FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1999 Commission File Number 1-3610
ALCOA INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0317820
(State of incorporation) (I.R.S. Employer Identification No.)
201 Isabella Street, Pittsburgh, Pennsylvania 15212-5858
(Address of principal executive offices) (Zip Code)
Office of Investor Relations 412-553-3042
Office of the Secretary 412-553-4707
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
As of July 21, 1999, 366,666,479 shares of common stock, par
value $1.00, of the Registrant were outstanding.
A07-15910
-1-
PART I - FINANCIAL INFORMATION
Alcoa and subsidiaries
Condensed Consolidated Balance Sheet
(in millions)
(unaudited)
June 30 December 31
ASSETS 1999 1998
----------- -----------
Current assets:
Cash and cash equivalents (includes cash of $109.6 in
1999 and $131.1 in 1998) $ 242.7 $ 342.2
Short-term investments 63.7 39.4
Receivables from customers, less allowances:
1999-$60.7; 1998-$61.4 2,105.9 2,163.2
Other receivables 154.2 171.0
Inventories (B) 1,631.1 1,880.5
Deferred income taxes 197.2 198.0
Prepaid expenses and other current assets 239.7 230.8
--------- ---------
Total current assets 4,634.5 5,025.1
--------- ---------
Properties, plants and equipment, at cost 18,535.2 18,224.5
Less, accumulated depreciation, depletion and
amortization 9,391.9 9,091.0
--------- ---------
Net properties, plants and equipment 9,143.3 9,133.5
Goodwill, net of accumulated amortization of $206.1 in --------- ---------
1999 and $179.3 in 1998 1,371.7 1,414.1
Other assets 1,948.9 1,889.8
--------- ---------
Total assets $17,098.4 $17,462.5
========= =========
LIABILITIES
Current liabilities:
Short-term borrowings $ 428.5 $ 431.0
Accounts payable, trade 1,095.1 1,044.3
Accrued compensation and retirement costs 530.9 553.2
Taxes, including taxes on income 320.2 431.3
Other current liabilities 468.3 627.4
Long-term debt due within one year 134.6 181.1
--------- ---------
Total current liabilities 2,977.6 3,268.3
--------- ---------
Long-term debt, less amount due within one year (C) 2,807.6 2,877.0
Accrued postretirement benefits 1,768.4 1,840.1
Other noncurrent liabilities and deferred credits 1,627.2 1,587.1
Deferred income taxes 339.6 358.1
--------- ---------
Total liabilities 9,520.4 9,930.6
--------- ---------
MINORITY INTERESTS 1,486.6 1,476.0
--------- ---------
CONTINGENT LIABILITIES (D) - -
SHAREHOLDERS' EQUITY
Preferred stock 55.8 55.8
Common stock 394.7 394.7
Additional capital 1,670.1 1,675.9
Retained earnings 5,607.3 5,305.1
Treasury stock, at cost (1,190.1) (1,028.7)
Accumulated other comprehensive loss (E) (446.4) (346.9)
--------- ---------
Total shareholders' equity 6,091.4 6,055.9
--------- ---------
Total liabilities and shareholders' equity $17,098.4 $17,462.5
========= =========
The accompanying notes are an integral part of the financial
statements.
