts
being rolled forward.
In addition to the above-noted aluminum positions, Alcoa had 157,000 mt and
75,000 mt of futures and options contracts outstanding at June 30, 2000 and
1999, respectively, that cover long-term, fixed-price commitments to supply
customers with metal from internal sources. Accounting convention requires that
these contracts be marked to market, which resulted in year-to-date after-tax
additions to earnings of $7 at June 30, 2000 and $6 at June 30, 1999.
Alcoa also sells products to various third parties at prices that are
influenced by changes in London Metal Exchange (LME) aluminum prices. From time
to time, the company may elect to hedge a portion of these exposures to reduce
the risk of fluctuating market prices on these sales. Towards this end, Alcoa
may enter into short positions using futures and options contracts. At June 30,
2000, these contracts totaled 94,000 mt. These contracts act to fix a portion of
the sales price related to these sales contracts.
Alcoa also purchases certain other commodities, such as fuel oil, natural
gas and copper, for its operations and enters into futures contracts to
eliminate volatility in the prices of such products. None of these contracts are
material.
Financial Risk - Alcoa is subject to significant exposure from fluctuations in
foreign currencies. As a matter of company policy, foreign currency exchange
contracts, including forwards and options, are sometimes used to limit the risk
of fluctuating exchange rates. In addition, Alcoa also attempts to maintain a
reasonable balance between fixed and floating rate debt and uses interest rate
swaps and caps to keep financing costs as low as possible.
Risk Management - All of the aluminum and other commodity contracts, as well as
the various types of financial instruments, are straightforward and held for
purposes other than trading. They are used primarily to mitigate uncertainty and
volatility, and principally cover underlying exposures.
Alcoa's commodity and derivative activities are subject to the management,
direction and control of the Strategic Risk Management Committee (SRMC). SRMC is
composed of the chief executive officer, the chief financial officer and other
officers and employees that the chief executive officer may select from time to
time. SRMC reports to the board of directors at each of its scheduled meetings
on the scope of its derivative activities.
Environmental Matters
Alcoa continues to participate in environmental assessments and cleanups at a
number of locations. These include approximately 24 owned or operating
facilities and adjoining properties, approximately 29 previously owned or
operated facilities and adjoining properties and approximately 90 Superfund and
other waste sites. A liability is recorded for environmental remediation costs
or damages when a cleanup program becomes probable and the costs or damages can
be reasonably estimated.
As assessments and cleanups proceed, the liability is adjusted based on
progress in determining the extent of remedial actions and related costs and
damages. The liability can change substantially due to factors such as the
nature and extent of contamination, changes in remedial requirements and
technological changes. Therefore, it is not possible to determine the outcomes
or to estimate with any degree of accuracy the potential costs for certain of
these matters. For example, there are issues related to the Massena, New York,
Pt. Comfort, Texas and Troutdale, Oregon sites that allege natural resource
damage or off-site contaminated sediments, where investigations are ongoing. The
following discussion provides additional details regarding the current status of
these three sites.
MASSENA/GRASSE RIVER. Sediments and fish in the Grasse River adjacent to
Alcoa's Massena, New York plant site contain varying levels of polychlorinated
biphenyl (PCB). Alcoa has been identified by the U.S. Environmental Protection
Agency (EPA) as potentially responsible for this contamination and, since 1989,
has been conducting investigations and studies of the river under order from the
EPA issued under the Comprehensive Environmental Response, Compensation and
Liability Act, also known as Superfund. During 1999, Alcoa continued to perform
studies and investigations on the Grasse River. A planned pilot test of certain
sediment capping techniques, intended for 1999, could not be completed because a
final scope of work could not be developed with EPA in time to complete the
project before the construction season concluded. In addition, in the 1999
fourth quarter, Alcoa submitted an Analysis of Alternatives to EPA. This report
identified potential courses of remedial action related to the PCB contamination
of the river. Alcoa has proposed to EPA that the planned pilot scale tests be
conducted to assess the feasibility of performing certain sediment-covering
techniques before selection and approval of a remedial alternative by EPA. The
costs of these pilot scale tests have been fully reserved. The results of these
tests and discussions with EPA regarding all of the alternatives identified
should provide additional information for the selection and approval of the
appropriate remedial alternative.
