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, 1998 Commission File Number 1-3610
ALUMINUM COMPANY OF AMERICA
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0317820
(State of incorporation) (I.R.S. Employer Identification No.)
425 Sixth Avenue - Alcoa Building, Pittsburgh, Pennsylvania 15219-1850
(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 August 4, 1998, 183,294,405 shares of common stock,
par value $1.00, of the Registrant were outstanding.
A07-15900
-1-
PART I - FINANCIAL INFORMATION
Alcoa and subsidiaries
Condensed Consolidated Balance Sheet
(in millions)
(unaudited)
June 30 December 31
1998 1997
---- ----
ASSETS
Current assets:
Cash and cash equivalents (includes cash of $320.3 in
1998 and $100.8 in 1997) $ 834.2 $ 800.8
Short-term investments 74.8 105.6
Accounts receivable from customers, less allowances:
1998-$63.7; 1997-$36.6 2,447.5 1,581.2
Other receivables 171.1 216.4
Inventories (b) 1,887.1 1,312.6
Deferred income taxes 242.2 172.3
Prepaid expenses and other current assets 259.6 228.0
--------- ---------
Total current assets 5,916.5 4,416.9
--------- ---------
Properties, plants and equipment, at cost 17,862.9 15,254.0
Less, accumulated depreciation, depletion and
amortization 8,788.9 8,587.5
--------- ---------
Net properties, plants and equipment 9,074.0 6,666.5
--------- ---------
Other assets 2,586.1 1,987.2
--------- ---------
Total assets $17,576.6 $13,070.6
========= =========
LIABILITIES
Current liabilities:
Short-term borrowings $ 461.6 $ 347.7
Accounts payable, trade 1,041.6 811.7
Accrued compensation and retirement costs 439.4 436.0
Taxes, including taxes on income 397.0 334.2
Other current liabilities 779.9 375.7
Long-term debt due within one year 162.8 147.2
--------- ---------
Total current liabilities 3,282.3 2,452.5
--------- ---------
Long-term debt, less amount due within one year (c) 3,703.4 1,457.2
Accrued postretirement benefits 1,898.8 1,749.6
Other noncurrent liabilities and deferred credits 1,628.4 1,271.2
Deferred income taxes 411.2 281.0
--------- ---------
Total liabilities 10,924.1 7,211.5
--------- ---------
MINORITY INTERESTS 2,301.5 1,439.7
--------- ---------
SHAREHOLDERS' EQUITY
Preferred stock 55.8 55.8
Common stock 178.9 178.9
Additional capital 573.1 578.1
Retained earnings 4,965.2 4,717.3
Treasury stock, at cost (1,022.7) (758.0)
Accumulated other comprehensive income (d) (399.3) (352.7)
--------- ---------
Total shareholders' equity 4,351.0 4,419.4
--------- ---------
Total liabilities and shareholders' equity $17,576.6 $13,070.6
========= =========
The accompanying notes are an integral part of the financial statements.
-2-
Alcoa and subsidiaries
Condensed Statement of Consolidated Income (unaudited)
(in millions, except per share amounts)
Second quarter Six months
ended ended
June 30 June 30
------- -------
1998 1997 1998 1997
---- ---- ---- ----
REVENUES
Sales $3,587.0 $3,432.0 $7,032.1 $6,663.1
Other income 18.3 37.7 46.4 79.0
------- ------- ------- -------
3,605.3 3,469.7 7,078.5 6,742.1
------- ------- ------- -------
COSTS AND EXPENSES
Cost of goods sold 2,760.0 2,602.1 5,378.2 5,091.1
Selling, general administrative and other
expenses 154.2 160.5 308.0 319.5
Research and development expenses 27.9 34.7 52.4 70.3
Provision for depreciation, depletion and
amortization 186.1 181.1 370.9 363.7
Special items (e) - - - (4.6)
Interest expense 41.8 33.4 81.0 70.7
Taxes other than payroll taxes 30.0 33.9 62.1 67.7
------- ------- ------- -------
3,200.0 3,045.7 6,252.6 5,978.4
------- ------- ------- -------
EARNINGS
Income before taxes on income 405.3 424.0 825.9 763.7
Provision for taxes on income (f) 135.8 148.0 276.7 266.9
------- ------- ------- -------
Income from operations 269.5 276.0 549.2 496.8
Less: Minority interests' share (62.4) (68.4) (132.2) (130.1)
------- ------- ------- -------
NET INCOME $ 207.1 $ 207.6 $ 417.0 $ 366.7
======= ======= ======= =======
EARNINGS PER SHARE (g)
Basic $ 1.24 $ 1.19 $ 2.49 $ 2.11
======= ======= ======= =======
Diluted $ 1.24 $ 1.18 $ 2.48 $ 2.09
======= ======= ======= =======
Dividends paid per common share $ .375 $ .25 $ .75 $ .475
======= ======= ======= =======
The accompanying notes are an integral part of the financial statements.