-2-
Alcoa and subsidiaries
Condensed Statement of Consolidated Income (unaudited)
(in millions, except per share amounts)
Second quarter Six months
ended ended
June 30 June 30
--------- ---------
1999 1998 1999 1998
REVENUES ---- ---- ---- ----
Sales $4,032.7 $3,587.0 $8,017.4 $7,032.1
Other income 42.8 18.3 39.2 46.4
------- ------- ------- -------
4,075.5 3,605.3 8,056.6 7,078.5
------- ------- ------- -------
COSTS AND EXPENSES
Cost of goods sold 3,140.4 2,787.5 6,268.0 5,434.9
Selling, general administrative and other
expenses 202.9 156.7 394.5 313.4
Research and development expenses 30.4 27.9 57.8 52.4
Provision for depreciation, depletion and
amortization 220.7 186.1 439.4 370.9
Interest expense 49.5 41.8 102.1 81.0
------- ------- ------- -------
3,643.9 3,200.0 7,261.8 6,252.6
------- ------- ------- -------
EARNINGS
Income before taxes on income 431.6 405.3 794.8 825.9
Provision for taxes on income (F) 138.1 135.8 254.3 276.7
------- ------- ------- -------
Income from operations 293.5 269.5 540.5 549.2
Less: Minority interests' share (53.5) (62.4) (79.4) (132.2)
------- ------- ------- -------
NET INCOME $ 240.0 $ 207.1 $ 461.1 $ 417.0
======= ======= ======= =======
EARNINGS PER SHARE (G)
Basic $ .65 $ .62 $ 1.25 $ 1.25
======= ======= ======= =======
Diluted $ .64 $ .62 $ 1.23 $ 1.24
======= ======= ======= =======
Dividends paid per common share $ .20125 $ .1875 $ .4025 $ .375
======= ======= ======= =======
The accompanying notes are an integral part of the financial
statements.
-3-
Alcoa and subsidiaries
Condensed Statement of Consolidated Cash Flows (unaudited)
(in millions)
Six months ended
June 30
-------
1999 1998
--------- ---------
CASH FROM OPERATIONS
Net income $ 461.1 $ 417.0
Adjustments to reconcile net income to cash from
operations:
Depreciation, depletion and amortization 431.4 377.5
Increase (reduction) in deferred income taxes (10.1) (1.0)
Equity income before additional taxes, net of dividends (7.3) (1.5)
Book value of asset disposals 9.5 18.4
Minority interests 79.4 132.2
Other (1.3) 1.2
Changes in assets and liabilities, excluding the effects
of acquisitions and divestitures:
Reduction (increase) in receivables 43.0 (132.4)
Reduction in inventories 233.7 87.0
Reduction in prepaid expenses and other current assets 11.6 23.5
Reduction in accounts payable and accrued expenses (141.6) (23.3)
Reduction in taxes, including taxes on income (64.7) (9.0)
(Reduction) increase in deferred hedging gains (45.3) 6.1
Net change in noncurrent assets and liabilities (87.5) 25.3
-------- --------
CASH FROM OPERATIONS 911.9 921.0
-------- --------
FINANCING ACTIVITIES
Net changes in short-term borrowings (7.6) (40.8)
Common stock issued and treasury stock sold 427.3 23.8
Repurchase of common stock (603.3) (293.5)
Dividends paid to shareholders (148.6) (126.0)
Dividends paid and return of capital to minority interests (61.9) (117.1)
Net change in commercial paper (70.3) 643.8
Additions to long-term debt 216.4 815.3
Payments on long-term debt (282.6) (97.8)
-------- --------
CASH (USED FOR) FROM FINANCING ACTIVITIES (530.6) 807.7
-------- --------
INVESTING ACTIVITIES
Capital expenditures (387.7) (366.5)
Acquisitions, net of cash acquired (15.9) (1,352.7)
Proceeds from the sale of assets 30.9 -
Additions to investments (68.1) (37.9)
Net change in short-term investments (24.2) 30.9
Changes in minority interests (4.5) 39.8
Other (6.8) (8.1)
-------- --------
CASH USED FOR INVESTING ACTIVITIES (476.3) (1,694.5)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (4.5) (.8)
-------- --------
CHANGES IN CASH
Net change in cash and cash equivalents (99.5) 33.4
Cash and cash equivalents at beginning of year 342.2 800.8
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 242.7 $ 834.2
======== ========
The accompanying notes are an integral part of the financial
statements.
-4-
Notes to Condensed Consolidated Financial Statements
(in millions)
A. Common Stock Split - On January 8, 1999, the board of
directors declared a two-for-one common stock split, which was
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.
