EXHIBIT 13
SELECTED FINANCIAL DATA
(dollars in millions, except per-share amounts and ingot
prices)
1998 1997 1996 1995 1994
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Sales $ 15,339.8 $ 13,319.2 $ 13,061.0 $ 12,499.7 $ 9,904.3
Income before extraordinary loss* 853.0 805.1 514.9 790.5 443.1
Extraordinary loss^ -- -- -- -- (67.9)
Net income* 853.0 805.1 514.9 790.5 375.2
Basic earnings per common share
^^
Before extraordinary loss^ 2.44 2.33 1.47 2.22 1.24
Net income 2.44 2.33 1.47 2.22 1.05
Diluted earnings per common
share^^
Before extraordinary loss^ 2.42 2.31 1.46 2.20 1.23
Net income 2.42 2.31 1.46 2.20 1.04
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Alcoa's average realized price
per pound for aluminum ingot .67 .75 .73 .81 .64
Average U.S. market price per
pound for aluminum ingot
(Metals Week) .66 .77 .71 .86 .71
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Cash dividends paid per common
share^^ .75 .488 .665 .45 .40
Total assets 17,462.5 13,070.6 13,449.9 13,643.4 12,353.2
Long-term debt (noncurrent) 2,877.0 1,457.2 1,689.8 1,215.5 1,029.8
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<FN>
*Includes net after-tax gains of $43.9 in 1997, and net after-tax charges of
$122.3 in 1996, $10.1 in 1995 and $50.0 in 1994. See Note D to the financial
statements for additional detail. Also included in 1994 is a gain of $300.2
related to the Alcoa/WMC transaction.
^The extraordinary loss relates to the early retirement of debentures.
^^All per-share amounts have been restated to reflect the two-for-one stock
split declared on January 8, 1999.
28
RESULTS OF OPERATIONS
(dollars in millions, except share amounts and ingot prices;
shipments in thousands of metric tons (mt); all per-share
amounts have been restated to reflect the two-for-one
stock split declared on January 8, 1999)
EARNINGS SUMMARY
Alcoa's 1998 financial highlights include:
> Net income of $853, 6% above 1997;
> Aluminum shipments of 3,951 mt, up 34% from 1997;
> Revenues of $15,340, driven by the record volumes noted
above; and
> Return on average shareholders' equity of 16.3%.
Improved financial results for 1998 relative to 1997
were the result of higher volumes, aided in part by the
Alumax and Inespal acquisitions, and continued operating
improvements. Partially offsetting these positive factors
were lower overall aluminum and alumina prices and the
impact of higher debt levels.
Alcoa's improved financial results for 1997 also were
strong, as summarized below:
> Net income of $805 ($761 before special items) was
56% above 1996;
> Aluminum shipments of 2,956 mt were the second highest
in company history
and 4% above 1996;
> Revenues of $13,319 increased 2% from 1996; and
> Return on average shareholders' equity rose 56% to
18.1%.
Alcoa's improved 1997 financial performance came in spite
of the fact that fabricated aluminum and alumina prices
were lower than 1996 and well below historic highs. Revenues
increased 2% above 1996 levels, as higher volumes more
than offset the loss of revenues related to the sale of
noncore businesses.
SEGMENT INFORMATION
In 1998, Alcoa adopted SFAS 131, "Disclosures about Segments
of an Enterprise and Related Information." Alcoa's operations
consist of four worldwide segments: Alumina and chemicals,
Primary metals, Flat-rolled products and Engineered products.
Alcoa's management reporting system measures the after-
tax operating income (ATOI) of each segment. Nonoperating
items, such as interest income, interest expense, foreign
exchange gains/losses 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. Segment assets
exclude cash, cash equivalents, short-term investments
and all deferred taxes. Segment assets also exclude corporate
items such as fixed assets, LIFO reserve, goodwill allocated
to corporate and other amounts.
Segment ATOI totaled $1,303 in 1998 compared with $1,265
in 1997 and $858 in 1996. See Note O to the financial
statements for additional information. The following discussion
provides shipment, revenue and ATOI data for each segment
for the years 1996 through 1998.
29
I. ALUMINA AND CHEMICALS
1998 1997 1996
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Third-party alumina shipments
(mt) 7,130 7,223 6,406
Third-party sales $1,847 $1,978 $1,963
Intersegment sales 832 634 617
After-tax operating income 318 302 340
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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 is
processed into industrial chemical products. Approximately
two-thirds of the third-party sales from this segment
are derived from alumina. In 1998, third-party sales of
alumina fell 14% from 1997, as realized prices fell 13%
and shipments fell 1%. Lower third-party shipments, as
well as higher intersegment sales in 1998, were a direct
result of the Alumax acquisition. Previously, sales of
alumina to Alumax were classified as third-party revenues;
these sales are now recorded as intersegment. Including
intersegment sales, shipments were up in 1998. Third-party
revenues from alumina in 1997 were 5% higher than 1996,
as a 13% increase in shipments was partially offset by
lower realized prices.
Third-party sales of alumina-based chemical products were
unchanged compared with 1997, as higher shipments, aided
by acquisitions, were offset by lower prices. In 1997,
third-party sales from these products fell 3% from 1996,
as lower volumes offset higher realized prices.
Despite lower prices, segment ATOI in 1998 rose 5% over
1997. Lower operating costs and the impact of the Inespal
acquisition were partly offset by lower realized prices.
In 1997, ATOI was $302, down 11% from 1996. The decrease
was the result of lower earnings from alumina operations,
which were negatively impacted by lower realized prices.
The effect of lower alumina prices was partially offset
by lower labor costs, improved productivity and improved
results from Alcoa's chemicals operations.
In 1997, Alcoa World Alumina and Chemicals (AWAC) received
an advance payment of $240 related to a long-term alumina
supply contract with Sino Mining Alumina Ltd (SMAL). The
contract entitles SMAL to purchase 400,000 mt of alumina
per year for thirty years. SMAL has the option to increase
its alumina purchases as its needs grow. Per-ton payments
also are made under the terms of the agreement.
In 1997, AWAC announced a 440,000 mt expansion of its
Wagerup alumina refinery in Western Australia. Construction
is expected to be complete in the 1999 second quarter.
II. PRIMARY METALS
1998 1997 1996
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Third-party aluminum shipments
(mt) 1,392 940 976
Third-party sales $2,105 $1,600 $1,580
Intersegment sales 2,283 1,966 1,900
After-tax operating income 331 417 313
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This group's focus is Alcoa's worldwide smelter system.
Primary metals receives alumina from the alumina and chemicals
segment
30
and produces aluminum ingot to be used by a variety of
Alcoa's other segments, as well as sold to outside customers.
In addition to ingot, powder and scrap are also sold by
this segment. Aluminum ingot produced by Alcoa and used
internally is transferred to other segments at prevailing
market prices. Third-party sales of ingot, which make
up the majority of this segment's revenues, rose 32% from
1997. The increase was the result of additional revenues
from the smelting operations of acquired companies, which
were partially offset by an 11% decline in realized prices.
In 1997, third-party ingot sales increased 5% from 1996,
as prices climbed 3% and shipments rose 2%.
Alcoa's average realized price for ingot in 1998 was 67
cents per pound, compared with 75 cents in 1997 and 73
cents in 1996. This compares with average prices on the
London Metal Exchange (LME) of 63 cents per pound in 1998,
74 cents in 1997 and 70 cents in 1996.
Alcoa operated its worldwide smelting system at 88% of
rated capacity in 1998 and, since 1994, has had 450,000
mt of smelting capacity idle.
Intersegment sales increased in 1998, relative to 1997,
due to acquisitions. Alumax and Inespal sourced the majority
of their metal needs internally, driving the increase
in intersegment sales.
Primary metals ATOI fell 21% in 1998 from 1997, as lower
metal prices more than offset the effect of acquired companies.
Lower operating costs in 1998 helped ease the decline,
muting the impact of lower prices. ATOI in 1997 rose 33%
over 1996, as higher ingot prices and shipments, along
with lower costs, resulted in improved performance.
III. FLAT-ROLLED PRODUCTS
1998 1997 1996
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Third-party aluminum shipments
(mt) 1,764 1,469 1,359
Third-party sales $4,900 $4,188 $4,082
Intersegment sales 59 53 21
After-tax operating income 306 268 160
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This segment's principal business is the production and
sale of aluminum sheet, plate and foil. This segment includes
rigid container sheet (RCS), which is used to produce
aluminum beverage cans, and mill products used in the
transportation and distributor markets. Slightly less
than half of the third-party shipments and sales in this
segment are derived from the sale of RCS, while an additional
one-third is obtained from mill products. Other flat-rolled
products, such as foil, comprise the remainder of this
segment. Third-party sales from this segment in 1998 increased
17% over 1997, as the impact from acquisitions was partially
offset by a 2% decline in prices. In 1997, third-party
sales rose 3% from 1996, as an 8% increase in shipments
more than offset lower prices.
Third-party sales from RCS were essentially unchanged
in 1998 from 1997, as were shipments and prices. For the
industry as a whole, 1998 shipments of beverage cans by
can manufacturers rose 2.2% from 1997. RCS sales in 1997
were down 4% from the previous year, primarily due to
the 1996 sale of Alcoa of Australia's (AofA) rolled products
division, which resulted in a 29,500 mt loss of shipments
for 1997 relative to 1996. Prices were down slightly from
1996, due to lower underlying metal prices.
Third-party sales from mill products were up 21% over
1997. Shipments, aided by acquisitions, increased 23%,
while prices fell 2%. Overall mill products prices were
lower, as lower volumes of higher priced transportation-
related products were offset by higher volumes of lower
value-added products. 1997 third-party sales increased
11% from 1996 as a result of a 10% increase in shipments.
This segment incurred a special item charge in 1996 totaling
$26. The net charge related to severance costs for employees
who voluntarily left the company and for permanent layoff
costs.
ATOI for flat-rolled products rose 14% in 1998, as increases
from mill products and foil were partially offset by declines
in RCS. RCS ATOI was down, as higher costs for labor and
services reduced margins. Mill products ATOI rose, as
acquisitions and higher prices for products used in the
transportation market offset losses related to the production
and sale of computer memory disks. ATOI in 1997 rose 68%
from 1996, as the U.S. RCS business and Alcoa's mill products
operations benefited from strong demand and lower costs.
IV. ENGINEERED PRODUCTS
1998 1997 1996
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Third-party aluminum shipments
(mt) 729 441 456
Third-party sales $3,110 $2,078 $1,869
Intersegment sales 11 9 15
After-tax operating income 184 100 46
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This segment includes hard and soft alloy extrusions,
aluminum forgings and wire, rod and bar. These products
serve the transportation, construction and distributor
markets. Third-party shipments were up 65% from 1997,
driving a 50% increase in third-party sales. Acquisitions
and higher shipments of forged wheels were responsible
for the increase in shipments. Average realized prices
for engineered products for the 1998 period fell 10%,
to $1.93 per pound, primarily due to the addition of the
Alumax extrusion businesses in the 1998 third quarter.
These businesses produce primarily soft alloy extrusions,
which have a lower value-added, resulting in a reduction
in average realized prices. Third-party sales in 1997
rose 11% from 1996, as prices rose 14%.
Third-party sales of extruded products were up 65% from
1997, as shipments, aided by acquisitions, increased 91%
from 1997 levels. Partially offsetting higher shipments
were lower soft alloy prices. In 1997, extruded products
revenues increased 12% from 1996, as shipments increased
19%, but prices fell 6%. Prices for hard alloy extrusions
were up 7% from 1996; however, lower prices for soft alloy
extrusions in the U.S. and in parts of Europe more than
offset the increases.
Forged wheel sales in 1998 rose 32% from 1997, as shipments,
up 38%, continue to rise. A portion of the increase is
due to Alcoa's new wheel facility in Hungary, which began
operations in September 1997. This facility is operating
at capacity, as European demand
31
for forged wheels continues to be strong. Also contributing
to the increase in shipments were higher sales of forged
automotive wheels, driven by strong demand for sport utility
vehicles and light trucks. Shipments in 1997 rose 21%
from 1996, generating an 18% increase in revenues.
Engineered products' 1998 ATOI rose 84% over the comparable
1997 period. The increase was due to acquired companies,
a gain on the sale of Alcoa's interest in Alcotec, a wire
fabricator, and improved operating results from European
extrusion facilities. Also contributing to the increase
were higher shipments of forged wheels. Results in 1997
more than doubled those recorded in 1996. Higher revenues
from extruded products and wire, rod and bar, along with
improved ATOI from European operations, drove the increase.