-3-
Alcoa and subsidiaries
Condensed Statement of Consolidated Cash Flows (unaudited)
(in millions)
Six months ended
June 30
-------
1998 1997
---- ----
CASH FROM OPERATIONS
Net income $ 417.0 $ 366.7
Adjustments to reconcile net income to cash from
operations:
Depreciation, depletion and amortization 377.5 371.4
Increase (reduction) in deferred income taxes (1.0) 4.4
Equity income before additional taxes, net of dividends (1.5) (13.6)
Non-cash special items - (4.6)
Book value of asset disposals 18.4 14.5
Minority interests 132.2 130.1
Other 1.2 (11.1)
Increase in receivables (132.4) (146.6)
Reduction in inventories 87.0 59.9
(Increase) reduction in prepaid expenses and other
current assets 23.5 (1.9)
Reduction in accounts payable and accrued expenses (23.3) (55.6)
Increase (reduction) in taxes, including taxes on income (9.0) 49.2
Cash received on long-term alumina supply contract - 240.0
Increase (reduction) in deferred hedging gains 6.1 (60.1)
Net change in noncurrent assets and liabilities 25.3 (9.3)
-------- --------
CASH FROM OPERATIONS 921.0 933.4
-------- --------
FINANCING ACTIVITIES
Net changes in short-term borrowings (40.8) 17.7
Common stock issued and treasury stock sold 23.8 151.1
Repurchase of common stock (293.5) (150.1)
Dividends paid to shareholders (126.0) (83.3)
Dividends paid and return of capital to minority interests (117.1) (257.5)
Additions to long-term debt 1,593.0 362.2
Payments on long-term debt (231.7) (430.3)
-------- --------
CASH FROM (USED FOR) FINANCING ACTIVITIES 807.7 (390.2)
-------- --------
INVESTING ACTIVITIES
Capital expenditures (366.5) (408.6)
Acquisitions, net of cash acquired (1,352.7) -
Proceeds from the sale of assets - 193.2
Additions to investments (37.9) (.7)
Net change in short-term investments 30.9 (56.1)
Changes in minority interests 39.8 24.4
Other (8.1) (6.8)
--------- --------
CASH USED FOR INVESTING ACTIVITIES (1,694.5) (254.6)
--------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (.8) (4.4)
--------- --------
CHANGES IN CASH
Net change in cash and cash equivalents 33.4 284.2
Cash and cash equivalents at beginning of year 800.8 598.1
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 834.2 $ 882.3
========= ========
The accompanying notes are an integral part of the financial statements.
-4-
Notes to Condensed Consolidated Financial Statements
(in millions, except share amounts)
Notes:
(a) Summarized consolidated financial data for Alcoa Aluminio S.A.
(Aluminio) and Alcoa of Australia Limited (AofA) begin on page 19.
(b) Inventories consisted of:
June 30 December 31
1998 1997
---- ----
Finished goods $ 491.8 $ 314.9
Work in process 509.5 433.0
Bauxite and alumina 296.2 263.9
Purchased raw materials 426.5 197.3
Operating supplies 163.1 103.5
------- -------
$1,887.1 $1,312.6
======= =======
Approximately 61% of total inventories at June 30, 1998 was
valued on a LIFO basis. If valued on an average cost basis,
total inventories would have been $787.6 and $769.8 higher
at June 30, 1998 and December 31, 1997, respectively.
(c) In January 1998, Alcoa issued $300 of 6.75% bonds due 2028.
The net proceeds were used for general corporate purposes.
In June 1998, Alcoa issued $200 of 6.125% bonds due in 2005,
$250 of 6.5% bonds due in 2018 and $675 of commercial paper.
The proceeds from the June offerings were used to fund the
Alumax transaction, see Note I for additional detail.
(d) The calculation of comprehensive income is as follows:
Second quarter Six months
ended ended
June 30 June 30
------- -------
1998 1997 1998 1997
---- ---- ---- ----
Net income $207.1 $207.6 $417.0 $366.7
Other comprehensive loss (32.5) (58.7) (46.6) (136.9)
Comprehensive income $174.6 $148.9 $370.4 $229.8
(e) A net pre-tax gain of $4.6 (an after-tax loss of $1.1)
was recorded in the 1997 first quarter related to
special items. Asset sales generated income of $25.0,
while increases to environmental reserves and an
impairment at a U.S. manufacturing facility resulted in
a charge of $20.4.
(f) The income tax provision for the period is based on the
effective tax rate expected to be applicable for the
full year. The 1998 second quarter rate of 33.5%
differs from the statutory rate primarily because of
lower tax rates on foreign income.
-5-
(g) 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 Six months
ended ended
June 30 June 30
------- -------
1998 1997 1998 1997
---- ---- ---- ----
Net income $207.1 $207.6 $417.0 $366.7
Less: Preferred stock dividends .5 .5 1.0 1.0
----- ----- ----- -----
Income available to common stockholders $206.6 $207.1 $416.0 $365.7
Weighted average shares outstanding 166.1 173.3 167.0 173.1
Basic EPS $1.24 $1.19 $2.49 $2.11
====== ====== ====== ======
Effect of dilutive securities:
Add Shares issuable upon exercise
of outstanding stock options 1.0 1.7 1.0 1.7
Diluted shares outstanding 167.1 175.0 168.0 174.8
Diluted EPS $1.24 $1.18 $2.48 $2.09
====== ====== ====== ======
(h) On February 6, 1998, Alcoa completed its acquisition of
Inespal, S.A. of Madrid, Spain. Alcoa paid
approximately $150 in cash and assumed $260 of debt and
liabilities in exchange for substantially all of
Inespal's businesses. Inespal is an integrated aluminum
producer with 1997 revenues of $1,100. The acquisition
included an alumina refinery, three aluminum smelters,
three aluminum rolling facilities, two extrusion plants,
an administrative center and related sales offices in
Europe.