B. Inventories
June 30 December 31
1999 1998
-------------- -------------
Finished goods $ 394.3 $ 418.2
Work in process 552.1 591.7
Bauxite and alumina 297.2 346.5
Purchased raw materials 232.0 361.1
Operating supplies 155.5 163.0
------- -------
$1,631.1 $1,880.5
======= =======
Approximately 56% of total inventories at June 30, 1999
were valued on a LIFO basis. If valued on an average cost
basis, total inventories would have been $705.6 and $702.8
higher at June 30, 1999 and December 31, 1998, respectively.
C. Long-Term Debt - In 1998, Alcoa issued $300 of thirty-year
6.75% bonds due 2028, $250 of 6.5% term debt due in 2018 and
$200 of 6.125% 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.
D. 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.
Alcoa Aluminio (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 fulfill their financial
responsibilities, Aluminio may be liable for its pro rata
share of the deficiency.
Alcoa of Australia (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.
E. Comprehensive Income
Second quarter Six months
ended ended
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
Net income $240.0 $207.1 $461.1 $417.0
Other comprehensive loss (10.6) (32.5) (99.5) (46.6)
----- ----- ----- -----
Comprehensive income $229.4 $174.6 $361.6 $370.4
===== ===== ===== =====
-5-
F. Income Taxes - The income tax provision for the period is
based on the effective tax rate expected to be applicable for
the full year. The 1999 second quarter rate of 32% differs
from the statutory rate primarily because of lower taxes on
foreign income.
G. Earnings Per Share - Basic earnings per share (EPS) amounts
are computed by dividing earnings applicable to common
shareholders by the average number of common shares
outstanding. Diluted EPS amounts assume the issuance of common
stock for all potentially dilutive equivalents outstanding.
Anti-dilutive outstanding stock options have been excluded from
the diluted EPS calculation. The detail of basic and diluted
EPS follow:
Second quarter Six months
ended ended
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
Net income $240.0 $207.1 $461.1 $417.0
Less: Preferred stock dividends .5 .5 1.0 1.0
----- ----- ----- -----
Income available to common $239.5 $206.6 $460.1 $416.0
stockholders
Weighted average shares outstanding 367.1 332.2 367.1 334.0
Basic EPS $ .65 $ .62 $ 1.25 $ 1.25
====== ====== ====== ======
Effect of dilutive securities:
Add: Shares issuable upon exercise
of outstanding stock options 4.2 2.0 6.9 2.0
Diluted shares outstanding 371.3 334.2 374.0 336.0
Diluted EPS $ .64 $ .62 $ 1.23 $ 1.24
====== ====== ====== ======
H. Acquisitions - In February 1998, Alcoa acquired 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 July 1998, Alcoa completed its acquisition of Alumax
Inc. (Alumax) for a total consideration of approximately
$3,800. The purchase price consisted of cash of approximately
$1,500, stock of approximately $1,300 and assumed debt of
approximately $1,000. Alumax operates a number of
manufacturing facilities in 22 states, Canada, Western Europe
and Mexico.
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.
The following presents pro forma information assuming that the
acquisition of 100% of Alumax by Alcoa had occurred at the
beginning of 1998. Adjustments that have been included to
arrive at the pro forma totals primarily include those related
to acquisition financing, the amortization of goodwill, the
elimination of transactions between Alcoa and Alumax and
additional depreciation related to the increase in basis that
resulted from the transaction. Tax effects from the pro forma
adjustments noted above also have been included at the 35%
statutory rate.
Six months
ended
June 30, 1998
-------------
Sales $8,477.4
Net income 455.6
Basic earnings per share 1.23
Diluted earnings per share 1.22
-6-
The pro forma results are not necessarily indicative of what
actually would have occurred if the transaction had been in
effect for the entire periods presented, are not intended to be
a projection of future results and do not reflect any cost
savings that might be achieved from the combined operations.