Also adding to the rise in ATOI was improved performance
related to forged aerospace products.
V. OTHER
1998 1997 1996
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Third-party aluminum shipments
(mt) 66 106 50
Third-party sales $3,362 $3,458 $3,567
Intersegment sales -- -- --
After-tax operating income 165 177 (.9)
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This category includes Alcoa Fujikura Ltd. (AFL), which
produces electrical components for the automotive industry
along with telecommunications products. In addition, Alcoa's
aluminum and plastic closures operations and Alcoa's residential
building products operations are included in this group.
Third-party sales from this group were down 3% from 1997,
as higher sales of automotive electrical components were
more than offset by the loss of revenues from the sale
of Alcoa Aluminio's cable business in late 1997. A similar
drop in third-party sales was experienced in 1997 versus
1996, as improved results from automotive electrical components
were more than offset by the loss of revenues from the
sale of certain noncore businesses.
Third-party sales at AFL increased 7% in 1998, due to
higher volumes, while prices declined slightly. This came
on top of an 18% volume related revenue gain in 1997,
compared with 1996. Closures revenues for 1998 fell 1%
compared with 1997, partially reversing a 15% increase
in 1997 over 1996.
This group incurred a special item gain of $71 in 1997.
The gain was the result of the sale of various businesses,
a majority interest in Alcoa's Brazilian cable business,
and land in Japan. In 1996, this segment had a special
item charge of $104. The net charge relates to the Alcoa
Electronic Packaging (AEP) shutdown, along with severance
costs for employees who voluntarily left the company and
for permanent layoff costs.
ATOI for this group fell 7% from 1997, as improved results
at AFL, along with a gain from the sale of Alcoa's Australian
gold operations, were more than offset by special item
gains in 1997 versus no special items in 1998. After-tax
operating income in 1997 increased $178 from 1996, due
to improved performance by AFL. Also contributing to the
turnaround were special items, which resulted in gains
in 1997 versus a substantial loss in 1996.
SPECIAL ITEMS
There were no special items recorded in 1998. Special
items in 1997 resulted in a net gain of $96 ($44 after
tax and minority interests, or 13 cents per basic share).
The fourth quarter sale of a majority interest in Alcoa's
Brazilian cable business and land in Japan generated gains
of $86. In addition, the sale of equity securities resulted
in a gain of $38, while the divestiture of noncore businesses
provided $25. These gains were partially offset by charges
of $53, related to environmental and impairment matters.
Included in 1996 income from operations was a charge of
$199 ($122 after tax and minority interests, or 35 cents
per basic share) consisting of several items. A net severance
charge of $96, which included pension and OPEB curtailment
credits of $75, related to incentive costs for employees
who voluntarily left the company and for permanent layoff
costs. In addition, the shutdown of AEP resulted in a
charge of $65, related primarily to asset write-downs.
Impairments at various manufacturing locations added another
$38 to special items in 1996.
COSTS AND OTHER
COST OF GOODS SOLD -- Cost of goods sold rose $1,649,
or 16%, to $11,805 in 1998. This followed a 2% increase
to $10,156 in 1997 from 1996. The 1998 increase was primarily
due to higher volumes of $1,800, which related primarily
to acquired companies. Offsetting a portion of the acquisition-
driven increases were cost and operating improvements
approaching $200. The $190 increase in 1997, relative
to 1996, was due to $175 of higher volumes partially offset
by the absence of costs associated with divested businesses.
Additionally, higher material costs of $155 were nearly
offset by cost improvements of $140.
SELLING AND GENERAL ADMINISTRATIVE EXPENSES -- S&GA expenses
increased 15% to $769 in 1998. However, as a percentage
of revenue, S&GA was unchanged from 1997 at 5%. The higher
1998 S&GA total was a result of acquisitions, partially
offset by cost reductions. These expenses totaled $671
in 1997, down $38 or 5% from 1996. The decrease was the
result of lower salary compensation costs resulting from
a reduction in the number of employees at U.S. aluminum
operations. Additionally, lower costs resulting from the
divestiture of noncore businesses also had a positive
impact.
RESEARCH AND DEVELOPMENT EXPENSES -- R&D expenses of $128
in 1998 were down 10% from 1997 on top of a 13% decline
in 1997 from 1996. A reduction in R&D personnel was primarily
responsible for lower spending on research in the metals,
castings, closures and alumina businesses.
INTEREST EXPENSE -- Interest expense rose $57 to $198
in 1998 from 1997. The increase was the result of 1998
borrowings of over $1,850, the proceeds of which were
used primarily to fund acquisitions.
32
Interest expense increased $7 in 1997 from 1996 as a result
of the full-year effect of Aluminio's 1996 debt offering
and higher debt levels in 1997 at Alcoa of Australia.
INCOME TAXES -- Alcoa's effective tax rate in 1998 was
32%, three percentage points below the statutory rate
of 35%. The lower rate is primarily due to lower taxes
on foreign income.
Alcoa's effective tax rate in 1997 was 33%, two percentage
points below the statutory rate of 35%. The lower rate
is primarily due to the favorable tax effect of certain
special items.
The 1996 effective tax rate was 33.3% and differs from
the statutory rate due to the recognition of a tax benefit
resulting from reversal of the valuation allowance on
deferred tax assets at Suriname Aluminum Company, partially
offset by state taxes on income.
OTHER INCOME/FOREIGN CURRENCY -- Other income declined
to $150 in 1998, an 8% decrease from 1997. The majority
of the change was due to increased losses from marking-
to-market certain aluminum commodity contracts. Lower
interest income also contributed to the decline. Offsetting
a portion of these negative factors were $21 of increased
gains related to asset sales, $8 of higher equity income,
and a positive swing in foreign exchange. Other income
totaled $163 in 1997, more than double the 1996 amount.
Reduced losses from marking-to-market aluminum commodity
contracts and higher equity and interest income were responsible
for the improvement.
Exchange gains (losses) included in other income were
$(3.7) in 1998, $(9.8) in 1997 and $3.1 in 1996. The total
impact on net income, after taxes and minority interests,
was $(8.0) in 1998, $6.9 in 1997 and $(.3) in 1996.
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 the U.S., Alcoa is net metal short and is subject to
the risk of higher aluminum prices for the anticipated
metal purchases required to fulfill the long-term customer
contracts noted above. 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 December 31, 1998 and 1997, these contracts
totaled
33
approximately 933,000 mt and 1,084,000 mt, respectively.
These contracts act to fix the purchase price for these
metal purchase requirements, thereby reducing Alcoa's
risk to rising metal prices.
A hypothetical 10% change from the 1998 year-end, three-
month LME aluminum ingot price of $1,244 per mt would
result in a pretax gain or loss to future earnings of
$110 related to all of the futures and options contracts
noted above. However, it should be noted that any change
in the value of these contracts, real or hypothetical,
would be significantly offset by an inverse change in
the value of the underlying metal purchase transactions.
Earnings were selected as the measure of sensitivity due
to the historical relationship between aluminum ingot
prices and Alcoa's earnings. The hypothetical change of
10% was calculated using a parallel shift in the existing
December 31, 1998 forward price curve for aluminum ingot.
The price curve takes into account the time value of money,
as well as future expectations regarding the price of
aluminum ingot. The model also assumes there will be no
aluminum smelter capacity restarted by Alcoa.
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 29,000 mt and 259,000 mt of futures and options contracts
outstanding at year-end 1998 and 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 charges to earnings of $45 in 1998,
$13 in 1997 and $57 in 1996. A hypothetical 10% change
in aluminum ingot prices from the year-end 1998 level
of $1,244 per mt would result in a pretax gain or loss
of $3 related to these positions. The hypothetical gain
or loss was calculated using the same model and assumptions
noted earlier.
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. For additional
information on financial instruments, see Notes A and
T to the financial statements.
FOREIGN EXCHANGE RISKS -- 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. A hypothetical
10% change in applicable 1998 year-end forward rates would
result in a pretax gain or loss of approximately $135
related to these positions. However, it should be noted
that any change in value of these contracts, real or hypothetical,
would be significantly offset by an inverse change in
the value of the underlying hedged item. The model assumes
a parallel shift in the forward curve for the applicable
currencies and includes the foreign currency impacts of
Alcoa's cross-currency interest rate swaps. See Notes
A and T for information related to the accounting policies
and fair market values of Alcoa's foreign exchange contracts
at December 31, 1998 and 1997.
In early 1999, Brazil experienced a devaluation of its
currency, the real. Based on information currently available,
Alcoa does not believe that the devaluation will have
a material impact on Alcoa's 1999 results of operations.
INTEREST RATE RISKS -- Alcoa 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. At December 31, 1998 and 1997, Alcoa
had $3,489 and $1,952 of debt outstanding at effective
interest rates of 6% and 7%, respectively, after the impact
of interest rate swaps and caps is taken into account.
A hypothetical change of 10% in Alcoa's effective interest
rate from year-end 1998 levels would increase or decrease
interest expense by $21. The interest rate effect of Alcoa's
cross-currency interest rate swaps has been included in
this analysis. For more information related to Alcoa's
use of interest rate instruments, see Notes A and T.
RISK MANAGEMENT -- All of the aluminum and other commodity
contracts, as well as the various types of financial instruments,
are straightforward and are 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 president, 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.
MATERIAL LIMITATIONS -- The disclosures, with respect
to aluminum prices and foreign exchange risk, do not take
into account the underlying anticipated purchase obligations
and the underlying transactional foreign exchange exposures.
If the underlying items were included in the analysis,
the gains or losses on the futures and options contracts
may be offset. Actual results will be determined by a
number of factors that are not under Alcoa's control and
could vary significantly from those disclosed.
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
34
for environmental remediation costs or damages when a cleanup
program becomes probable and the costs or damages can be
reasonably estimated. For additional information, see Notes A
and U to the financial statements.
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 ranges of potential costs for certain
matters. For example, there are issues related to Alcoa's
Massena, New York, and Pt. Comfort, Texas plant sites
that allege natural resource damage or off-site contaminated
sediments, where investigations are ongoing. Based on
these facts, it is possible that results of operations
in a particular period could be materially affected by
certain of these matters. 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 the end of 1998
was $217.0, of which $84.6 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 20% of this balance relates
to Alcoa's Massena, New York plant site and 16% relates
to Alcoa's Pt. Comfort, Texas plant site. Remediation
expenses charged to the reserve were $63 in 1998, $64
in 1997 and $72 in 1996. These 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
(dollars in millions, except share amounts)
CASH FROM OPERATIONS
Cash from operations rose 16% in 1998 to $2,197, versus
$1,888 in 1997. The increase was primarily the result
of higher earnings, a reduction in deferred hedging gains
and lower working capital requirements. Partially offsetting
these items was $240 of cash received in 1997 related
to a long-term alumina supply agreement.
Lower working capital requirements for 1998 provided net
cash inflows of $269, which was $175 higher than 1997.
The decrease in working capital requirements was essentially
due to lower levels of receivables and inventories, partially
offset by a decrease in accounts payable and accrued expenses.
FINANCING ACTIVITIES
Financing activities used $280 of cash in 1998, versus
$989 in the 1997 period. The primary reason for the lower
use of funds was the issuance of debt to fund acquisitions.
In 1998, Alcoa issued $1,100
35
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. Partially offsetting these borrowings were
net payments of $350 on commercial paper and the repayment
of $950 of Alumax debt. In the 1998 third quarter, Alcoa
entered into a new $2,000 revolving-credit facility. The
facility is comprised of a 364-day $1,000 facility and
a five-year $1,000 facility. The revolving-credit facilities
are used to support the Alcoa and AofA commercial paper
programs.
Alcoa used $365 of cash in 1998 to repurchase 9,774,600
shares of the company's common stock at an average price
of $37.35 per share. In 1997, Alcoa used $604 to repurchase
16,154,534 shares of common stock. Stock purchases in
1998 and 1997 were partially offset by $87 and $203, respectively,
of stock issued for employee stock option plans.
Dividends paid to shareholders were $265 in 1998, an increase
of $95 from 1997. The difference was due to Alcoa's variable
dividend program, which paid out 25 cents per share in
addition to the base dividend of 50 cents per share in
1998. There was no variable dividend in 1997. In early
January 1999, Alcoa's board of directors increased the
base dividend and the threshold for payment of the variable
dividend by 50%, to 75 cents per share and $2.25 per share,
respectively. This will result in a quarterly dividend
of 20.125 cents per share for 1999, a 7% increase from
the 1998 quarterly dividend of 18.75 cents per share.