(i) On March 9, 1998, Alcoa and Alumax Inc. (Alumax)
announced that they had entered into an agreement under
which Alcoa was to acquire all of the outstanding shares
of Alumax for a combination of cash and stock. On
June 16, 1998, after approval by the U.S. Department of
Justice (DOJ) and other regulatory agencies, Alcoa
completed the first step of the acquisition by
purchasing approximately 51% of the outstanding shares
of Alumax at $50 per share. Following approval by
Alumax shareholders at a special meeting on July 31,
1998, Alcoa completed the acquisition by exchanging its
common stock for the remaining shares of Alumax at a
ratio of .6975 share of Alcoa stock per share of Alumax
stock. The exchange resulted in Alcoa issuing
18,425,380 shares to Alumax shareholders. The transaction
was valued at approximately $3,800, including the
assumption of debt, and will be accounted for using the
purchase method. The purchase price includes cash and
stock paid to Alumax shareholders 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 goodwill resulting from the acquisition will be
amortized over a forty-year period. Alcoa's results of
operations for the 1998 second quarter do not include
any amounts relative to Alumax, as the income generated
during the two week period in which Alcoa owned 51% of
Alumax was not material to Alcoa's earnings.
-6-
As part of the agreement with the DOJ and its related
approval of the Alumax transaction, Alcoa agreed to
divest its cast plate operations in Vernon, CA. Annual
sales for these operations are approximately $30 million.
Alcoa does not anticipate that this divestiture will have
a material impact on its operations.
The following presents pro forma information assuming
that the acquisition of 100% of Alumax by Alcoa 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 and Alumax 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.
Six months
ended
June 30
-------
1998 1997
---- ----
Sales $8,477.4 $7,978.0
Net income 427.5 392.8
Basic earnings per share 2.31 2.05
Diluted earnings per share 2.29 2.03
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.
(j) 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. The standard is required to be adopted
by Alcoa for the 2000 first quarter. The Company believes
that SFAS 133 will have a material impact on its financial
statements as its current aluminum, foreign exchange and
interest rate derivative contracts will be recorded on the
balance sheet at fair value. Management is currently
assessing the details of how the standard will impact its
financial statements and is preparing a plan of
implementation.
-7-
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, 1997.
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 9.
-8-
Independent Auditor's Review Report
To the Shareholders and Board of Directors
Aluminum Company of America (Alcoa)
We have reviewed the unaudited condensed consolidated
balance sheet of Alcoa and subsidiaries as of June 30,
1998, the unaudited condensed statements of consolidated
income for the three-month and six-month periods ended
June 30, 1998 and 1997, and the unaudited condensed
statement of consolidated cash flows for the six-month
periods ended June 30, 1998 and 1997, which are included
in Alcoa's Form 10-Q for the period ended June 30, 1998.
These financial statements are the responsibility of
Alcoa's management.
We conducted our review in accordance with standards
established by the American Institute of Certified Public
Accountants. A review of interim financial information
consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially
less in scope than an audit conducted in accordance with
generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the condensed
consolidated financial statements referred to above for
them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with
generally accepted auditing standards, the consolidated
balance sheet of Alcoa and subsidiaries as of December 31,
1997, 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 8, 1998, except for Note V, for which the date is
February 6, 1998, 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, 1997, 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 7, 1998, except for Note i,
for which the date is August 5, 1998
-9-
Management's Discussion and Analysis of the
Results of Operations and Financial Condition
(dollars in millions, except share amounts)
Results of Operations
Principal income and operating data follow.
Second quarter ended Six months ended
June 30 June 30
------- -------
1998 1997 1998 1997
---- ---- ---- ----
Sales $3,587.0 $3,432.0 $7,032.1 $6,663.1
Net income 207.1 207.6 417.0 366.7
Basic earnings per common share 1.24 1.19 2.49 2.11
Diluted earnings per common share 1.24 1.18 2.48 2.09
Shipments of aluminum products (1) 866 760 1,644 1,480
Shipments of alumina (1) 1,888 1,780 3,811 3,549
<FN>
(1) in thousands of metric tons (mt)
Overview
Alcoa earned $207.1 or $1.24 per common share for the second
quarter of 1998, compared with $207.6 or $1.19 per share, in the
1997 second quarter. For the first half of 1998, earnings were
$417.0, or $2.49 per share, versus $366.7 or $2.11 per share in
the 1997 six-month period. The 1997 first half included special
charges of $1.1 related to asset sales, increases to
environmental reserves and an impairment at a U.S. manufacturing
facility.
The improved earnings level for the first half of 1998 was due to
higher aluminum shipments, resulting in part from the Inespal
acquisition, and a better product mix. Gains from these
improvements were offset by lower aluminum prices, which have
fallen 16% on the London Metal Exchange (LME) since the beginning
of 1998.
AofA's pretax income from operations for the 1998 second quarter
and year-to-date periods was down $34.1 and $50.3, respectively,
from the comparable 1997 periods. Lower realized prices for
alumina and aluminum, partially offset by higher alumina
shipments, were the primary reasons for the declines.