I. Recently Issued Accounting Standards - In June 1998, the
Financial Accounting Standards Board (FASB) issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities."
The standard requires that entities value all derivative
instruments at fair value and record the instruments on the
balance sheet. The standard also significantly changes the
requirements for hedge accounting. In June 1999, the FASB
approved a delay in the effective date of this standard until
January 2001. 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.
J. Reclassifications - Certain amounts have been reclassified to
conform to current year presentation.
K. Segment Information - Alcoa is primarily a producer of
aluminum products. Its segments are organized by product on a
worldwide basis. Alcoa's management reporting system evaluates
performance based on a number of factors; however, the primary
measure of performance is the after-tax operating 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.
Alcoa's products are used primarily by transportation (including
aerospace, automotive, rail and shipping), packaging, building
and construction, and industrial customers worldwide. Alcoa's
reportable segments include Alumina and chemicals, Primary
metals, Flat-rolled products and Engineered products. Businesses
that do not fall into these categories are listed as Other. The
following details sales and ATOI for each reportable segment for
the three-month and six-month periods ended June 30, 1999 and
1998.
Second quarter ended Alumina and Primary Flat-rolled Engineered
June 30, 1999 chemicals metals products products Other Total
Sales:
Third-party sales $455.8 $ 518.6 $1,257.6 $939.3 $861.1 $4,032.4
Intersegment sales 220.7 675.4 10.9 3.4 - 910.4
----- ------- ------- ----- ----- -------
Total sales $676.5 $1,194.0 $1,268.5 $942.7 $861.1 $4,942.8
===== ======= ======= ===== ===== =======
After-tax operating
income $ 61.7 $ 96.5 $ 72.3 $ 60.5 $ 70.2 $ 361.2
Second quarter ended
June 30, 1998
Sales:
Third-party sales $484.7 $ 467.8 $1,177.3 $612.7 $842.5 $3,585.0
Intersegment sales 185.8 555.2 14.9 2.6 - 758.5
----- ------- ------- ----- ----- -------
Total sales $670.5 $1,023.0 $1,192.2 $615.3 $842.5 $4,343.5
===== ======= ======= ===== ===== =======
After-tax operating
income $ 92.5 $ 74.3 $ 81.2 $ 40.8 $ 48.5 $ 337.3
-7-
Second quarter ended Alumina and Primary Flat-rolled Engineered
June 30, 1999 chemicals metals products products Other Total
Sales:
Third-party sales $ 876.1 $1,052.3 $2,527.2 $1,881.6 $1,673.9 $8,011.1
Intersegment sales 451.9 1,338.3 25.5 6.9 - 1,822.6
------- ------- ------- ------- ------- -------
Total sales $1,328.0 $2,390.6 $2,552.7 $1,888.5 $1,673.9 $9,833.7
======= ======= ======= ======= ======= =======
After-tax operating
income $ 121.4 $ 161.9 $ 137.5 $ 105.8 $ 97.8 $ 624.4
Six months ended
June 30, 1998
Sales:
Third-party sales $ 996.1 $ 879.0 $2,299.8 $1,163.2 $1,690.1 $7,028.2
Intersegment sales 331.8 1,027.3 31.3 5.1 - 1,395.5
------- ------- ------- ------- ------- -------
Total sales $1,327.9 $1,906.3 $2,331.1 $1,168.3 $1,690.1 $8,423.7
======= ======= ======= ======= ======= =======
After-tax operating
income $ 191.4 $ 158.0 $ 163.0 $ 80.6 $ 87.6 $ 680.6
The following table reconciles Alcoa's measure of segment profit
to consolidated net income.