Alcoa's variable dividend program provides for the distribution
in the following year of 30% of Alcoa's annual earnings
in excess of $2.25 per share.
Dividends paid and return of capital to minority interests
totaled $222 in 1998, a decline of $121 from the prior
year. The decrease is a result of AWAC and AofA returning
funds to their investors in 1997. Of the $343 cash outflow
in 1997, $206 relates to payments made by AofA, while
a payment of $96 was made by AWAC.
Payments on long-term debt during 1997 exceeded additions
by $218. During the 1997 fourth quarter, AFL issued a
$250 five-year term loan and entered into a $250 five-
year, revolving-credit facility. Higher short-term borrowings
in 1997 relative to 1996 were a result of higher borrowings
at Alcoa Italia.
Debt as a percentage of invested capital was 31.7% at
the end of 1998, compared with 25.0% for 1997 and 25.5%
for 1996.
INVESTING ACTIVITIES
Cash used for investing activities during 1998 totaled
$2,377, compared with $679 in 1997. Capital expenditures
totaled $932, compared with $912 in 1997 and $996 in 1996.
Of the total expenditures in 1998, 29% related to capacity
expansion, including alumina production in Australia and
automotive sheet production in the U.S. Also included
are costs of new and expanded facilities for environmental
control in ongoing operations totaling $105 in 1998, $94
in 1997 and $68 in 1996.
Alcoa used $1,463 in 1998 for acquisitions, notably the
Alumax and Inespal transactions. Alcoa also added $126
to its investments in 1998, primarily to acquire a stake
in the Norwegian metals producer, Elkem. Acquisitions
accounted for $302 of investing cash
36
outflows during 1996 and included the purchase of Alumix
in Italy and Alcan's extrusion operations in Brazil.
In 1998, Alcoa received $55 from the sale of its specialty
chemical, Alcotec wire, Vernon cast plate and Australian
gold operations. Asset sales in 1997 generated $265 and
included the Caradco, Arctek, Alcoa Composites, Norcold,
Dayton Technologies and Richmond, Indiana facilities.
Also included was the sale of a majority interest in Alcoa's
Brazilian cable business.
YEAR 2000 ISSUE
Alcoa, like other businesses, is facing the Year 2000
issue. The Year 2000 issue arises from the past practice
of utilizing two digits (as opposed to four) to represent
the year in some computer programs and software. If uncorrected,
this could result in computational errors as dates are
compared across the century boundary.
As a basic materials supplier, the vast majority of the
products produced and sold by Alcoa are unaffected by
Year 2000 issues in use or operation since they contain
no microprocessors.
Alcoa is addressing the Year 2000 issue through a formal
program that reports to the company's chief information
officer. Alcoa's methodology encompasses four phases:
Awareness/Inventory; Assessment; Remediation and Compliance
Testing. Ongoing leadership is provided by a Global Program
Office, which is directly linked into Alcoa's business
units and resource units, including the newly acquired
Alumax facilities. The Global Program Office provides
processes and tools to the business units and monitors
progress through systematic reporting and on-site verification
reviews in cooperation with the company's internal auditors.
Progress is reported regularly to the company's senior
executives and to the Audit Committee of Alcoa's board
of directors.
Internally, computer- and microprocessor-based systems,
such as mainframe, minicomputer and personal computer
systems and the software they utilize, have been assessed.
Operational support, process control, facilities, infrastructure
and mechanical systems are being addressed as well. These
systems assist in the control of Alcoa's operations by
performing such functions as maintaining manufacturing
parameters, monitoring environmental conditions and assisting
with facilities management and security. Many of these
systems rely on software or contain embedded electronic
components that could be affected by Year 2000 compliance
issues. Since many of these systems are common across
operating locations, information sharing and efficiencies
have been realized in the Year 2000 efforts. Priority
for any required remediation efforts has been assigned
based on the criticality of the system or business process
affected.
As of December 31, 1998, the remediation phase has been
completed for 90% of Alcoa's critical components with
86% of all critical components having completed compliance
testing. Individual exceptions providing for completion
during 1999 have been approved by business unit and resource
unit management and reviewed by the Year 2000 Global Program
Office and the chief information officer. These, along
with all other critical systems, will be specifically
addressed within Alcoa's contingency planning process.
Alcoa does not believe that this limited rescheduling
will adversely affect its overall Year 2000 readiness.
It is presently expected that compliance testing will
be completed for 99% of critical systems by the third
quarter.
Alcoa relies on numerous third-party vendors and suppliers
for a wide variety of goods and services, including raw
materials, telecommunications and utilities such as water
and electricity. Many of the company's operating locations
would be adversely affected if these supplies and services were
curtailed as a result of a supplier's Year 2000 noncompliance.
Alcoa has surveyed its vendors and suppliers using questionnaires
and, based on the response and significance to the company's
operations, may initiate follow-up meetings. If Alcoa
concludes that a third-party trading partner presents
a substantial risk of a Year 2000 based business disruption,
an effort will be made to resolve the issue. If necessary,
a new provider of the affected goods or services will
be qualified and secured. Communication with suppliers
and other third parties regarding Year 2000 issues is
a continuing process.
Alcoa and certain of its trading partners utilize electronic
data interchange (EDI) to effect business communications.
The company's EDI system software has been upgraded to
support transactions in a Year 2000 compliant format.
Migration of EDI transactions to this new format will
occur as existing EDI transaction formats are modified
by Alcoa and its EDI trading partners on a case-by-case
basis. Some Alcoa customers have indicated that they will
not modify EDI transaction sets but will rely on other
techniques to achieve Year 2000 capability.
Alcoa's Year 2000 program utilizes on-site verification
of Year 2000 efforts at its various operating locations.
Using audit-like techniques, the Year 2000 Global Program
Office and the company's internal auditors verify that
business and resource units have followed the prescribed
processes and methodologies and also sample local Year
2000 readiness. Each of Alcoa's business units will receive
at least one verification audit during 1999 with more
than sixty reviews planned.
Based on current information, Alcoa believes that the
most likely worst case scenario to result from a Year
2000 failure by Alcoa, its suppliers or customers would
be a short-term reduction in manufacturing capability
at one or more of Alcoa's operations and a temporary limitation
on Alcoa's ability to deliver products to customers. Based
on internal efforts and formal communications with third
parties, Alcoa does not believe that Year 2000 issues
are likely to result in significant operational problems
or have a material adverse impact on its consolidated
financial position, operations or cash flow. Nonetheless,
failures of suppliers, third-party vendors or customers
resulting from Year 2000 issues could result in a short-
term material adverse effect.
In 1998, Alcoa incurred $38 of direct costs in connection
with its Year 2000 program. These costs include external
consulting costs and the cost of hardware and software
replaced as a result of Year 2000 issues. Direct costs
for 1999 are estimated to be between $35 and $60.
37
MANAGEMENT'S REPORT TO ALCOA SHAREHOLDERS
The accompanying financial statements of Alcoa and consolidated
subsidiaries were prepared by management, which is responsible
for their integrity and objectivity. The statements were
prepared in accordance with generally accepted accounting
principles and include amounts that are based on management's
best judgments and estimates. The other financial information
included in this annual report is consistent with that
in the financial statements.
The company maintains a system of internal controls, including
accounting controls, and a strong program of internal
auditing. The system of controls provides for appropriate
procedures that are consistent with high standards of
accounting and administration. The company believes that
its system of internal controls provides reasonable assurance
that assets are safeguarded against losses from unauthorized
use or disposition and that financial records are reliable
for use in preparing financial statements.
Management also recognizes its responsibility for conducting
the company's affairs according to the highest standards
of personal and corporate conduct. This responsibility
is characterized and reflected in key policy statements
issued from time to time regarding, among other things,
conduct of its business activities within the laws of
the host countries in which the company operates and potentially
conflicting outside business interests of its employees.
The company maintains a systematic program to assess compliance
with these policies.
/s/ Paul H. O'Neill
Paul H. O'Neill
Chairman of the Board and Chief Executive Officer
/s/ Richard B. Kelson
Richard B. Kelson
Executive Vice President and Chief Financial Officer
AUDIT COMMITTEE REPORT
The Audit Committee of the Board of Directors, which is
composed of five independent directors, met seven times
in 1998.
The Audit Committee oversees Alcoa's financial reporting
process on behalf of the Board of Directors. In fulfilling
its responsibility, the committee recommended to the Board
the reappointment of PricewaterhouseCoopers LLP as the
company's independent public accountants. The Audit Committee
reviewed with the Vice President-Audit and the independent
accountants the overall scope and specific plans for their
respective audits. The committee reviewed with management
Alcoa's annual and quarterly reporting process, and the
adequacy of the company's internal controls. Without management
present, the committee met separately with the Vice President-
Audit and the independent accountants to review the results
of their examinations, their evaluations of the company's
internal controls, and the overall quality of Alcoa's
financial reporting.
/s/ Henry B. Schacht
Henry B. Schacht
Chairman, Audit Committee
INDEPENDENT ACCOUNTANT'S REPORT
To the Shareholders and Board of Directors
Alcoa Inc. (Alcoa)
In our opinion, the accompanying consolidated balance
sheet and the related consolidated statements of income
and shareholders' equity and of cash flows present fairly,
in all material respects, the financial position of Alcoa
at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years
in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial
statements are the responsibility of Alcoa's management;
our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits
of these statements in accordance with generally accepted
auditing standards which require that we plan and perform
the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating
the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion
expressed above.
/s/ PricewaterhouseCoopers LLP
600 Grant St., Pittsburgh, Pa.
January 8, 1999
38
STATEMENT OF CONSOLIDATED INCOME Alcoa and subsidiaries
(in millions, except per-share amounts)
For the year ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------
REVENUES
Sales (O) $ 15,339.8 $ 13,319.2 $ 13,061.0
Other income, principally
interest 149.6 162.5 67.4
- ------------------------------------------------------------------------------
15,489.4 13,481.7 13,128.4
- ------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of goods sold 11,804.8 10,155.8 9,966.0
Selling, general
administrative and other
expenses 768.8 670.6 708.8
Research and development
expenses 128.4 143.2 165.5
Provision for depreciation,
depletion and amortization 842.4 734.9 747.2
Special items (D) -- (95.5) 198.9
Interest expense (S) 197.9 140.9 133.7
Taxes other than payroll
taxes 142.3 130.1 126.6
- ------------------------------------------------------------------------------
13,884.6 11,880.0 12,046.7
- ------------------------------------------------------------------------------
EARNINGS
Income before taxes on
income 1,604.8 1,601.7 1,081.7
Provision for taxes on income
(P) 513.5 528.7 360.7
- ------------------------------------------------------------------------------
Income from operations 1,091.3 1,073.0 721.0
Minority interests (238.3) (267.9) (206.1)
- ------------------------------------------------------------------------------
NET INCOME $ 853.0 $ 805.1 $ 514.9
- ------------------------------------------------------------------------------
EARNINGS PER SHARE (M)
Basic $ 2.44 $ 2.33 $ 1.47
Diluted $ 2.42 $ 2.31 $ 1.46
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
39
CONSOLIDATED BALANCE SHEET Alcoa and subsidiaries
(in millions)
December 31 1998 1997
- -----------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents (includes
cash of $131.1 in 1998 and $100.8
in 1997) (T) $ 342.2 $ 800.8
Short-term investments (T) 39.4 105.6
Receivables from customers, less
allowances: 1998-$61.4; 1997-$36.6 2,163.2 1,581.2
Other receivables 171.0 216.4
Inventories (E) 1,880.5 1,312.6
Deferred income taxes 198.0 172.3
Prepaid expenses and other current
assets 230.8 228.0
- -----------------------------------------------------------------------------
Total current assets 5,025.1 4,416.9
Properties, plants and equipment (F) 9,133.5 6,666.5
Goodwill, net of accumulated
amortization of $179.3 in 1998 and
$153.5 in 1997 (C) 1,414.1 487.6
Other assets (H and T) 1,889.8 1,499.6
- -----------------------------------------------------------------------------
TOTAL ASSETS $ 17,462.5 $ 13,070.6
- -----------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Short-term borrowings (weighted
average rate of 4.8% in 1998 and
6.3% in 1997) (T) $ 431.0 $ 347.7
Accounts payable, trade 1,044.3 811.7
Accrued compensation and retirement
costs 553.2 436.0
Taxes, including taxes on income 431.3 334.2
Other current liabilities 627.4 375.7
Long-term debt due within one year
(G and T) 181.1 147.2
- -----------------------------------------------------------------------------
Total current liabilities 3,268.3 2,452.5
Long-term debt, less amount due within
one year (G and T) 2,877.0 1,457.2
Accrued postretirement benefits (Q) 1,840.1 1,749.6
Other noncurrent liabilities and
deferred credits (I) 1,587.1 1,271.2
Deferred income taxes 358.1 281.0
- -----------------------------------------------------------------------------
Total liabilities 9,930.6 7,211.5
- -----------------------------------------------------------------------------
MINORITY INTERESTS (A and J) 1,476.0 1,439.7
- -----------------------------------------------------------------------------
Contingent liabilities (L) -- --
SHAREHOLDERS' EQUITY
Preferred stock (N) 55.8 55.8
Common stock (B and N) 394.7 178.9
Additional capital (B) 1,675.9 578.1
Retained earnings 5,305.1 4,717.3
Treasury stock, at cost (1,028.7) (758.0)
Accumulated other comprehensive loss (346.9) (352.7)
- -----------------------------------------------------------------------------
Total shareholders' equity 6,055.9 4,419.4
- -----------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $ 17,462.5 $ 13,070.6
- -----------------------------------------------------------------------------
The accompanying notes are an integral part of the financial
statements.