In Brazil, Aluminio's second quarter and year-to-date 1998 pretax
income from operations decreased $15.4 and $12.8, respectively,
from the comparable 1997 periods. Aluminio's results reflect the
effect of divestitures, which reduced revenues by $97.9 from the
1997 six-month period. In addition, lower volumes for ingot and
lower aluminum prices also had a negative effect on pretax
income.
-10-
Consolidated revenues and shipment information by segment
follows.
Alumina and Chemicals Segment
Second quarter ended Six months ended
June 30 June 30
------- -------
1998 1997 1998 1997
---- ---- ---- ----
Alumina and chemicals revenues $ 481 $ 499 $ 974 $ 994
Alumina shipments (000 mt) 1,888 1,780 3,811 3,549
Total revenues for the Alumina and Chemicals segment in the 1998
second quarter fell 4% when compared with the 1997 second
quarter. Year-to-date, revenues decreased 2% from the 1997
period.
Alumina revenues for the 1998 second quarter were down 9% as
realized prices fell 14% and shipments increased 6%. Year-to-
date, revenues decreased 5% as realized prices declined 11% and
shipments rose 7% over the 1997 six-month period. Although
alumina shipments have increased substantially from 1997,
realized prices have declined to a greater degree, resulting in
lower revenues.
Revenues from chemical products rose 4% and 1%, respectively,
from the 1997 second quarter and six-month periods. The
acquisition of Inespal in the 1998 first quarter was the primary
reason for the increases.
The entities jointly owned by Alcoa and WMC Limited of Australia
(WMC), known as Alcoa World Alumina and Chemicals (AWAC),
produced 5,941 mt of alumina during the 1998 six-month period,
compared with 5,088 mt in the comparable 1997 period. Of the
1998 six-month amount, 3,811 mt was shipped to third-party
customers.
Aluminum Processing Segment
Second quarter ended Six months ended
June 30 June 30
------- -------
Product classes 1998 1997 1998 1997
--------------- ---- ---- ---- ----
Shipments (000 mt)
Flat-rolled products 392 369 753 698
Aluminum ingot 302 227 548 457
Engineered products 146 144 295 287
Other aluminum products 26 20 48 38
------ ------ ------ ------
Total 866 760 1,644 1,480
Revenues
Flat-rolled products $1,138 $1,051 $2,210 $1,948
Aluminum ingot 445 379 836 759
Engineered products 672 639 1,313 1,244
Other aluminum products 75 74 139 149
------ ------ ------ ------
Total $2,330 $2,143 $4,498 $4,100
Flat-rolled products - Total flat-rolled products revenue rose 8%
from the 1997 second quarter and 13% from the 1997 year-to-date
period. The increases were due primarily to higher shipments for
sheet and plate along with increased shipments resulting from the
Inespal acquisition by Alcoa in February 1998.
-11-
The majority of revenues and shipments for flat-rolled products
are derived from rigid container sheet (RCS), which is used to
produce aluminum beverage can bodies and can ends. RCS revenues
were up 5% from the 1997 six-month period, but declined 4% when
compared with the 1997 second quarter. In the 1998 second
quarter, shipments fell 5% while prices were up slightly; in the
1998 six-month period realized prices increased 4% while
shipments fell 1%.
Sheet and plate revenues in the 1998 second quarter were up 26%
compared with the 1997 quarter and 27% on a year-to-date basis.
The increases were primarily due to higher shipments, which
increased 29% and 22% from the 1997 quarter and year-to-date
periods. Higher sheet and plate shipments were driven by the
Inespal acquisition along with a strong transportation market.
Aluminum ingot - Revenues for this product were up 17% in the
1998 quarter and 10% in the 1998 six-month period. The increases
are due to higher shipments, with the 1998 quarter rising 34% and
the half-year increasing 20%. Lower shipments from AofA and
Aluminio were more than offset by increased shipments from
Alcoa's European smelters. In the aluminum ingot market, LME
ingot inventories have decreased 15% this year at the same time
that the 3-month LME ingot price has fallen 16%.
Engineered products - These products include extrusions used in
the transportation and construction markets, aluminum forgings
and wire, rod and bar. Revenues from the sale of engineered
products increased 5% in the 1998 second quarter while prices
rose 4%. Year-to-date, revenues and prices were up 6% and 2%,
respectively.
Revenues for extruded products were higher by 16% and 11% from
the 1997 second quarter and six-month periods. Prices rose 3%
and 6% over the same periods, while shipments were up 13% and 4%,
respectively. The primary reasons for the revenue increases are
higher shipments in Europe and higher prices for hard alloy
extrusions, used primarily by the transportation markets.
Revenues from the sale of forged aluminum wheels increased 31%
and 32% from the 1997 quarter and six-month periods. The
increases were primarily a result of shipments from Alcoa's new
European wheels facility, which began operations late in the 1997
second quarter. Prices were essentially unchanged in both
periods.
Other aluminum products - Revenues from sales of other aluminum
products for the 1998 year-to-date period were 7% lower than
those in the 1997 period. Lower sales of aluminum closures, with
revenues decreasing 32% as Alcoa sold its Richmond, In. closure
facility in 1997, were partially offset by higher revenues from
the sale of scrap.