The Analysis of Alternatives report and the results of the pilot tests must
be reviewed and approved by EPA. Currently, no one of the alternatives is more
likely to be selected than any other. The range of additional costs associated
with the potential courses of remedial action is between zero and $53. During
meetings in March and April, 2000, EPA indicated to Alcoa that it believes
additional remedial alternatives need to be included in the Analysis of
Alternatives. Such additional remedies involve removal of more sediment from the
river than was included in the alternatives provided in the recent Analysis of
Alternatives report. The cost of such potential additional remedial alternatives
can not be estimated at this time.
In 1988, Reynolds discovered that soils in the area of the heat transfer
medium system at Reynolds' primary aluminum production plant in Massena, New
York were contaminated with polychlorinated biphenyls ("PCBs") and other
contaminants. Remediation of the contaminated soils and other contaminated areas
of the plant was substantially completed in 1998. Portions of the St. Lawrence
River system adjacent to the plant are also contaminated with PCBs. Since 1989,
Reynolds has been conducting investigations and studies of the river system
under order from the EPA issued under Superfund. Reynolds is in the process of
working with the EPA to better define the scope of the dredging program, which
is planned for 2001. Alcoa and Reynolds are also aware of a natural resource
damage claim that may be asserted by certain federal, state and tribal natural
resource trustees at this location.
PT. COMFORT/LAVACA BAY. In 1990, Alcoa began discussions with certain state
and federal natural resource trustees concerning alleged releases of mercury
from its Pt. Comfort, Texas facility into the adjacent Lavaca Bay. In March
1994, EPA listed the "Alcoa (Point Comfort)/Lavaca Bay Site" on the National
Priorities List and, shortly thereafter, Alcoa and EPA entered into an
administrative order on consent under which Alcoa is obligated to conduct
certain remedial investigations and feasibility studies. In accordance with this
order, Alcoa recently submitted a draft remedial investigation, a draft
feasibility study and a draft baseline risk assessment to EPA. In addition,
Alcoa recently commenced construction of the EPA-approved project to fortify an
offshore dredge disposal island. The probable and estimable costs of these
actions are fully reserved. In addition, during March 2000, Alcoa submitted a
Feasibility Study to EPA providing remedial alternatives for the site. Alcoa
believes it has now fully reserved the probable cost of remediation for the
site. Since the order with EPA, Alcoa and the natural resource trustees have
continued efforts to understand natural resource injury and ascertain
appropriate restoration alternatives. That process is currently expected to be
completed by late 2000 or early 2001.
TROUTDALE, OREGON. In 1994, the EPA added Reynolds' Troutdale, Oregon
primary aluminum production plant to the National Priorities List of Superfund
sites. Reynolds is cooperating with the EPA and, under a September 1995 consent
order, is working with the EPA in investigating potential environmental
contamination at the Troutdale site and promoting more efficient cleanup at the
site.
Based on the above, it is possible that Alcoa's results of operations, in a
particular period, could be materially affected by matters relating to these two
sites. However, based on facts currently available, management believes that the
disposition of these matters will not have a materially adverse effect on the
financial position or liquidity of the company.
Alcoa's remediation reserve balance at June 30, 2000 was $343 (of which $45
was classified as a current liability) and reflects the most probable costs to
remediate identified environmental conditions for which costs can be reasonably
estimated. No single site represents more than 20% of the total reserve balance.
Remediation expenses charged to the reserve in the 2000 second quarter were $21.
They include expenditures currently mandated, as well as those not required by
any regulatory authority or third-party. Additions to the reserve of $189 were
made in the 2000 second quarter pertaining predominantly to Reynolds sites.
Included in annual operating expenses are the recurring costs of managing
hazardous substances and environmental programs. These costs are estimated to be
about 2% of cost of goods sold.
Liquidity and Capital Resources
Cash from Operations
Cash from operations during the 2000 year-to-date period totaled $1,106,
compared with $912 in the 1999 period. The increase reflects higher net income
and an increase in the minority interests' share of net income, partly offset by
higher working capital requirements.
Financing Activities
Financing activities provided $1,940 of cash in the 2000 first half, compared
with $531 used in the 1999 period. The increase was mainly due to the issuance
of debt to fund acquisitions. Short-term borrowings and commercial paper grew by
$1,311 and $1,453, respectively, in the 2000 period, compared with decreases of
$7 and 70, respectively, in the 1999 period. Long-term debt increased by $1,607
in the 2000 six-month period, versus an increase of $216 in the 1999 period.