40
STATEMENT OF CONSOLIDATED CASH FLOWS Alcoa and subsidiaries
(in millions)
For the year ended December 31 1998 1997 1996
- ------------------------------------------------------------------------------
CASH FROM OPERATIONS
Net income $ 853.0 $ 805.1 $ 514.9
Adjustments to reconcile net income
to cash from operations:
Depreciation, depletion and
amortization 856.2 753.6 764.2
Change in deferred income taxes 109.5 83.2 120.3
Equity earnings before additional
taxes, net of dividends (2.9) (30.9) (6.6)
Noncash special items -- (95.5) 168.3
Gains from investing activities--
sale of assets (32.0) -- --
Book value of asset disposals 36.6 42.2 61.8
Minority interests 238.3 267.9 206.1
Other (22.5) (5.2) (8.5)
Changes in assets and
liabilities, excluding effects
of acquisitions and
divestitures:
Reduction in receivables 144.7 12.0 42.7
Reduction in inventories 100.5 52.5 87.8
(Increase) reduction in prepaid
expenses and other current
assets 22.7 (25.6) (40.3)
Increase (reduction) in
accounts payable and accrued
expenses (68.0) 81.5 (181.1)
Increase (reduction) in taxes,
including taxes on income 68.6 (26.5) 27.4
Cash received on long-term
alumina supply contract -- 240.0 --
Reduction in deferred hedging
gains (50.6) (113.3) (264.5)
Net change in noncurrent assets
and liabilities (57.4) (153.4) (213.6)
- ------------------------------------------------------------------------------
CASH FROM OPERATIONS 2,196.7 1,887.6 1,278.9
- ------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net additions (reduction) to short-
term borrowings (75.6) 142.5 (140.7)
Common stock issued and treasury
stock sold 87.2 203.0 41.4
Repurchase of common stock (365.1) (603.5) (317.2)
Dividends paid to shareholders (265.2) (170.4) (234.2)
Dividends paid and return of
capital to minority interests (222.0) (342.5) (173.2)
Additions to long-term debt 2,030.8 519.8 916.2
Payments on long-term debt (1,469.9) (738.2) (627.1)
- ------------------------------------------------------------------------------
CASH USED FOR FINANCING
ACTIVITIES (279.8) (989.3) (534.8)
- ------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (931.8) (912.4) (995.7)
Acquisitions, net of cash acquired
(K) (1,462.9) -- (302.3)
Sale of assets 55.2 265.2 82.8
Sale of (additions to) investments (125.9) 51.7 (58.8)
Changes in minority interests 32.6 14.2 (34.2)
Repayment from (loan to) WMC -- -- 121.8
Changes in short-term investments 66.2 (87.3) (11.7)
Other (10.4) (10.0) (10.0)
- ------------------------------------------------------------------------------
CASH USED FOR INVESTING
ACTIVITIES (2,377.0) (678.6) (1,208.1)
- ------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH 1.5 (17.0) 6.5
- ------------------------------------------------------------------------------
Net change in cash and cash
equivalents (458.6) 202.7 (457.5)
Cash and cash equivalents at
beginning of year 800.8 598.1 1,055.6
- ------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 342.2 $ 800.8 $ 598.1
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial
statements.
41
STATEMENT OF SHAREHOLDERS' EQUITY Alcoa and subsidiaries
(in millions, except share amounts)
Accumulated
other
compre- Total
hensive share-
Comprehensive Preferred Common Additional Retained Treasury income holders'
December 31 income stock stock capital earnings stock (loss) equity
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF 1995 $ 55.8 $ 178.9 $ 637.1 $ 3,800.1 $ (138.9) $ (88.3) $ 4,444.7
Comprehensive income--1996:
Net income--1996 $514.9 514.9 514.9
Other comprehensive income
(loss), net of tax:
Minimum pension
liability, net of $1.9
tax expense 3.5
Unrealized translation
adjustments (8.9)
Realized translation
adjustments (5.2)
Unrealized gains on
securities, net of
$12.6 tax benefit 23.4 12.8 12.8
----------
Comprehensive income $527.7
----------
Cash dividends:
Preferred @ $3.75 per share (2.1) (2.1)
Common @ $.665 per share (232.1) (232.1)
Treasury shares purchased (317.2) (317.2)
Stock issued: compensation
plans (45.2) 1.8 84.8 41.4
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF 1996 55.8 178.9 591.9 4,082.6 (371.3) (75.5) 4,462.4
Comprehensive income--1997:
Net income--1997 $ 805.1 805.1 805.1
Other comprehensive income
(loss), net of tax:
Minimum pension
liability, net of $2.3
tax benefit (4.2)
Unrealized translation
adjustments (249.6)
Unrealized gains on
securities, net of $.7
tax expense 1.3
Gains on securities
included in net income,
net of $13.3 tax
benefit (24.7) (277.2) (277.2)
----------
Comprehensive income $ 527.9
----------
Cash dividends:
Preferred @ $3.75 per share (2.1) (2.1)
Common @ $.488 per share (168.3) (168.3)
Treasury shares purchased (603.5) (603.5)
Stock issued: compensation
plans (13.8) 216.8 203.0
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF 1997 55.8 178.9 578.1 4,717.3 (758.0) (352.7) 4,419.4
Comprehensive income--1998:
Net income--1998 $ 853.0 853.0 853.0
Other comprehensive income
(loss), net of tax:
Minimum pension
liability, net of $3.0
tax benefit (5.6)
Unrealized translation
adjustments 11.4 5.8 5.8
----------
Comprehensive income $ 858.8
----------
Cash dividends:
Preferred @ $3.75 per share (2.1) (2.1)
Common @ $.75 per share (263.1) (263.1)
Treasury shares purchased (365.1) (365.1)
Stock issued: Alumax
acquisition 18.4 1,302.4 1,320.8
Stock issued: compensation
plans (7.2) 94.4 87.2
Stock issued: two-for-one
split (B) 197.4 (197.4) --
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF 1998
$ 55.8 $ 394.7 $1,675.9 $ 5,305.1 $(1,028.7) $ (346.9)* $ 6,055.9
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
* Comprised of unrealized translation adjustments of $(331.3) and minimum
pension liability of $(15.6)
SHARE ACTIVITY (B)
(number of shares)
Common stock
--------------------------------------------------------------------------
Preferred stock Issued Treasury Net outstanding
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF 1995 557,649 357,845,166 (5,217,106) 352,628,060
Treasury shares purchased (10,805,000) (10,805,000)
Stock issued: compensation plans 3,196,218 3,196,218
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF 1996 557,649 357,845,166 (12,825,888) 345,019,278
Treasury shares purchased (16,154,534) (16,154,534)
Stock issued: compensation plans 7,686,508 7,686,508
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF 1997 557,649 357,845,166 (21,293,914) 336,551,252
Treasury shares purchased (9,774,600) (9,774,600)
Stock issued: Alumax acquisition 36,850,760 36,850,760
Stock issued: compensation plans 3,181,666 3,181,666
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF 1998 557,649 394,695,926 (27,886,848) 366,809,078
- ------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial
statements.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except share amounts)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial
statements include the accounts of Alcoa and companies
more than 50% owned. Investments in other entities are
accounted for principally on an equity basis.
The consolidated financial statements are prepared in
conformity with generally accepted accounting principles
and require management to make certain estimates and assumptions.
These may affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities
at the date of the financial statements. They may also
affect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from
those estimates upon subsequent resolution of identified
matters.
INVENTORY VALUATION. Inventories are carried at the lower
of cost or market, with cost for a substantial portion
of U.S. and Canadian inventories determined under the
last-in, first-out (LIFO) method. The cost of other inventories
is principally determined under the average-cost method.
See Note E for additional detail.
AMORTIZATION OF INTANGIBLES. The excess purchase price
over the net tangible assets of businesses acquired is
reported as goodwill in the consolidated balance sheet.
Goodwill and other intangibles are amortized on a straight-
line basis over not more than 40 years. The carrying value
of goodwill and other intangibles is evaluated periodically
in relation to the operating performance and future undiscounted
cash flows of the underlying businesses. Adjustments are
made if the sum of expected future net cash flows is less
than book value. See Note H for additional information.
ENVIRONMENTAL EXPENDITURES. Expenditures for current operations
are expensed or capitalized, as appropriate. Expenditures
relating to existing conditions caused by past operations,
and which do not contribute to future revenues, are expensed.
Liabilities are recorded when remedial efforts are probable
and the costs can be reasonably estimated. The liability
may include costs such as site investigations, consultant
fees, feasibility studies, outside contractor and monitoring
expenses. Estimates are not discounted or reduced by potential
claims for recovery. Claims for recovery are recognized
when received. The estimates also include costs related
to other potentially responsible parties to the extent
that Alcoa has reason to believe such parties will not
fully pay their proportionate share. The liability is
periodically reviewed and adjusted to reflect current
remediation progress, prospective estimates of required
activity and other factors that may be relevant, including
changes in technology or regulations. See Note U for additional
information.
FINANCIAL INSTRUMENTS AND COMMODITY CONTRACTS. Alcoa enters
into long-term contracts to supply fabricated products
to a number of its customers. To hedge the market risk
of changing prices for purchases or sales of metal, Alcoa
uses commodity futures and options contracts.
Gains and losses related to transactions that qualify
for hedge accounting, including closed futures contracts,
are deferred and reflected in cost of goods sold when
the underlying physical transaction takes place. The deferred
gains or losses are reflected on the balance sheet in
other current and noncurrent liabilities or assets. If
future purchased metal needs are revised lower than initially
anticipated, the futures contracts associated with the
reduction no longer qualify for deferral and are marked-
to-market. Mark-to-market gains and losses are recorded
in other income in the current period.
The effectiveness of the hedge is measured by a historical
and probable future high correlation of changes in the
fair value of the hedging instruments with changes in
value of the hedged item. If correlation ceases to exist,
hedge accounting will be terminated and gains or losses
recorded in other income. To date, high correlation has
always been achieved.
Alcoa also enters into futures and options contracts that
cover long-term, fixed-price commitments to supply customers
with metal from internal sources. These contracts are
marked-to-market, and the gains and losses from changes
in market value of the contracts are recorded in other
income in the current period. This resulted in after-tax
losses of $44.5 in 1998, $12.7 in 1997 and $57.1 in 1996.
Alcoa also attempts to maintain a reasonable balance between
fixed- and floating-rate debt, using interest rate swaps
and caps, to keep financing costs as low as possible.
If the requirements for hedge accounting are met, amounts
paid or received under these agreements are recognized
over the life of the agreements as adjustments to interest
expense. Otherwise, the instruments are marked-to-market,
and the gains and losses from changes in the market value
of the contracts are recorded in other income in the current
period.
Upon early termination of an interest rate swap or cap,
gains or losses are deferred and amortized as adjustments
to interest expense of the related debt over the remaining
period covered by the terminated swap or cap.
Alcoa is subject to exposure from fluctuations in foreign
currencies. To manage this exposure, Alcoa uses foreign
exchange contracts. Gains and losses on contracts that
meet the requirements for hedge accounting are deferred
and included in the basis of the underlying transactions.
Contracts that do not meet these requirements are marked-
to-market in other income each period.
Cash flows from financial instruments are recognized in
the statement of cash flows in a manner consistent with
the underlying transactions. See Note T for additional
detail.