-12-
Nonaluminum Segment
Revenues for the Nonaluminum Segment were $776 in the 1998 second
quarter, down 2% from the 1997 quarter. For the half-year,
revenues of $1,560 were essentially unchanged from the year ago
period. The lack of revenue growth in this segment from a year-
to-date perspective is the result of the sale of a portion of the
cable business in Brazil and lower revenues from building
products. These decreases were offset by a 7% increase in
revenues at Alcoa Fujikura (AFL) and a 13% increase in revenues
in the plastic closures businesses.
Cost of Goods Sold
Cost of goods sold increased $157.9, or 6%, from the 1997 second
quarter. Year-to-date, the increase was $287.1, also 6%. The
increases reflect the effect of acquisitions, higher volumes and
a higher value-added product mix partially offset by the impact
of divestitures. Cost of goods sold as a percentage of revenues
was 76.5%, or .1 points higher than in the 1997 year-to-date
period.
Other Income & Expenses
Other income totaled $18.3 for the 1998 second quarter, a decrease
of $19.4 from the 1997 period. Losses from mark-to-market metal
trading activities increased $22.7 from the 1997 quarter resulting
in the decrease. For the 1998 six-month period, other income fell
to $46.4 again due to higher losses from mark-to-market activities
partially offset by higher interest and equity income.
Selling, general and administrative expenses decreased $6.3 and
$11.5 from the year-ago quarter and six-month periods. Lower
spending, partially offset by the addition of Inespal in the 1998
first quarter, were the primary reasons for the declines.
Interest expense was up $10.3 from the 1997 six-month period. In
January 1998, Alcoa issued $300 of 6.75% bonds due 2028, the net
proceeds of which were used for general corporate purposes.
Additionally, in June 1998, Alcoa issued $200 of 6.125% bonds due
in 2005, and $250 of 6.5% bonds due in 2018. The proceeds from
these two bonds were used to fund the Alumax transaction.
The income tax provision for the period is based on the effective
tax rate expected to be applicable for the full year. The 1998
second quarter rate of 33.5% differs from the statutory rate
primarily because of lower tax rates on foreign income.
Minority interests' share of income from operations decreased 9%
from the 1997 second quarter, primarily due to lower earnings at
Aluminio and AofA, partially offset by an increase in earnings at
AFL.
Commodity Risks
Alcoa is a leading global producer of aluminum ingot and aluminum
fabricated products. Aluminum ingot is an internationally
priced, sourced and traded commodity. The principal trading
market for ingot is the LME. Alcoa participates in this market
by buying and selling forward portions of its aluminum
requirements and output.
-13-
In the normal course of business, Alcoa enters into long-term
contracts with a number of its fabricated products customers. At
December 31, 1997, such contracts totaled approximately 2,093,000
mt. Alcoa may enter into similar arrangements in the future.
In order to hedge the risk of higher prices for the anticipated
metal purchases required to fulfill these long-term customer
contracts, 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, 1998 and December
31, 1997, these contracts totaled approximately 452,000 mt and
1,084,000 mt, respectively.
The futures and options contracts limit the unfavorable effect of
price increases on metal purchases and likewise limit the
favorable effect from price declines. The contracts are with
creditworthy counterparties and are further supported by cash,
treasury bills, or irrevocable letters of credit issued by
carefully chosen banks.
For financial accounting purposes, the gains and losses on the
hedging contracts are reflected in earnings concurrent with the
hedged costs. Alcoa intends to close out the hedging positions
at the time it purchases the metal from third parties, thus
creating the right economic match both in time and price. The
cash flows from these contracts are classified in a manner
consistent with the underlying nature of the transactions.
In addition, Alcoa had 157,000 mt and 259,000 mt of LME contracts
outstanding at June 30, 1998 and December 31, 1997, 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 after-
tax losses of $21.1 and gains of $7.1 at June 30, 1998 and 1997,
respectively.
Alcoa also purchases certain other commodities, such as 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
used to manage transactional exposure to changes in currency
exchange rates. The forward contracts principally cover firm
commitments. Options generally are used to hedge anticipated
transactions.
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.
-14-
Risk Management
All of the aluminum and other commodity contracts, as well as the
various types of financial instruments, are straightforward.
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). It is composed of the chief
executive officer, the president, the chief financial officer and
other officers and employees as 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 derivatives
activities.
Environmental Matters
Alcoa continues to participate in environmental assessments
and cleanups at a number of locations, including at operating
facilities and adjoining properties, at previously owned or
operated facilities and at 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. For example, there
are certain matters, including several related to alleged
natural resource damage or alleged off-site contaminated
sediments, where investigations are ongoing. It is not
possible to determine the outcomes or to estimate with any
degree of certainty the ranges of potential costs for these
matters. However, with the exception of the Massena/Grasse
River and Pt. Comfort/Lavaca Bay locations described below,
based upon available information and current reserves,
management of Alcoa does not believe that it is reasonably
possible that the results of operation could be materially
affected by existing environmental contingencies.
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 US 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. By the end of 1998, Alcoa expects to submit
the results of its studies and recommendations of feasible
remedial alternatives. The costs to complete a remedy are
not currently capable of estimation since they will depend on
the remedial method chosen. Alcoa is also aware of a natural
resource damage claim that may be asserted by certain
federal, state and tribal natural resource trustees at this
location.