Second quarter Six months
ended ended
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
Total after-tax operating income $361.2 $337.3 $624.4 $680.6
Elimination of intersegment (profit) loss (9.7) (8.0) (19.1) (12.0)
Unallocated amounts (net of tax):
Interest income 8.4 17.6 13.2 38.1
Interest expense (32.2) (27.2) (66.3) (52.7)
Minority interest (53.5) (62.4) (79.4) (132.2)
Mark-to-market gains (losses) 6.3 (21.1) 6.0 (40.9)
Corporate expense (41.2) (35.0) (76.9) (78.5)
Other (1) .7 5.9 59.2 14.6
------ ------ ------ ------
Consolidated net income $240.0 $207.1 $461.1 $417.0
====== ====== ====== ======
<FN>
(1) Other is comprised of differences between segment and corporate taxes, the
results of internal hedging contracts between corporate and the segments,
external hedging gains and losses, LIFO charges and credits and other
miscellaneous items.
L. Foreign Currency - Effective July 1, 1999, the Brazilian Real
became the functional currency for translating the financial
statements of Alcoa's 59%-owned Brazilian subsidiary, Alcoa
Aluminio. Economic factors and circumstances related to
Aluminio's operations have changed significantly since the
devaluation of the Real in the 1999 first quarter. Under SFAS
52, Foreign Currency Translation, the change in these facts and
circumstances requires a change to Aluminio's functional
currency.
As a result of the change, at July 1, 1999, Alcoa's shareholders'
equity and minority interests accounts were reduced by $156 and
$108, respectively. These amounts were driven principally by a
reduction in fixed assets.
One of the factors affecting the change in Aluminio's functional
currency was Alcoa's recent purchase of approximately $185 of
Aluminio's 7.5% secured export notes. The repurchase of these
notes is consistent with Alcoa's recent policy change regarding
the manner in which large subsidiaries are capitalized, and will
result in lower overall financing costs to the company.
-8-
- -------------------
In the opinion of the Company, the financial statements
and summarized financial data in this Form 10-Q report
include all adjustments, including those of a normal
recurring nature, necessary to fairly state the results
for the periods. This Form 10-Q report should be read
in conjunction with the Company's annual report on Form
10-K for the year ended December 31, 1998.
The financial information required in this Form 10-Q by
Rule 10-01 of Regulation S-X has been subject to a
review by PricewaterhouseCoopers LLP, the Company's
independent certified public accountants, as described
in their report on page 10.
-9-
Independent Accountant's Review Report
To the Shareholders and Board of Directors
Alcoa Inc. (Alcoa)
We have reviewed the unaudited condensed consolidated
balance sheet of Alcoa and subsidiaries as of June 30,
1999, the unaudited condensed statements of consolidated
income for the three-month and six-month periods ended
June 30, 1999 and 1998, and the unaudited condensed
statement of consolidated cash flows for the six-month
periods ended June 30, 1999 and 1998, which are included
in Alcoa's Form 10-Q for the period ended June 30, 1999.
These financial statements are the responsibility of
Alcoa's management.
We conducted our review in accordance with standards
established by the American Institute of Certified Public
Accountants. A review of interim financial information
consists principally of applying analytical procedures to
financial data and making inquiries of persons
responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards,
the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the condensed
consolidated financial statements referred to above for
them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with
generally accepted auditing standards, the consolidated
balance sheet of Alcoa and subsidiaries as of December 31,
1998, and the related statements of consolidated income,
shareholders' equity, and cash flows for the year then
ended (not presented herein). In our report dated
January 8, 1999, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1998, is
fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been
derived.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
July 7, 1999
-10-
Management's Discussion and Analysis of the
Results of Operations and Financial Condition
(dollars in millions, except share amounts and ingot prices;
shipments in thousands of metric tons (mt))
Results of Operations
Principal income and operating data follow.