PROPERTIES, PLANTS AND EQUIPMENT. Properties, plants and
equipment are recorded at cost. Depreciation is recorded
principally on the straight-line method at rates based
on the estimated useful lives of the assets, averaging
33 years for structures and between five and 25 years
for machinery and equipment. Profits or losses from the
sale of assets are included in other income. Repairs and
maintenance are charged to expense as incurred. Interest
related to the construction of qualifying assets is capitalized
as part of the construction costs.
Depletion is taken over the periods during which the estimated
mineral reserves are extracted. See Notes F and S for
additional detail.
43
REVENUE RECOGNITION. Alcoa recognizes revenue when title
passes to the customer.
STOCK-BASED COMPENSATION. Alcoa accounts for stock-based
compensation in accordance with the provisions of APB
Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations. Accordingly, compensation
cost is not required to be recognized on options granted.
Disclosures required with respect to alternative fair
value measurement and recognition methods prescribed by
Statement of Financial Accounting Standard (SFAS) No.
123, "Accounting for Stock-Based Compensation," are presented
in Note N.
FOREIGN CURRENCY. The local currency is the functional
currency for Alcoa's significant operations outside the
U.S., except in Brazil and Canada, where the U.S. dollar
is used as the functional currency. The determination
of the functional currency for Alcoa's Brazilian and Canadian
operations is made based on the appropriate economic and
management indicators.
RECENTLY ADOPTED ACCOUNTING STANDARDS. Alcoa has adopted
SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," which was issued in June 1997.
SFAS No. 131 establishes standards for disclosures about
products and geographic areas. In addition, it requires
the disclosure of segment information on the same basis
that is used internally for evaluating performance and
allocating resources. Accordingly, Alcoa reports four
segments, consisting of Alumina and chemicals, Primary
metals, Flat-rolled products and Engineered products.
Segment information for 1996 and 1997 has been restated
to meet the requirements of SFAS No. 131. See Note O to
these financial statements for the required disclosures.
In February 1998, SFAS No. 132, "Employers Disclosures
about Pensions and Other Postretirement Benefits," was
issued. The implementation of SFAS No. 132 revised certain
footnote disclosure requirements related to pension and
other retiree benefits. See Note Q to these financial
statements for the revised disclosures.
RECENTLY ISSUED ACCOUNTING STANDARDS. In June 1998, the
Financial Accounting Standards Board issued SFAS No. 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 first quarter
of 2000. The company believes that the adoption of the
standard will have a material impact on its financial
statements. Upon adoption, Alcoa's aluminum, 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.
A new Statement of Position (SOP) was issued by the American
Institute of CPAs in April 1998. The SOP, "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 SOP, which will be adopted for 1999, will have a
material impact on Alcoa's financial statements.
RECLASSIFICATION. Certain amounts in previously issued
financial statements were reclassified to conform to 1998
presentations.
B. COMMON STOCK SPLIT
On January 8, 1999, the board of directors declared a
two-for-one common stock split, distributed on February
25, 1999 to shareholders of record at the close of business
on February 8, 1999. In this report, all per-share amounts
and number of shares have been restated to reflect the
stock split. In addition, an amount equal to the one dollar
par value of the shares issued at December 31, 1998 has
been transferred from additional capital to common stock.
C. ACQUISITIONS
In July 1998, Alcoa acquired Alumax Inc. (Alumax) for
approximately $3,800, consisting of cash of approximately
$1,500, stock of approximately $1,300 and assumed debt
of approximately $1,000. Alumax operates over 70 plants
and other manufacturing facilities in 22 states, Canada,
Western Europe and Mexico.
The following unaudited pro forma information for the
years ended December 31, 1998 and 1997 assumes that the
acquisition of Alumax had occurred at the beginning of
each respective year. Adjustments that have been made
to arrive at the pro forma totals 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 have been included
at the 35% U.S. statutory rate.
December 31 (unaudited) 1998 1997
- ------------------------------------------------------------------------
Net sales $ 16,766.3 $ 16,160.2
Net income 875.5 770.2
- ------------------------------------------------------------------------
Earnings per share:
Basic 2.36 2.02
Diluted 2.35 2.00
- ------------------------------------------------------------------------
The pro forma results are not necessarily indicative of
what actually would have occurred if the transaction had
been in effect for the 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.
In February 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. The acquisition
included an alumina refinery, three aluminum smelters,
three aluminum rolling facilities, two extrusion plants
and an administrative center.
In 1996, Alcoa made various acquisitions totaling $302.
They include the purchase of Alumix, Italy's state-owned
integrated aluminum producer, and Alcan's extrusion operations
in Brazil.
44
Alcoa's acquisitions have been accounted for using the
purchase method. The purchase price has been allocated
to the assets acquired and liabilities assumed based on
their estimated fair market values. Any excess purchase
price over the fair market value of the net assets acquired
has been recorded as goodwill. In the case of the Alumax
acquisition, the allocation of the purchase price resulted
in goodwill of approximately $945, which will be amortized
over a forty-year period. Operating results have been
included in the statement of consolidated income since
the dates of the acquisitions. Had the Inespal acquisition,
and those made in 1996, occurred at the beginning of each
respective year, net income for the year would not have
been materially different.
D. SPECIAL ITEMS
Special items in 1997 resulted in a gain of $95.5 ($43.9,
or 13 cents per basic share, after tax and minority interests).
The fourth quarter sales of a majority interest in Alcoa's
Brazilian cable business and land in Japan generated gains
of $85.8. In addition, the sale of equity securities resulted
in a gain of $38.0, while the divestiture of noncore businesses
provided $25.0. These gains were partially offset by charges
of $53.3, related primarily to environmental and impairment
matters.
Special items in 1996 consisted of a charge totaling $198.9
($122.3, or 35 cents per share, after tax and minority
interests). A net severance charge of $95.5, which includes
pension and OPEB curtailment credits of $75.0, relates
to incentive costs for employees who voluntarily left
the company and for permanent layoff costs. The shutdown
of Alcoa Electronic Packaging resulted in an additional
charge of $65.4, related primarily to asset writedowns.
Impairments at various manufacturing locations added another
charge of $38.0.
E. INVENTORIES
December 31 1998 1997
- ------------------------------------------------------------------------
Finished goods $ 418.2 $ 314.9
Work in process 591.7 433.0
Bauxite and alumina 346.5 263.9
Purchased raw materials 361.1 197.3
Operating supplies 163.0 103.5
- ------------------------------------------------------------------------
$ 1,880.5 $ 1,312.6
- ------------------------------------------------------------------------
Approximately 55% of total inventories at December 31,
1998 were valued on a LIFO basis. If valued on an average-
cost basis, total inventories would have been $702.8 and
$769.8 higher at the end of 1998 and 1997, respectively.
F. PROPERTIES, PLANTS AND EQUIPMENT, AT COST
December 31 1998 1997
- ------------------------------------------------------------------------
Land and land rights, including
mines $ 283.7 $ 221.2
Structures 4,560.5 3,898.1
Machinery and equipment 12,649.3 10,482.8
- ------------------------------------------------------------------------
17,493.5 14,602.1
Less: accumulated depreciation
and depletion 9,091.0 8,587.5
- ------------------------------------------------------------------------
8,402.5 6,014.6
Construction work in progress 731.0 651.9
- ------------------------------------------------------------------------
$ 9,133.5 $ 6,666.5
- ------------------------------------------------------------------------
G. LONG-TERM DEBT
December 31 1998 1997
- ------------------------------------------------------------------------
Commercial paper, variable rate,
(5.4% average rate) $ 745.2 --
5.75% Notes payable, due 2001 244.1 $ 248.8
6.125% Bonds, due 2005 200.0 --
6.50% Bonds, due 2018 250.0 --
6.75% Bonds, due 2028 300.0 --
Bank loans, 7.5 billion yen, due
1999, (4.4% fixed rate) 78.0 78.0
Tax-exempt revenue bonds ranging
from 3.4% to 6.6%, due 2000-2012 152.5 130.5
Alcoa Fujikura Ltd.
Variable-rate term loan, due
1999-2002 (5.5% and 6.1%
average rate) 230.0 250.0
Alcoa Aluminio 7.5% Notes, due
2008 387.7 395.2
Variable-rate notes, due 1999-
2001 (6.6% and 6.9% average
rates) 40.5 97.3
Alcoa of Australia
Euro-commercial paper, variable
rate, (5.4% and 5.7% average
rates) 250.0 225.3
Other subsidiaries 180.1 179.3
- ------------------------------------------------------------------------
3,058.1 1,604.4
Less: amount due within one year 181.1 147.2
- ------------------------------------------------------------------------
$ 2,877.0 $ 1,457.2
- ------------------------------------------------------------------------
The amount of long-term debt maturing in each of the next
five years is $181.1 in 1999, $72.0 in 2000, $368.2 in
2001, $229.8 in 2002 and $1,029.6 in 2003.
In 1998, Alcoa issued $300 of thirty-year bonds due in
2028, $250 of term debt due in 2018 and $200 of term debt
due in 2005. Alcoa also issued $1,100 of commercial paper,
a portion of which has since been repaid. The proceeds
from these borrowings were used to fund acquisitions and
for general corporate purposes.
In 1998, Alcoa entered into a new $2.0 billion revolving-
credit facility, which expires in equal amounts in August
1999 and August 2003. Under this agreement, certain levels
of consolidated net worth must be maintained while commercial
paper balances are outstanding.
In 1997, Alcoa Fujikura issued a $250 term loan and entered
into a five-year, $250 revolving-credit agreement. The
proceeds of the term loan were used to repay existing
debt. These agreements require Alcoa Fujikura to maintain
certain financial ratios.
In 1996, Alcoa Aluminio (Aluminio) issued $400 of export
notes. The agreement requires Aluminio to maintain certain
financial ratios.
A portion of the commercial paper issued by Alcoa and
the Euro-commercial paper issued by Alcoa of Australia
(AofA) is classified as long-term debt because it is backed
by the revolving-credit facility noted above.
45
H. OTHER ASSETS
December 31 1998 1997
- ------------------------------------------------------------------------
Investments, principally equity
investments $ 586.2 $ 464.7
Intangibles, net of accumulated
amortization of $139.0 in 1998
and $104.0 in 1997 127.3 119.8
Noncurrent receivables 66.8 83.9
Deferred income taxes 504.8 387.9
Deferred charges and other 604.7 443.3
- ------------------------------------------------------------------------
$ 1,889.8 $ 1,499.6
- ------------------------------------------------------------------------
I. OTHER NONCURRENT LIABILITIES AND DEFERRED CREDITS
December 31 1998 1997
- ------------------------------------------------------------------------
Deferred hedging gains $ 55.2 $ 101.6
Deferred alumina sales revenue 228.0 235.9
Environmental remediation 124.1 170.3
Deferred credits 335.5 161.3
Other noncurrent liabilities 844.3 602.1
- ------------------------------------------------------------------------
$ 1,587.1 $ 1,271.2
- ------------------------------------------------------------------------
The deferred hedging gains are associated with metal contracts
and will be reflected in future earnings concurrent with
the hedged revenues or costs.
J. MINORITY INTERESTS
The following table summarizes the minority shareholders'
interests in the equity of consolidated subsidiaries.
December 31 1998 1997
- ------------------------------------------------------------------------
Alcoa of Australia $ 376.3 $ 390.7
Alcoa Aluminio 366.0 387.7
Alcoa Alumina and Chemicals 290.2 320.9
Alcoa Fujikura 232.6 182.7
Other majority-owned companies 210.9 157.7
- ------------------------------------------------------------------------
$ 1,476.0 $ 1,439.7
- ------------------------------------------------------------------------
K. CASH FLOW INFORMATION
Cash payments for interest and income taxes follow.
1998 1997 1996
- ------------------------------------------------------------------------------
Interest $ 198.8 $ 145.9 $ 136.4
Income taxes 371.0 342.5 265.8
- ------------------------------------------------------------------------------
The details of cash payments related to acquisitions follow.
1998 1997 1996
- ------------------------------------------------------------------------------
Fair value of assets $ 5,511.0 -- $ 365.2
Liabilities (2,554.7) -- (62.4)
Stock issued (1,320.8) -- --
- ------------------------------------------------------------------------------
Cash paid 1,635.5 -- 302.8
Less: cash acquired 172.6 -- .5
- ------------------------------------------------------------------------------
Net cash paid for
acquisitions $ 1,462.9 -- $ 302.3
- ------------------------------------------------------------------------------
L. 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 may
be substantial, the ultimate liability cannot now be determined
because of the considerable uncertainties that exist.