-15-
Pt. Comfort/Lavaca Bay - In 1990, Alcoa began discussions
with certain state and federal natural resource trustees
concerning alleged releases of mercury from its Point
Comfort, Texas, facility to 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. By
the end of 1998, Alcoa expects to submit certain studies,
including a remedial investigation, a baseline risk
assessment and a feasibility study. Alcoa has proposed and
recently has received approval from EPA to fortify an
offshore dredge disposal island, potentially including the
removal of certain mercury contaminated sediments adjacent to
Alcoa's plant in and near routinely dredged navigation
channels. The probable and estimable costs of these actions
are fully reserved. Additional costs to complete a remedy
are not capable of estimation due to the inability to
determine whether and where additional amounts of material
might require removal. Since the order agreed to with EPA,
Alcoa and the natural resource trustees have continued
efforts to understand natural resource injury and ascertain
appropriate restoration alternatives. That process is
expected to be completed within the next 12 to 24 months.
Alcoa's remediation reserve balance at the end of the 1998
second quarter was $219.6 (of which $56.3 was classified as a
current liability) and reflects the most probable costs to
remediate identified environmental conditions for which costs
can be reasonably estimated. About 23% of the reserve
relates to Alcoa's Massena, New York plant site and 21%
relates to Alcoa's Pt. Comfort, Texas plant site.
Remediation expenses charged to the reserve during the 1998
second quarter were $10.7. They include expenditures
currently mandated as well as those not required by any
regulatory authority or third party.
Included in annual operating expenses are the recurring costs
of managing hazardous substances and environmental programs.
These costs are estimated to be about 2% of cost of goods
sold.
Liquidity and Capital Resources
Cash from Operations
Cash from operations during the 1998 six-month period was $921.0,
a $12.4 decrease from the comparable 1997 period. The primary
driver of the decrease was a $240.0 cash payment on a long-term
alumina supply contract that was received in 1997. The effect of
this item was partially offset by higher earnings, lower working
capital requirements and changes in deferred hedging contracts.
Financing Activities
Financing activities used $807.7 of cash during the first six
months of 1998. This included $293.5 to repurchase 3,962,300
shares of the Company's common stock. Dividends paid to
shareholders were $126.0 in the 1998 six-month period, an
increase of $42.7 over the 1997 period. The increase was
primarily due to Alcoa's bonus dividend program, which paid out
12.5 cents in the 1998 first and second quarters above the base
dividend of 25 cents. There was no bonus dividend in 1997.
Dividends paid and return of capital to minority interests
totaled $117.1 in the 1998 six-month period versus $257.5 in the
comparable 1997 period. In the 1997 period, AWAC and AofA
returned funds to their investors, resulting in the decline.
-16-
In the 1998 six-month period, Alcoa issued $1,593 of long-term
debt. The debt was comprised principally of $675 of commercial
paper, $250 of term debt due in 2018, $200 of term debt due in
2005 and $300 of thirty year bonds due in 2028. The net proceeds
were used for the Alumax transaction and general corporate
purposes. Debt as a percentage of invested capital was 35.8% at
the end of the 1998 second quarter compared with 19.9% at year-
end 1997.
Investing Activities
Investing activities used $1,694.5 during the 1998 six-month
period, compared with $254.6 in the 1997 period. Alcoa's
purchase of 51% of the outstanding stock of Alumax was the
primary use of funds in the six-month period. In addition,
capital expenditures totaled $366.5, down $42.1 from the 1997
period. The 1997 six-month period also included $193.2 from the
sale of Alcoa's Caradco, Arctek, Alcoa Composites, Norcold,
Dayton Technologies and Richmond, Indiana facilities.
Accounting Rule Change
A new accounting rule was issued by the American Institute of
CPA's in April, 1998. The rule, "Reporting on the Costs of Start-
Up Activities," requires that costs incurred to open a new
facility, introduce a new product, commence a new operation or
other similar activities be expensed as incurred. Management
does not believe that this standard, which will be adopted for
1999, will have a material impact on Alcoa's financial
statements.
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. The standard is required
to be adopted by Alcoa for the 2000 first quarter. The Company
believes that SFAS 133 will have a material impact on its
financial statements as its current aluminum, foreign exchange
and interest rate derivative contracts will be recorded on the
balance sheet at fair value. Management is currently assessing
the details of how the standard will impact its financial
statements and is preparing a plan of implementation.
Year 2000 Issue
Alcoa, assisted by outside consultants, has conducted a review of
its administrative and process control computer systems to
identify areas that are affected by the "Year 2000" issue. The
Year 2000 issue is the result of computer programs being written
using two digits (rather than four) to define the applicable
year. This could result in computational errors as dates are
compared across the century boundary. The vast majority of the
Company's products do not contain embedded systems, such as
microprocessors or other electronic components, and thus are not
susceptible to Year 2000 issues in their operation.
Plans detailing the tasks and resources required to complete Year
2000 readiness for the Company's administrative and process
control computer systems are being concluded during the 1998
third quarter. The Company's process control systems include
monitoring and control devices used in plants and other operating
locations. Many of these systems are common across operating
locations, resulting in information sharing and efficiencies in
assessment and remediation. The total costs associated with any
required modifications for these critical systems is not expected
to be material to the Company's financial position.
-17-
The Company is assessing supply continuity through a survey of
its supplier base, with key suppliers targeted for direct
meetings. In addition, the Company is in the process of
integrating Alumax's Year 2000 efforts into its overall
implementation plan.