Offsetting this growth in debt was an increase in payments on long-term debt,
$1,358 in the 2000 period versus $283 in the 1999 period.
Dividends paid to shareholders were $201 in the 2000 six-month period, an
increase of $52 over the 1999 period. The change was primarily due to a 24%
increase in Alcoa's total dividend, which paid out 25 cents in the 2000 period
versus 20.125 cents per share in the 1999 period.
Investing Activities
Investing activities used $2,961 during the 2000 first half, compared with
$476 in the 1999 period. Acquisitions accounted for the bulk of the change,
requiring $2,534 above cash acquired in the 2000 period versus $16 in the 1999
period. In the 2000 first quarter Alcoa acquired Excel Extrusions, Inc. from
Noranda Aluminum. In the second quarter, Alcoa acquired MCG from Wassall plc.,
as well as Cordant, the portion of Howmet not owned by Cordant, and Reynolds.
Also in the second quarter, AofA acquired Eastern Aluminum Ltd.
During the 1999 period, Alcoa acquired the bright products business of
Pechiney's Rhenalu rolling plant located near Toulouse, France and Reynolds'
aluminum extrusion plant in Irurzun, Spain.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported, in March 1998, Region V of the Environmental
Protection Agency (EPA) referred various alleged environmental violations at
Alcoa's Warrick Operations to the civil division of the U.S. Department of
Justice (DOJ). The alleged violations stem from an April 1997 multi-media
environmental inspection of Warrick Operations by the EPA relating to water
permit exceedances as reported on monthly discharge monitoring reports,
wastewater toxicity issues and alleged opacity violations. After negotiations,
the parties reached final agreement on the language of a consent decree in
settlement of this matter. Alcoa agreed to pay a civil penalty of $2.4 and
agreed to performance of a supplemental environmental project and injunctive
relief. The consent decree was signed and lodged with the court on May 13, 2000.
The court entered the consent decree as a final judgment on June 14, 2000, and
Alcoa paid the civil penalty on June 21, 2000.
As previously reported, in March 1999, two search warrants were executed by
various federal and state agencies on the Alcoa Port Allen Works of Discovery
Aluminas, Inc., a subsidiary in Port Allen, Louisiana. Also in March, Discovery
Aluminas, Inc. was served with a grand jury subpoena that required the
production to a federal grand jury of certain company records relating to
alleged environmental issues involving wastewater discharges and management of
solid or hazardous wastes at the plant. In April 1999, the Port Allen plant
manager was indicted for a single count of violating the Clean Water Act. The
case has not been set for trial. In October 1999, a second grand jury subpoena
for documents was issued to Alcoa requesting information regarding wastewater
discharges from the Port Allen plant. Alcoa responded to the subpoena, continues
to cooperate with the government, and is engaged in discussions seeking to
resolve the situation.
In late 1998, Howmet International Inc. ("Howmet") discovered certain
product testing and specification non-compliance issues at the Montreal, Quebec
and Bethlehem, Pennsylvania operations of its Howmet Aluminum Castings
subsidiaries (formerly called Cercast). In 1999, Howmet discovered several
additional instances of other testing and specification non-compliance at its
Hillsboro, Texas aluminum casting facility, at the Montreal and Bethlehem
operations and, in 2000, at its Dover, New Jersey super-alloy casting facility.
Howmet has notified customers and the appropriate government agencies and has
substantially completed correction of these issues. Howmet knows of no
in-service problems associated with any of these issues. In addition, Howmet
Aluminum Casting has been, and expects to continue to be, late in delivery of
products to certain customers. The Defense Criminal Investigative Service
("DCIS"), in conjunction with the other agents from the Department of Defense
and the National Aeronautics and Space Administration, has undertaken an
investigation with respect to certain of the foregoing matters at the Montreal
and Bethlehem facilities. The DCIS has informed Howmet that the investigation
concerns possible violations of the False Claims Act and the False Statements
Act, as well as possible criminal penalties. Howmet is unable to determine
definitively what, if any, civil or criminal penalties might be imposed as a
result of the investigation. All customer claims relating to the foregoing
matters either have been resolved or, in the judgment of Howmet, will be
resolved within existing reserves. On August 6, 1999 Howmet entered into an
Administrative Agreement with the U.S. Air Force terminating Notices of Proposed
Debarment issued on March 1, 1999 relating to certain of the foregoing matters.