Therefore, it is possible that results of operations or
liquidity in a particular period could be materially affected
by certain contingencies. However, based on facts currently
available, management believes that the disposition of
matters that are pending or asserted will not have a materially
adverse effect on the financial position of the company.
Aluminio is currently party to a hydroelectric construction
project in Brazil. Total estimated construction costs
are $600, of which the company's share is 24%. In the
event that other participants in this project fail to
fufill their financial responsibilities, Aluminio may
be liable for its pro rata share of the deficiency.
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 $163 in 1999, $166 in
2000, $162 in 2001, $158 in 2002, $156 in 2003 and $2,125
thereafter. Expenditures under these contracts totaled
$171 in 1998, $219 in 1997 and $229 in 1996.
M. EARNINGS PER SHARE
Basic earnings per common share (EPS) amounts are computed
by dividing earnings after the deduction of preferred
stock dividends by the average number of common shares
outstanding. Diluted EPS amounts assume the issuance of
common stock for all potentially dilutive equivalents
outstanding. See Note N for additional information.
The details of basic and diluted earnings per common share
follow.
1998 1997 1996
- ------------------------------------------------------------------------------
Net income $ 853.0 $ 805.1 $ 514.9
Less: preferred stock
dividends 2.1 2.1 2.1
- ------------------------------------------------------------------------------
Income available to common
stockholders $ 850.9 $ 803.0 $ 512.8
Weighted average shares
outstanding 349,113,644 344,451,592 348,667,048
Basic EPS $ 2.44 $ 2.33 $ 1.47
Effect of dilutive
securities:
Shares issuable upon
exercise of dilutive
outstanding stock options 2,502,992 3,267,850 3,692,430
- ------------------------------------------------------------------------------
Fully diluted shares
outstanding 351,616,636 347,719,442 352,359,478
Diluted EPS $ 2.42 $ 2.31 $ 1.46
- ------------------------------------------------------------------------------
N. PREFERRED AND COMMON STOCK
PREFERRED STOCK. Alcoa has two classes of preferred stock.
Serial preferred stock has 557,740 shares authorized,
with a par value of $100 per share and an annual $3.75
cumulative dividend preference per share. Class B serial
preferred stock has 10 million shares authorized (none
issued) and a par value of $1 per share.
COMMON STOCK. There are 600 million shares authorized
at a par value of $1 per share. As of December 31, 1998,
38,670,464 shares of common stock were reserved for issuance
under the long-term stock incentive plan.
46
Stock options under the long-term stock incentive plan
have been and may be granted, generally at not less than
market prices on the dates of grant, except for the 25
cents per-share options issued as a payout of earned performance
share awards. The stock option program includes a reload
or stock continuation ownership feature. Stock options
granted have a maximum term of 10 years. Vesting occurs
one year from the date of grant and six months for options
granted under the reload feature.
Alcoa's net income and earnings per share would have been
reduced to the pro forma amounts shown below if compensation
cost had been determined based on the fair value at the
grant dates.
1998 1997 1996
- ------------------------------------------------------------------------------
Net income:
As reported $ 853.0 $ 805.1 $ 514.9
Pro forma 815.0 755.5 472.2
- ------------------------------------------------------------------------------
Basic earnings per share:
As reported 2.44 2.33 1.47
Pro forma 2.33 2.19 1.35
- ------------------------------------------------------------------------------
Diluted earnings per share:
As reported 2.42 2.31 1.46
Pro forma 2.31 2.17 1.34
- ------------------------------------------------------------------------------
The weighted average fair value of options granted was
$5.73 per share in 1998, $5.90 per share in 1997 and $4.02
per share in 1996.
The fair value of each option is estimated on the date
of grant or subsequent reload using the Black-Scholes
pricing model with the following assumptions:
1998 1997 1996
- ------------------------------------------------------------------------------
Average risk-free interest rate 5.2% 6.1% 5.7%
Expected dividend yield 2.1 1.3 2.2
Expected volatility 25.0 25.0 25.0
Expected life (years):
Stock options that are not
reloaded 2.5 2.5 3.0
Stock options that are reloaded 1.5 1.0 1.0
- ------------------------------------------------------------------------------
The transactions for shares under options were:
1998 1997 1996
- ------------------------------------------------------------------------------
Outstanding, beginning
of year:
Number 21,097,450 20,067,884 17,099,286
Weighted average
exercise price $31.67 $25.87 $21.92
Granted:
Number 11,799,080 12,775,614 17,401,354
Weighted average
exercise price $34.37 $36.07 $28.15
Exercised:
Number (5,986,190) (11,424,352) (14,322,006)
Weighted average
exercise price $30.13 $26.40 $23.95
Expired or forfeited:
Number (281,346) (321,696) (110,750)
Weighted average
exercise price $36.49 $31.70 $25.71
- ------------------------------------------------------------------------------
Outstanding, end of year:
Number 26,628,994 21,097,450 20,067,884
Weighted average
exercise price $33.00 $31.67 $25.87
- ------------------------------------------------------------------------------
Exercisable, end of year:
Number 13,755,508 10,411,112 8,693,586
Weighted average
exercise price $30.47 $26.73 $23.30
- ------------------------------------------------------------------------------
Shares reserved
for future options 11,393,256 17,797,060 9,311,870
- ------------------------------------------------------------------------------
The following tables summarize certain stock option information
at December 31, 1998:
Options outstanding:
Weighted Weighted
Range of average average
exercise price Number remaining life exercise price
- ------------------------------------------------------------------------------
$ 0.25 322,036 employment $ 0.25
career
13.14-19.70 1,007,162 1.7 17.42
19.71-29.56 2,957,476 6.0 24.71
29.57-44.47 22,342,320 7.0 35.27
- ------------------------------------------------------------------------------
26,628,994 6.6 33.00
- ------------------------------------------------------------------------------
Options exercisable:
Weighted average
Range of exercisable
exercise price Number price
- --------------------------------------------------------------------------
$ 0.25 322,036 $ 0.25
13.14-19.70 1,007,162 17.42
19.71-29.56 2,957,476 24.71
29.57-37.28 9,468,834 34.68
- --------------------------------------------------------------------------
13,755,508 30.47
- --------------------------------------------------------------------------
O. SEGMENT AND GEOGRAPHIC AREA 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 of each
segment. Nonoperating items such as interest income, interest
expense, foreign exchange gains/losses 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.
Segment assets exclude cash, cash equivalents, short-term
investments and all deferred taxes. Segment assets also
exclude corporate items such as fixed assets, LIFO reserves,
goodwill allocated to corporate and other amounts.
The accounting policies of the segments are the same as
those described in the Summary of Significant Accounting
Policies (Note A). Transactions between segments are established
based on negotiation between the parties. Differences
between segment totals and Alcoa's consolidated totals
for line items not reconciled are primarily due to allocations
to corporate.
Alcoa's products are used primarily by packaging, transportation
(including aerospace, automotive, rail and shipping),
building and construction, and industrial customers worldwide.
Total exports from the U.S. were $1,283.1 in 1998, compared
with $1,207 in 1997 and $1,015 in 1996. Alcoa's reportable
segments follow.
ALUMINA AND CHEMICALS. 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.
The alumina operations of Alcoa World Alumina and Chemicals
(AWAC) comprise the majority of this segment.
47
PRIMARY METALS. This group's 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.
FLAT-ROLLED PRODUCTS. This segment's primary business
is the production and sale of aluminum sheet, plate and
foil. This segment includes the aggregation of rigid container
sheet (RCS), which is used to produce aluminum beverage
cans, and mill products used in the transportation and
distributor markets.
ENGINEERED PRODUCTS. This segment includes the aggregation
of hard and soft alloy extrusions, aluminum forgings and
wire, rod and bar. These products serve primarily the
transportation, construction and distributor markets.
OTHER. This category includes Alcoa Fujikura Limited,
which produces electrical components for the automotive
industry along with telecommunication products. In addition,
Alcoa's aluminum and plastic closure operations and Alcoa's
residential building products operations are included
in this group.
Alumina and Primary Flat-rolled Engineered
Segment information chemicals metals products products Other Total
- --------------------------------------------------------------------------------------------------------------------------------
1998
Sales:
Third-party sales $ 1,847.2 $ 2,104.8 $ 4,900.2 $ 3,110.0 $ 3,361.8 $ 15,324.0
Intersegment sales 832.1 2,282.6 58.6 10.9 -- 3,184.2
- --------------------------------------------------------------------------------------------------------------------------------
Total sales $ 2,679.3 $ 4,387.4 $ 4,958.8 $ 3,120.9 $ 3,361.8 $ 18,508.2
- --------------------------------------------------------------------------------------------------------------------------------
Profit and loss:
Equity income (loss) $ .6 $ 27.0 $ 8.2 $ (.4) $ 9.8 $ 45.2
Depreciation, depletion and
amortization 158.9 175.6 190.2 88.4 154.5 767.6
Special items -- -- -- -- -- --
Income tax 173.8 174.3 126.0 84.5 106.8 665.4
After-tax operating income 317.7 331.0 305.5 183.5 165.1 1,302.8
- --------------------------------------------------------------------------------------------------------------------------------
Assets:
Capital expenditures $ 275.1 $ 164.3 $ 152.0 $ 105.0 $ 143.2 $ 839.6
Equity investment 50.3 149.9 69.2 -- 146.0 415.4
Total assets 3,081.8 5,340.9 3,512.8 2,427.4 2,245.6 16,608.5
- --------------------------------------------------------------------------------------------------------------------------------
1997
Sales:
Third-party sales $ 1,977.7 $ 1,600.0 $ 4,187.5 $ 2,077.5 $ 3,457.9 $ 13,300.6
Intersegment sales 634.0 1,965.8 52.7 9.2 -- 2,661.7
- --------------------------------------------------------------------------------------------------------------------------------
Total sales $ 2,611.7 $ 3,565.8 $ 4,240.2 $ 2,086.7 $ 3,457.9 $ 15,962.3
- --------------------------------------------------------------------------------------------------------------------------------
Profit and loss:
Equity income (loss) $ .2 $ 23.0 $ 7.2 $ (.4) $ 11.6 $ 41.6
Depreciation, depletion and
amortization 174.6 129.5 173.0 66.2 155.9 699.2
Special items loss (gain) 4.2 (2.9) (1.5) (2.3) (70.6) (73.1)
Income tax 167.8 224.4 123.1 47.7 103.8 666.8
After-tax operating income 301.8 417.4 268.4 99.9 177.3 1,264.8
- --------------------------------------------------------------------------------------------------------------------------------
Assets:
Capital expenditures $ 201.0 $ 137.3 $ 158.9 $ 148.6 $ 128.3 $ 774.1
Equity investment 51.4 140.2 61.0 1.2 123.6 377.4
Total assets 3,027.3 2,333.6 2,785.5 1,469.2 2,284.2 11,899.8
- --------------------------------------------------------------------------------------------------------------------------------
1996
Sales:
Third-party sales $ 1,962.8 $ 1,579.8 $ 4,082.1 $ 1,868.6 $ 3,567.0 $ 13,060.3
Intersegment sales 617.1 1,899.6 21.2 14.9 -- 2,552.8
- --------------------------------------------------------------------------------------------------------------------------------
Total sales $ 2,579.9 $ 3,479.4 $ 4,103.3 $ 1,883.5 $ 3,567.0 $ 15,613.1
- --------------------------------------------------------------------------------------------------------------------------------
Profit and loss:
Equity income $ .7 $ 16.8 $ .4 -- $ 13.0 $ 30.9
Depreciation, depletion and
amortization 167.4 138.5 187.7 $ 63.7 171.0 728.3
Special items 7.5 3.1 25.7 10.7 103.6 150.6
Income tax 167.2 161.8 87.2 28.8 25.3 470.3
After-tax operating income
(loss) 339.7 313.2 160.0 46.2 (.9) 858.2
- --------------------------------------------------------------------------------------------------------------------------------
Assets:
Capital expenditures $ 295.4 $ 92.4 $ 160.8 $ 139.7 $ 219.5 $ 907.8
Equity investment 141.1 141.7 62.4 1.3 82.9 429.4
Total assets 3,399.4 2,565.1 2,796.3 1,300.3 2,564.3 12,625.4
- --------------------------------------------------------------------------------------------------------------------------------
48
The following reconciles segment information to consolidated
totals.