An unexpected Year 2000 problem could result in an interruption
to certain normal business activities or operations. However,
based on the work completed to date and the expected completion
of its Year 2000 project, the Company believes that significant
interruptions will not be encountered.
-18-
Alcoa and subsidiaries
Summarized unaudited consolidated financial data for Aluminio, a
Brazilian subsidiary effectively owned 59% by Alcoa, follow.
June 30 December 31
------- -----------
1998 1997
---- ----
Cash and short-term investments $ 316.7 $ 305.8
Other current assets 385.3 389.8
Properties, plants and equipment, net 811.0 825.4
Other assets 242.9 233.1
-------- ---------
Total assets 1,755.9 1,754.1
-------- ---------
Current liabilities 292.3 316.8
Long-term debt 399.6 403.2
Other liabilities 89.0 88.5
-------- ---------
Total liabilities 780.9 808.5
-------- ---------
Net assets $ 975.0 $ 945.6
======== =========
Second quarter ended Six months ended
June 30 June 30
------- -------
1998 1997 1998 1997
---- ---- ---- ----
Revenues (1) $ 219.8 $ 316.3 $ 493.2 $ 604.5
Costs and expenses (212.9) (293.5) (462.0) (559.3)
Translation and exchange adjustments .5 - 1.1 (.1)
Income tax (expense) benefit (1.4) (4.5) (2.9) (9.0)
------- ------ ------ ------
Net income $ 6.0 $ 18.3 $ 29.4 $ 36.1
======= ====== ====== ======
Alcoa's share of net income $ 3.5 $ 10.8 $ 17.3 $ 21.3
======= ====== ====== ======
<FN>
(1) Revenues from Alcoa and its subsidiaries, the terms of which were
established by negotiations between the parties, follow.
Second quarter ended June 30: 1998 - $3.5, 1997 - $2.5
Six months ended June 30: 1998 - $5.5, 1997 - $4.9
-19-
Alcoa and subsidiaries
Summarized unaudited consolidated financial data for AofA, an
Australian subsidiary, 60% owned by Alcoa, follow.
June 30 December 31
1998 1997
---- ----
Cash and short-term investments $ 6.7 $ 9.5
Other current assets 401.5 386.1
Properties, plants and equipment, net 1,332.2 1,385.9
Other assets 84.5 86.2
------- -------
Total assets 1,824.9 1,867.7
------- -------
Current liabilities 277.2 304.1
Long-term debt 262.5 225.3
Other liabilities 359.0 361.6
------- -------
Total liabilities 898.7 891.0
------- -------
Net assets $ 926.2 $ 976.7
======= =======
Second quarter ended Six months ended
June 30 June 30
------- -------
1998 1997 1998 1997
---- ---- ---- ----
Revenues (1) $ 411.2 $ 504.5 $ 853.0 $ 996.2
Costs and expenses (324.2) (383.4) (654.8) (747.7)
Income tax (expense) benefit (33.4) (42.7) (73.2) (89.6)
------- ------- ------- -------
Net income $ 53.6 $ 78.4 $ 125.0 $ 158.9
======= ======= ======= =======
Alcoa's share of net income $ 32.2 $ 47.0 $ 75.0 $ 95.3
======= ======= ======= =======
<FN>
(1) Revenues from Alcoa and its subsidiaries, the terms of which were
established by negotiations between the parties, follow.
Second quarter ended June 30: 1998 - $15.3, 1997 - $14.90
Six months ended June 30: 1998 - $28.4, 1997 - $27.6
-20-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Region 5 of the United States EPA has referred various
alleged environmental violations at Alcoa's Warrick Operations to
the civil division of the DOJ. The alleged violations stem from
an April 1997 multi-media environmental inspection of Warrick
Operations by EPA. The alleged violations relate to water permit
exceedances as reported on monthly discharge monitoring reports,
wastewater toxicity issues and alleged opacity violations. Alcoa
agreed to enter into a tolling agreement to suspend the statute
of limitations related to the alleged violations in this matter
on March 16, 1998, in order to facilitate settlement discussions
with DOJ and EPA which are ongoing at this time.
On May 13, 1998, an action was filed in the Superior Court
of Riverside County, California allegedly on behalf of more than
500 plaintiffs who currently live, or formerly lived, in the Glen
Avon, California area. The plaintiffs, who claim to have
suffered personal injuries, both physical and emotional, as well
as property damage, as a result of air and water contamination
due to the escape of toxic wastes from the Stringfellow disposal
site. The complaint, which names Alcoa, Alumax and more than 130
other companies as defendants, has not been served on either
Alcoa or Alumax and no investigation or discovery regarding the
claims asserted has been conducted.
As previously reported, The New York State Department of
Environmental Conservation (DEC), in a letter dated October 10,
1997, notified Alcoa that its Massena, New York facility
allegedly is in violation of certain air pollution control
requirements. The allegations included operation of certain
emission sources without permits, non-compliance with permitting
and control standards for sulfur dioxide and violation of
requirements related to the deposition of fluoride on vegetation.
In early March 1998, the Company agreed to an Order on Consent
with the DEC. Resolution includes a civil penalty of $57,500.
The settlement became effective on March 6, 1998.