Second quarter Six months
ended ended
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
Sales $4,032.7 $3,587.0 $8,017.4 $7,032.1
Net income 240.0 207.1 461.1 417.0
Basic earnings per common share .65 .62 1.25 1.25
Diluted earnings per common share .64 .62 1.23 1.24
Shipments of aluminum products 1,117 866 2,249 1,644
Shipments of alumina 1,836 1,888 3,500 3,811
Alcoa's average realized ingot price .64 .67 .63 .70
Earnings Summary
Alcoa reported 1999 second quarter net income of $240.0, a 16%
increase from the 1998 second quarter. The increase was due
primarily to higher shipments, which were fueled by acquisitions,
partly offset by lower prices. Cost reductions partly offset the
impact of lower prices on margins. For the year-to-date period,
net income rose 11% to $461.1. Again, higher shipments and lower
operating costs, partly offset by lower overall prices, generated
the increase.
Revenues in the 1999 quarter rose 12% to $4 billion, and
increased 14% from the 1998 six-month period to $8 billion. The
increase in revenues for both periods was due to higher aluminum
shipments, offset in part by lower overall aluminum prices.
Alumina shipments fell 8% from the 1998 six-month period as
shipments to Alumax, which were classified as third-party sales
before the acquisition, are now intersegment shipments.
Annualized return on shareholders' equity was 14.8% for the 1999
quarter, compared with 18.3% in the 1998 quarter. The decline is
due to higher shareholders' equity balances in 1999, resulting
primarily from the Alumax acquisition in 1998, partially offset
by higher earnings.
Segment Information
I. Alumina and Chemicals
Second quarter Six months
ended ended
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
Third-party alumina shipments 1,836 1,888 3,500 3,811
Third-party sales $455.8 $484.7 $ 876.1 $996.1
Intersegment sales 220.7 185.8 451.9 331.8
----- ----- ----- -----
Total sales $676.5 $670.5 $1,328.0 $1,327.9
===== ===== ======= =======
After-tax operating income $ 61.7 $ 92.5 $ 121.4 $ 191.4
This segment's activities include the mining of bauxite, which is
then refined into alumina. The alumina is sold to internal and
external customers worldwide or is processed into industrial
chemical products. A majority of the third-party sales from this
segment are derived from alumina. While total sales were nearly
unchanged, third-party sales for this segment decreased 12% from
the 1998 six-month period, while intersegment sales rose 36%
during the same period. The primary reason for the drop in third-
party sales and the increase in intersegment sales is the Alumax
acquisition. Prior to the acquisition, Alumax was an alumina
customer of Alcoa. Accordingly, shipments to Alumax smelters
were recorded as third-party sales. These same sales are
-11-
now recorded as intersegment. Without the effects of the Alumax
acquisition, third-party alumina shipments were up 9% for the six-
month period. In addition, third-party realized prices for
alumina fell 5% from the 1998 year-to-date period.
After-tax operating income for this segment fell 33% to $61.7 for
the 1999 second quarter, and 37% to $121.4 for the six-month
period. The decline is primarily due to lower internal and third-
party prices, partly offset by improved cost performance. On a
quarter-to-quarter basis, lower prices and slightly higher
operating costs drove the decline.
II. Primary Metals
Second quarter Six months
ended ended
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
Third-party aluminum shipments 354 311 724 561
Third-party sales $ 518.6 $ 467.8 $1,052.3 $ 879.0
Intersegment sales 675.4 555.2 1,338.3 1,027.3
------- ------- ------- -------
Total sales $1,194.0 $1,023.0 $2,390.6 $1,906.3
======= ======= ======= =======
After-tax operating income $ 96.5 $ 74.3 $ 161.9 $ 158.0
This segment's primary focus is Alcoa's worldwide smelter system.
Primary metals receives alumina from the alumina and chemicals
segment and produces aluminum ingot to be used by a variety of
Alcoa's other segments, as well as sold to outside customers.
The sale of ingot represents over 90% of this segment's third-
party sales. Third-party ingot revenues rose 18% from the 1998
six-month period as a 30% increase in shipments, primarily from
acquired companies and Brazil, more than offset a decline in
prices.
Intersegment sales rose 30% in the 1999 year-to-date period as
the addition of Alumax's fabrication operations resulted in
higher internal demand for metal. Alcoa's average realized third-
party price for ingot fell 4% from the 1998 second quarter to 64
cents per pound, reflecting the decline in market prices over the
last year.