1998 1997 1996
- ------------------------------------------------------------------------------
Sales:
Total sales $ 18,508.2 $ 15,962.3 $ 15,613.1
Elimination of intersegment
sales (3,184.2) (2,661.7) (2,552.8)
Other revenues 15.8 18.6 .7
- ------------------------------------------------------------------------------
Consolidated sales $ 15,339.8 $ 13,319.2 $ 13,061.0
- ------------------------------------------------------------------------------
Net income:
Total after-tax operating
income $ 1,302.8 $ 1,264.8 $ 858.2
Elimination of intersegment
(profit) loss (15.7) 11.6 (7.8)
Unallocated amounts (net of
tax):
Interest income 63.5 67.2 63.5
Interest expense (128.6) (91.7) (86.5)
Minority interest (238.3) (267.9) (206.1)
Mark-to-market losses (44.5) (12.7) (57.1)
Corporate expense (196.6) (171.9) (160.4)
Other 110.4 5.7 111.1
- ------------------------------------------------------------------------------
Consolidated net income $ 853.0 $ 805.1 $ 514.9
- ------------------------------------------------------------------------------
Assets:
Total assets $ 16,608.5 $ 11,899.8 $ 12,625.4
Elimination of intersegment
receivables (377.7) (286.5) (274.9)
Unallocated amounts:
Cash, cash equivalents and
short-term investments 381.6 906.4 616.6
Deferred tax assets 702.8 560.2 638.3
Corporate goodwill 479.7 -- --
Corporate fixed assets 315.0 326.0 263.0
LIFO reserve (702.8) (769.8) (753.7)
Other 55.4 434.5 335.2
- ------------------------------------------------------------------------------
Consolidated assets $ 17,462.5 $ 13,070.6 $ 13,449.9
- ------------------------------------------------------------------------------
Geographic information for revenues, based on country
of origin, and long-lived assets follows:
1998 1997 1996
- ------------------------------------------------------------------------------
Revenues:
United States $ 8,728.4 $ 7,189.4 $ 7,245.9
Australia 1,469.7 1,874.5 1,918.9
Spain 965.0 44.4 43.9
Brazil 934.4 1,160.6 1,135.5
Canada 573.6 404.1 350.7
Germany 553.5 580.0 623.2
Other 2,115.2 2,066.2 1,742.9
- ------------------------------------------------------------------------------
$15,339.8 $13,319.2 $13,061.0
- ------------------------------------------------------------------------------
Long-lived assets:
United States $ 6,725.6 $ 4,132.8 $ 4,173.2
Australia 1,441.3 1,453.3 1,781.0
Brazil 967.1 1,046.7 1,138.6
Canada 890.2 1.9 1.9
Germany 212.6 201.2 232.6
Other 1,023.6 852.8 766.4
- ------------------------------------------------------------------------------
$11,260.4 $ 7,688.7 $ 8,093.7
- ------------------------------------------------------------------------------
P. INCOME TAXES The components of income before taxes
on income were:
1998 1997 1996
- ------------------------------------------------------------------------------
U.S. $ 594.8 $ 707.5 $ 419.0
Foreign 1,010.0 894.2 662.7
- ------------------------------------------------------------------------------
$ 1,604.8 $ 1,601.7 $ 1,081.7
- ------------------------------------------------------------------------------
The provision for taxes on income consisted of:
1998 1997 1996
- ------------------------------------------------------------------------------
Current:
U.S. federal* $ 159.0 $ 172.1 $ 3.5
Foreign 218.9 273.8 217.0
State and local 26.1 (.4) 19.9
- ------------------------------------------------------------------------------
404.0 445.5 240.4
- ------------------------------------------------------------------------------
Deferred:
U.S. federal* 81.2 81.7 143.1
Foreign 24.5 (3.5) (34.8)
State and local 3.8 5.0 12.0
- ------------------------------------------------------------------------------
109.5 83.2 120.3
- ------------------------------------------------------------------------------
Total $ 513.5 $ 528.7 $ 360.7
- ------------------------------------------------------------------------------
<FN>
*Includes U.S. taxes related to foreign income
Reconciliation of the U.S. federal statutory rate to Alcoa's
effective tax rate follows.
1998 1997 1996
- ------------------------------------------------------------------------------
U.S. federal statutory rate 35.0% 35.0% 35.0%
Taxes on foreign income (4.1) (.2) (3.0)
State taxes net of federal
benefit .7 (.2) 1.7
Other .4 (1.6) (.4)
- ------------------------------------------------------------------------------
Effective tax rate 32.0% 33.0% 33.3%
- ------------------------------------------------------------------------------
The components of net deferred tax assets and liabilities
follow.
1998 1997
---------------------------------------------------
Deferred Deferred Deferred Deferred
tax tax tax tax
December 31 assets liabilities assets liabilities
- ------------------------------------------------------------------------------
Depreciation -- $ 880.5 -- $ 840.4
Employee benefits $ 868.6 -- $ 789.5 --
Loss provisions 207.7 -- 186.3 --
Deferred income/expense 124.4 103.3 128.9 113.0
Tax loss carryforwards 192.5 -- 156.0 --
Tax credit carryforwards 4.9 -- -- --
Other 67.9 46.3 72.6 51.1
- ------------------------------------------------------------------------------
1,466.0 1,030.1 1,333.3 1,004.5
Valuation allowance (134.7) -- (103.5) --
- ------------------------------------------------------------------------------
$1,331.3 $1,030.1 $1,229.8 $1,004.5
- ------------------------------------------------------------------------------
Of the total deferred tax assets associated with the tax
loss carryforwards, $66.2 expires over the next 10 years
and $126.3 is unlimited. A substantial portion of the
valuation allowance relates to these carryforwards because
the ability to generate sufficient foreign taxable income
in future years is uncertain.
The cumulative amount of Alcoa's share of undistributed
earnings for which no deferred taxes have been provided
was $1,528.0 at December 31, 1998. Management has no plans
to distribute such earnings in the foreseeable future.
It is not practical to determine the deferred tax liability
on these earnings.
49
Q. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Alcoa maintains pension plans covering most U.S. employees
and certain other employees. Pension benefits generally
depend on length of service, job grade and remuneration.
Substantially all benefits are paid through pension trusts
that are sufficiently funded to ensure that all plans
can pay benefits to retirees as they become due.
Alcoa maintains health care and life insurance benefit
plans covering most eligible U.S. retired employees and
certain other retirees. Generally, the medical plans pay
a stated percentage of medical expenses, reduced by deductibles
and other coverages. These plans are generally unfunded,
except for certain benefits funded through a trust. Life
benefits are generally provided by insurance contracts.
Alcoa retains the right, subject to existing agreements,
to change or eliminate these benefits.
The table below reflects the status of Alcoa's pension
and postretirement benefit plans.
Pension benefits Postretirement benefits
---------------------------------------------------
December 31 1998 1997 1998 1997
- ------------------------------------------------------------------------------
CHANGE IN BENEFIT
OBLIGATION
Benefit obligation at
beginning of year $ 4,700.3 $ 4,534.9 $ 1,675.1 $ 1,559.8
Service cost 118.8 95.4 17.8 17.8
Interest cost 317.8 304.6 111.9 104.7
Amendments 8.1 .8 .8 2.0
Actuarial losses 164.8 167.2 30.5 96.1
Alumax acquisition 473.3 -- 148.2 --
Divestitures (46.6) (7.9) (4.8) (3.5)
Benefits paid (332.6) (337.0) (117.0) (101.2)
Exchange rate (10.1) (57.7) (.3) (.6)
- ------------------------------------------------------------------------------
Benefit obligation at end
of year $ 5,393.8 $ 4,700.3 $ 1,862.2 $ 1,675.1
- ------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets
at beginning of year $ 5,100.8 $ 4,335.2 $ 88.3 $ 75.1
Actual return on plan
assets 600.5 1,042.0 11.6 13.2
Alumax acquisition 428.4 -- -- --
Divestiture (50.1) (10.3) -- --
Employer contributions 47.2 113.7 -- --
Participants
contributions 11.3 12.3 -- --
Benefits paid (350.6) (316.4) -- --
Administrative expenses (16.6) (15.8) -- --
Exchange rate (12.8) (59.9) -- --
- ------------------------------------------------------------------------------
Fair value of plan assets
at end of year $ 5,758.1 $ 5,100.8 $ 99.9 $ 88.3
- ------------------------------------------------------------------------------
FUNDED STATUS 364.3 400.5 (1,762.3) (1,586.8)
Unrecognized net
actuarial loss (789.2) (785.9) (47.6) (82.3)
Unrecognized net prior
service cost (credit) 90.4 126.3 (150.8) (185.5)
Unrecognized transition
obligation 1.9 4.5 -- --
- ------------------------------------------------------------------------------
Net amount recognized $ (332.6) $ (254.6) $(1,960.7) $(1,854.6)
- ------------------------------------------------------------------------------
AMOUNT RECOGNIZED IN THE
BALANCE SHEET CONSISTS OF:
Prepaid benefit 58.5 26.4 -- --
Accrued benefit liability (424.7) (310.6) (1,960.7) (1,854.6)
Intangible asset 9.3 14.0 -- --
Accumulated other
comprehensive income 24.3 15.6 -- --
- ------------------------------------------------------------------------------
Net amount recognized $ (332.6) $ (254.6) $(1,960.7) $(1,854.6)
- ------------------------------------------------------------------------------
The components of net periodic benefit costs are reflected
below.
Pension benefits Postretirement benefits
------------------------------------------------------------------------------------------------
December 31 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC
BENEFIT COSTS
Service cost $ 118.8 $ 95.4 $ 101.7 $ 17.8 $ 17.8 $ 19.3
Interest cost 317.8 304.6 291.0 111.9 104.7 104.4
Expected return on plan
assets (390.6) (346.2) (324.1) (8.0) (6.8) (5.8)
Amortization of prior service
cost (benefit) 48.3 36.7 34.5 (34.0) (34.2) (40.9)
Recognized actuarial (gain)
loss (7.2) .7 1.0 (5.2) (3.4) (3.2)
Amortization of transition
obligation 1.6 1.4 2.3 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit costs $ 88.7 $ 92.6 $ 106.4 $ 82.5 $ 78.1 $ 73.8
- ---------------------------------------------------------------------------------------------------------------------------------
50
The aggregate benefit obligation and fair value of plan
assets for the pension plans with benefit obligations
in excess of plan assets were $754.3 and $445.0, respectively,
as of December 31, 1998, and $383.3 and $179.3, respectively,
as of December 31, 1997. The aggregate pension accumulated
benefit obligation and fair value of plan assets with
accumulated benefit obligations in excess of plan assets
were $500.8 and $287.1, respectively, as of December 31,
1998, and $179.0 and $26.3, respectively, at December
31, 1997.
Weighted average assumptions used to determine plan liabilities
and expense follow.
December 31 1998 1997 1996
- ------------------------------------------------------------------------------
Discount rate 6.50% 6.75% 7.00%
Expected long-term return on
plan assets 9.00 9.00 9.00
Rate of compensation increase 5.00 5.00 5.00
- ------------------------------------------------------------------------------
For measurement purposes, a 6.75% annual rate of increase
in the per capita cost of covered health care benefits
was assumed for 1999. The rate was assumed to decrease
gradually to 5.0% in 2004 and remain at that level thereafter.
Assumed health care cost trend rates have a significant
effect on the amounts reported for the health care plan.
A one percentage point change in assumed health care cost
trend rates would have the following effects:
1% 1%
increase decrease
- ------------------------------------------------------------------------
Effect on total of service and
interest cost components $ 10.7 $ (9.1)
Effect on postretirement benefit
obligations 139.8 (120.8)
- --------------------------------------------------------------------------
Alcoa also sponsors a number of defined contribution pension
plans. Expenses were $57.3 in 1998, $47.2 in 1997 and
$44.4 in 1996.
R. LEASE EXPENSE Certain equipment, warehousing and office
space and oceangoing vessels are under operating lease
agreements. Total expense for all leases was $129.6 in
1998, $110.9 in 1997 and $95.4 in 1996. Under long-term
operating leases, minimum annual rentals are $81.5 in
1999, $60.3 in 2000, $47.7 in 2001, $30.1 in 2002, $16.5
in 2003 and a total of $40.4 for 2004 and thereafter.
S. INTEREST COST COMPONENTS
1998 1997 1996
- ------------------------------------------------------------------------------
Amount charged to expense $ 197.9 $ 140.9 $ 133.7
Amount capitalized 13.2 9.0 5.3
- ------------------------------------------------------------------------------
$ 211.1 $ 149.9 $ 139.0
- ------------------------------------------------------------------------------
T. FINANCIAL INSTRUMENTS The carrying values and fair
values of Alcoa's financial instruments at December 31
follow.