On August 17, 1995, Alumax Inc. filed suit in the United
States District Court for the Eastern District of Arkansas
against Hot Metal Molding, Inc. alleging infringement of a
process patent held by Alumax that is used in semi-solid forming
applications. The litigation was expanded by order of the Court
to include Ormet Primary Aluminum Corporation ("Ormet"), the
exclusive North American licensee of Pechiney Corporation's
technology for casting thixotropic billet, and by Alumax's motion
to add certain subsidiaries and affiliates of Buhler AG, a Swiss
manufacturer of die casting machines as defendants in the action.
Ormet filed counterclaims alleging that the patent is invalid,
void and unenforceable and seeking a declaratory judgment that
the patent would not be infringed by the use of Ormet's billet in
any diecasting application. On October 3, 1997, certain
defendants filed counterclaims against Alumax, alleging
violations of the Sherman and Clayton Acts for which they seek
injunctive relief and treble damages in an unspecified amount.
The Court granted all parties leave to amend their pleadings in
January 1998, and trial was scheduled to begin in early July
1998. On May 14, 1998, Alumax and Hot Metal Molding entered into
a settlement agreement whereby Hot Metal Molding was granted a
non-exclusive license, retroactively to January 1, 1992, in
respect of the patent and certain other Alumax patents. On June
14, 1998, Alumax entered into a similar agreement with Buhler AG.
Hot Metal Molding and Buhler AG dismissed all claims and counter
claims. Alumax voluntarily dismissed its contributory
infringement claim against Ormet and moved to challenge Ormet's
standing to pursue antitrust counterclaims against Alumax.
Although the Court denied Alumax's motion at a hearing on June
26, 1998, Alumax intends to seek reconsideration of that motion.
-21-
In December 1996, JMB Realty Corporation (JMB) filed a
complaint for declaratory relief and damages against Alcoa and
two subsidiaries, Alcoa Properties, Inc. and Alcoa Securities
Corporation in the Circuit Court of Cook County, Illinois. JMB
claimed that it was entitled to a rebate of approximately $80
million (including interest through mid-1998) from Alcoa arising
from a stock transaction that occurred in 1986 in which a
subsidiary of JMB purchased the outstanding stock of
substantially all of Alcoa's real estate holding subsidiaries.
JMB also sought an order canceling three promissory notes that it
made and delivered to Alcoa. JMB owed Alcoa approximately $60
million on the notes (including interest through mid-1998). In
response to JMB's suit, Alcoa denied that any rebate is owed to
JMB, and counterclaimed for collection of the outstanding balance
due on the notes. In June 1998, the Court granted a motion for
partial summary judgment filed by Alcoa, and entered judgment on
the notes against JMB. Later that month, the parties settled the
issues between them. The settlement led to a net payment to
Alcoa in June 1998.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of Alcoa shareholders held on May 8, 1998,
Hugh M. Morgan was elected, and Henry B. Schacht and Franklin A.
Thomas were reelected, as directors of Alcoa to serve for three-
year terms. Votes cast for Mr. Morgan were 143,640,315 and votes
withheld were 1,366,057; votes cast for Mr. Schacht were
143,677,549 and votes withheld were 1,328,823; and votes cast for
Mr. Thomas were 143,614,081 and votes withheld were 1,392,291.
Also at that annual meeting, a proposal to approve an amendment
to Alcoa's Articles of Incorporation and a proposal to approve an
amendment to Alcoa's Long Term Stock Incentive Plan were adopted.
Total votes cast for the amendment to the Articles of
Incorporation were 123,048,366, votes cast against were
21,638,718 and there were 319,288 abstentions. Total votes cast
for the amendment to the Long Term Stock Incentive Plan were
110,926,065, votes cast against were 23,410,374 and there were
481,767 abstentions. Additionally, a proposal submitted by a
shareholder regarding certain charitable contributions by Alcoa
was defeated. Total votes cast for the shareholder proposal were
2,401,623, votes cast against were 127,769,063 and there were
4,647,520 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. Articles of the Registrant as amended
12. Computation of Ratio of Earnings to Fixed Charges
15. Independent Accountants' letter regarding unaudited
financial information
27. Financial Data Schedule
99. Unaudited Pro Forma Condensed Consolidated Financial
Statements
(b) Alcoa filed a Form 8-K, dated June 10, 1998, with the
Securities and Exchange Commission that included Unaudited Pro
Forma Condensed Consolidated Financial Statements prepared in
connection with the acquisition by Alcoa of Alumax Inc. Alcoa
filed a Form 8-K on July 15, 1998 that included three press
releases issued by Alcoa relating to second quarter earnings, a
quarterly common stock dividend and cost-cutting goals,
respectively. Alcoa also filed a Form 8-K on July 31, 1998 that
included a press release issued by Alcoa announcing the
completion of the Alumax merger.
-23-
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
ALUMINUM COMPANY OF AMERICA
August 5, 1998 By /s/ RICHARD B. KELSON
Date Richard B. Kelson
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
August 5, 1998 By /s/ EARNEST J. EDWARDS
Date Earnest J. Edwards
Senior Vice President and Controller
(Chief Accounting Officer)
-24-
EXHIBITS
Page
----
3. Articles of the Registrant as amended
12. Computation of Ratio of Earnings to Fixed Charges 26
15. Independent Accountants' letter regarding unaudited 27
financial information
27. Financial Data Schedule
-25-