The Administrative Agreement permitted the affected facilities to resume
accepting new U.S. government contracts and subcontracts. On June 20, 2000,
Alcoa completed its acquisition of Howmet.
Effective May 17, 2000, Article FIFTH of Alcoa's Articles of Incorporation
was amended to increase the number of shares of common stock, $1.00 par value,
that Alcoa is authorized to issue from 600 million to 1.8 billion. The
amendment, which had been approved by Alcoa's Board of Directors on January 10,
2000, was submitted to and approved by Alcoa's shareholders at the annual
meeting held on May 12, 2000. (See Part II, Item 4 below.) Approval of the
amendment was required to permit the two-for-one split of the common stock that
was distributed on June 9, 2000 to holders of record on May 26, 2000. The
amendment permits the issuance of additional shares up to the new 1.8 billion
maximum authorization without further action or authorization by shareholders,
except as may be required in a specific case by applicable law or stock exchange
regulations. Such additional authorized shares, if and when issued, would have
the same rights and privileges as the shares of Alcoa common stock issued and
outstanding before the amendment became effective.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
At the annual meeting of Alcoa shareholders held on May 12, 2000, Paul H.
O'Neill was reelected a director of Alcoa to serve for a term expiring December
31, 2000, and Kenneth W. Dam and Judith M. Gueron were reelected to serve for
three-year terms. Votes cast for Mr. O'Neill were 306,435,745 and votes withheld
were 2,898,561; votes cast for Mr. Dam were 306,548,699 and votes withheld were
2,785,607; and votes cast for Dr. Gueron were 306,522,575 and votes withheld
were 2,811,731.
Also at that annual meeting, a proposal to approve an amendment to Alcoa's
Articles of Incorporation to increase the number of authorized shares of common
stock was adopted. Total votes cast for the amendment to the Articles of
Incorporation were 301,441,334, votes cast against were 6,005,350, and there
were 1,889,596 abstentions. Abstentions are not counted for voting purposes
under Pennsylvania law, the jurisdiction of Alcoa's incorporation.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
3(a). Articles of Incorporation of the Registrant as amended
10(n). Revolving Credit Agreement (364-Day), dated as of
April 28, 2000
10(t). Revolving Credit Agreement (Five-Year), dated as of
April 28, 2000
12. Computation of Ratio of Earnings to Fixed Charges
15. Independent Accountants' letter regarding unaudited
financial information
27. Financial Data Schedule
(b) During the second quarter of 2000, Alcoa filed with the Securities and
Exchange Commission:
(1) a Form 8-K, dated May 8, 2000, reporting under Item 5 the approval by
the U.S. Department of Justice and the European Union, and the
completion of, the merger between Alcoa and Reynolds Metals Company
("Reynolds"). In addition, Alcoa filed a Form 8-K/A on July 10, 2000,
including under Item 2 the approval and completion of the merger
between Alcoa and Reynolds and including under Item 7 historical
financial statements of Reynolds and unaudited pro forma condensed
consolidated financial information of Alcoa and Reynolds.
(2) a Form 8-K, dated May 15, 2000, reporting under Item 5 a two-for-one
common stock split and including restated financial information to
reflect the stock split; and
(3) a Form 8-K, dated June 22, 2000, reporting under Item 5 information
concerning new technology in the aluminum smelting process.
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.
July 27, 2000 By /s/ RICHARD B. KELSON
------------------------ ----------------------------
Date Richard B. Kelson
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
July 27, 2000 By /s/ TIMOTHY S. MOCK
------------------------ ----------------------------
Date Timothy S. Mock
Vice President and Controller
(Chief Accounting Officer)
EXHIBITS
Page
3(a). Articles of Incorporation of the Registrant as amended
10(n). Revolving Credit Agreement (364-Day), dated as of
April 28, 2000
10(t). Revolving Credit Agreement (Five-Year), dated as of
April 28, 2000
12. Computation of Ratio of Earnings to Fixed Charges 28
15. Independent Accountants' letter regarding unaudited 29
financial information
27. Financial Data Schedule