1998 1997
---------------------------------------------------
Carrying Fair Carrying Fair
value value value value
- ------------------------------------------------------------------------------
Cash and cash equivalents $ 342.2 $ 342.2 $ 800.8 $ 800.8
Short-term investments 39.4 39.4 105.6 105.6
Noncurrent receivables 66.8 66.8 83.9 83.9
Short-term debt 612.1 612.1 494.9 494.9
Long-term debt 2,877.0 2,902.1 1,457.2 1,456.3
- ------------------------------------------------------------------------------
The methods used to estimate the fair values of certain
financial instruments follow.
CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS AND
SHORT-TERM DEBT. The carrying amounts approximate fair
value because of the short maturity of the instruments.
All investments purchased with a maturity of three months
or less are considered cash equivalents.
NONCURRENT RECEIVABLES. The fair value of noncurrent receivables
is based on anticipated cash flows and approximates carrying
value.
LONG-TERM DEBT. The fair value is based on interest rates
that are currently available to Alcoa for issuance of
debt with similar terms and remaining maturities.
Alcoa holds or purchases derivative financial instruments
for purposes other than trading. Details of the significant
instruments follow.
FOREIGN EXCHANGE CONTRACTS. The company enters into foreign
exchange contracts to hedge its significant firm and anticipated
purchase and sale commitments denominated in foreign currencies.
These contracts cover periods commensurate with known
or expected exposures, generally within 24 months, and
are principally unsecured foreign exchange contracts with
carefully selected banks. The market risk exposure is
essentially limited to risk related to currency rate movements.
Unrealized losses on these contracts at December 31, 1998
and 1997 were $36.0 and $84.9, respectively.
The table below reflects the various types of foreign
exchange contracts Alcoa uses to manage its foreign exchange
risk.
1998 1997
---------------------------------------------------
Notional Market Notional Market
amount value amount value
- ------------------------------------------------------------------------------
Forwards $ 2,845.3 $ (57.8) $ 2,235.8 $ (102.7)
Purchased options 51.8 1.2 232.5 (42.1)
Written options 27.1 (.1) 202.1 40.3
- ------------------------------------------------------------------------------
The notional values summarized above provide an indication
of the extent of the company's involvement in such instruments
but do not represent its exposure to market risk. Alcoa
utilizes written options mainly to offset or close out
purchased options.
The following table summarizes by major currency the contractual
amounts of Alcoa's forward exchange and option contracts
translated to U.S. dollars at December 31 rates. The "buy"
amounts represent
51
the U.S. dollar equivalent of commitments to purchase
foreign currencies, and the "sell" amounts represent the
U.S. dollar equivalent of commitments to sell foreign
currencies.
1998 1997
---------------------------------------------------
Buy Sell Buy Sell
- ------------------------------------------------------------------------------
Australian dollar $1,750.7 $210.6 $1,492.0 $291.3
Canadian dollar 230.3 129.3 7.1 1.1
Dutch guilder 134.9 22.5 111.9 18.1
Japanese yen 109.3 14.0 68.2 12.1
Deutsche mark 21.9 69.0 36.5 151.2
Pound sterling 29.8 69.7 62.3 115.3
Other 35.0 35.7 38.1 63.5
- ------------------------------------------------------------------------------
$2,311.9 $550.8 $1,816.1 $652.6
- ------------------------------------------------------------------------------
INTEREST RATE SWAPS. Alcoa manages its debt portfolio
by using interest rate swaps and options to achieve an
overall desired position of fixed and floating rates.
As of December 31, 1998, the company had the following
interest rate swap contracts outstanding:
> Four interest rate swap contracts relating to Alcoa's
5.75% notes that mature in 2001. The swaps convert $175
notional amount from fixed rates to floating rates and
mature in 2001.
> Four basis swap contracts on $175 notional amount relating
to Alcoa's outstanding commercial paper. These swaps mature
in 1999.
> Five interest rate swap contracts relating to Alcoa
Fujikura's variable rate loan. These agreements convert
the variable rate to a fixed rate on a notional amount
of $218 and mature in 2002.
In addition to the above, Aluminio has a number of interest
rate swap contracts, relating to deposit accounts, that
primarily convert local currency floating rates to dollar
fixed rates, on a notional amount of $276.
Alcoa utilizes cross-currency interest rate swaps to take
advantage of international debt markets while limiting
foreign exchange risk. At year-end 1998, Alcoa had in
place foreign currency forward contracts to effectively
convert the principal payment due in 1999 on its Yen7.5
billion loan to a U.S. dollar obligation on a notional
amount of $78. Alcoa also had in place Yen2.5 billion of
cross-currency interest rate swaps that effectively convert
U.S. dollar-denominated debt into liabilities in yen based
on Japanese interest rates.
Based on current interest rates for similar transactions,
the fair value of all interest rate swap agreements is
not material.
Credit and market risk exposures are limited to the net
interest differentials. The net payments or receipts from
interest rate swaps are recorded as part of interest expense
and are not material. The effect of interest rate swaps
on Alcoa's composite interest rate on long-term debt was
not material at the end of 1998 or 1997.
Alcoa is exposed to credit loss in the event of nonperformance
by counterparties on the above instruments, but does not
anticipate nonperformance by any of the counterparties.
For further information on Alcoa's hedging and derivatives
activities, see Note A.
U. 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.
See Note A for additional information.
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 ranges of potential costs for certain
matters. For example, there are issues related to the
Massena, New York, and Pt. Comfort, Texas 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 two 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.
During 1998, Alcoa continued to perform studies and
investigations on the Grasse River. In addition, Alcoa proposed
to submit the report of remedial alternatives to EPA in phases,
as additional information is obtained from these ongoing
studies and investigations. In October 1998, Alcoa submitted
the first of these phased reports, consisting of a summary
of results of certain river and sediment studies performed
over the past several years. Based on these studies, Alcoa
has proposed to EPA that pilot scale tests be performed
to assess the feasibility of performing certain sediment
covering techniques. The costs of these pilot scale tests
have been fully reserved. The results of these tests and
other related field pilot studies should permit the development
of the remaining phases of the remedial alternative report.
Alcoa is awaiting EPA approval for these pilot tests.
Based on the above, the costs to complete a remedy related
to this site currently cannot be estimated 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.
52
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 and a draft baseline risk assessment to
EPA. Alcoa expects to submit a draft feasibility study
during 1999. 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. Additional costs to complete
a remedy currently cannot be estimated since they will
depend on the extent of remediation required, if any,
the remedial method chosen and the time frame to complete
any remediation activity. 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 expected to
be completed within the next 12 to 24 months.
Based on the above, it is possible that results of operations
in a particular period could be materially affected by
certain of these matters. 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 the end of 1998
and 1997 was $217.0 and $243 (of which $84.6 and $72.7
were classified as a current liability), respectively,
and reflects the most probable costs to remediate identified
environmental conditions for which costs can be reasonably
estimated. About 20% of the 1998 balance relates to the
Massena plant site and 16% of the 1998 balance relates
to the Pt. Comfort plant site. Remediation expenses charged
to the reserve were $63 in 1998, $64 in 1997 and $72 in
1996. 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.
SUPPLEMENTAL FINANCIAL INFORMATION
QUARTERLY DATA (UNAUDITED)
(dollars in millions, except per-share amounts)
1998 First Second Third Fourth Year
- ------------------------------------------------------------------------------
Sales $3,445.1 $3,587.0 $4,108.9 $4,198.8 $15,339.8
Income from
operations 279.7 269.5 266.2 275.9 1,091.3
Net income 209.9 207.1 217.7 218.3* 853.0
Earnings per
share:
Basic .63 .62 .61 .59 2.44
Diluted .62 .62 .61 .59 2.42
- ------------------------------------------------------------------------------
<FN>
*The 1998 fourth quarter included an after-tax credit of $31.6 related to
changes in the LIFO index.
1997 First Second Third Fourth Year
- ------------------------------------------------------------------------------
Sales $3,231.1 $3,432.0 $3,357.5 $3,298.6 $3,319.2
Income from
operations 220.8 276.0 286.4 289.8 1,073.0
Net income 159.1 207.6 228.1 210.3* 805.1
Earnings per
share:
Basic .46 .60 .66 .62 2.33
Diluted .45 .59 .65 .61 2.31
- ------------------------------------------------------------------------------
<FN>
*The 1997 fourth quarter included an after-tax credit of $19.1 related to
changes in the LIFO index.
NUMBER OF EMPLOYEES (UNAUDITED)
1998 1997 1996
- ------------------------------------------------------------------------------
Other Americas 40,900 36,200 29,800
U.S. 38,900 27,200 28,900
Europe 18,200 11,900 12,500
Pacific 5,500 6,300 5,600
- ------------------------------------------------------------------------------
103,500 81,600 76,800
- ------------------------------------------------------------------------------
53
GRAPHICS APPENDIX LIST
Revenues by Segment - page 29
billions of dollars
1996 1997 1998
---- ---- ----
Alumina and Chemicals 2.0 2.0 1.8
Primary Metals 1.6 1.6 2.1
Engineered Products 1.9 2.1 3.1
Flat-rolled Products 4.1 4.2 4.9
Other Segments 3.5 3.4 3.4
Higher volumes for aluminum and alumina more than offset lower
overall prices for these products. Nonaluminum product
revenues fell as improved revenues from automotive electrical
components and plastic closures were offset by the loss of
revenues from divested operations.
Alumina Production - page 29
thousands of metric tons
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
10,195 10,578 10,644 11,048 12,938
Aluminum Product Shipments - page 30
thousands of metric tons
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Ingot 655 673 901 920 1,367
Fabricated Products 1,896 1,909 1,940 2,036 2,584
----- ----- ----- ----- -----
Total 2,551 2,582 2,841 2,956 3,951
===== ===== ===== ===== =====
Average Realized Ingot Price - page 30
cents per pound
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
$.64 $.81 $.73 $.75 $.67
Number of Employees - page 33
in thousands at year end
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Nonaluminum 17.3 26.7 33.8 39.7 46.7
Alumina and Aluminum 42.9 45.3 43.0 41.9 56.8
---- ---- ---- ---- -----
Total 60.2 72.0 76.8 81.6 103.5
===== ==== ==== ==== =====
Cash From Operations - page 35
millions of dollars
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
1,394 1,713 1,279 1,888 2,197
Debt as a Percent of Invested Capital - page 35
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
20.3 24.0 25.5 25.0 31.7
Free Cash Flow to Debt Coverage - page 36
times covered
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
1.09 1.12 0.79 1.13 0.63
Capital Expenditures and Depreciation - page 36
millions of dollars
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Capital Expenditures 612 887 996 912 932
Depreciation 671 713 747 735 842
Employees by Geographic Area - page 53
1998: 103,500
Other Americas 39%
U.S. 38%
Europe 18%
Pacific 5%
Percent Return on Shareholders' Equity - page 63
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Before Unusual Items 5.2 18.8 14.4 17.1 16.3
After Unusual Items 9.9 18.5 11.6 18.1 16.3
Dividends Paid per Common Share* - page 64
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Variable 0 0 .215 0 .25
Base .40 .45 .45 .488 .50
--- --- ---- ---- ---
.40 .45 .665 .488 .75
<FN>
* Adjusted to reflect two-for-one stock split in February 1995 and
February 1999
Stock Listing - page 64
Common: New York Stock Exchange, The Electronical Stock
Exchange in Switzerland and exchanges in Brussels, Frankfurt
and London
Preferred: Ticker Symbol:AA American Stock Exchange
Quarterly Common Stock Information - page 64
1998* 1999*
---------------------------- ----------------------------
Quarter High Low Dividend High Low Dividend
First $39-1/16 $32-9/16 $.1875 $38-1/8 $32-1/8 $.1125
Second 39-11/16 31-3/8 .1875 39-5/8 32-5/8 .125
Third 37 29 .1875 44-13/16 37-9/16 .125
Fourth 40-5/8 33-5/8 .1875 42 33 .125
- --------------------------------------------------------------------------------
Year $40-5/8 $29 $.75 $44-13/16 $32-1/8 $.4875
================================================================================
<FN>
* Adjusted to reflect two-for-one stock split declared January 8, 1999
Common Share Data - page 64
Estimated number Average shares
of shareholders* outstanding (000)+
- ----------------------------------------------------------
1998 119,000 349,114
1997 95,800 344,452
1996 88,300 348,667
1995 83,600 356,036
1994 55,200 355,764
- ----------------------------------------------------------
<FN>
*These estimates include shareholders who own stock registered in
their own names and those who own stock through banks and brokers.
+Adjusted to reflect two-for-one split declared January 8, 1999