Primary metals ATOI rose $3.9 to $161.9 for the first six months
of 1999. The increase in ATOI is attributable to higher volumes
and improved cost performance, which were nearly offset by a 10%
decline in realized prices. For the 1999 quarter, ATOI rose
$22.2 or 30%. The increase is a result of higher volumes, partly
offset by the above-mentioned 4% decline in realized prices. In
addition, improved results from Brazil had a positive impact on
ATOI in the 1999 second quarter.
III. Flat-Rolled Products
Second quarter Six months
ended ended
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
Third-party aluminum shipments 496 417 983 802
Third-party sales $1,257.6 $1,177.3 $2,527.8 $2,299.8
Intersegment sales 10.9 14.9 25.5 31.3
------- ------- ------- -------
Total sales $1,268.5 $1,192.2 $2,552.7 $2,331.1
======= ======= ======= =======
After-tax operating income $ 72.3 $ 81.2 $ 137.5 $ 163.0
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. Approximately one-half of the third-party sales from
this segment are derived from mill products and one-third are
-12-
from RCS. Third-party flat-rolled product's sales rose 10% from
the 1998 year-to-date period. The increase was due to a 23%
increase in shipments, which were driven by acquisitions, partly
offset by lower prices.
Third-party sales of RCS were down 10% as shipments were flat and
prices fell over the 1998 six-month period. Quarter to quarter,
revenues fell 14% as prices slipped 10%. Mill product's revenues
rose 32% from the 1998 six-month period as shipments, driven by
acquisitions, increased 64%. For the 1999 quarter, revenues were
up 30% as shipments rose 63%. Realized prices for mill products
in 1999 have declined over 1998 as a result of a lower value-
added mix, due principally to the Alumax acquisition.
ATOI for this segment fell 16% to $137.5 for the 1999 six-month
period. RCS generated the majority of the decline, as lower
selling prices had a negative impact on margins. Mill product's
ATOI rose over the year-to-year period, as higher volumes, aided
by acquisitions, offset the impact of lower prices and a less
profitable mix.
IV. Engineered products
Second quarter Six months
ended ended
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
Third-party aluminum shipments 249 128 507 249
Third-party sales $939.3 $612.7 $1,881.6 $1,163.2
Intersegment sales 3.4 2.6 6.9 5.1
----- ----- ------- -------
Total sales $942.7 $615.3 $1,888.5 $1,168.3
===== ===== ======= =======
After-tax operating income $ 60.5 $ 40.8 $ 105.8 $ 80.6
This segment includes hard and soft alloy extrusions, aluminum
forgings and wire, rod and bar. These products serve the
transportation, construction and distributor markets. Revenues
from third-party sales of engineered products increased 53% from
the 1998 second quarter, as acquisitions fueled a 95% increase in
shipments.
Approximately 80% of the revenues from this segment are derived
from the sale of extrusions. Third-party sales of soft
extrusions were up 137% from the 1998 year on a 166% increase in
shipments. The large increase in shipments was primarily due to
the Alumax acquisition, which nearly doubled Alcoa's existing
soft alloy business. Hard alloy revenues fell 20% as shipments
were down 17%.
Revenues from the sale of forged aluminum wheels increased 23% in
the 1999 six-month period, as a 26% increase in shipments offset
a decline in prices. Sales of other forged products fell 8% on a
similar decline in shipments.
Segment ATOI increased 31% to $105.8 in the 1999 year-to-date
period. Higher shipments of soft alloy extrusions partly offset
by lower hard alloy margins generated the increase. Lower
operating costs also contributed to the improvement in ATOI.
V. Other
Second quarter Six months
ended ended
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
Third-party aluminum shipments 18 10 35 32
Third-party sales $861.1 $842.5 $1,673.9 $1,690.1
After-tax operating income $ 70.2 $ 48.5 $ 97.8 $ 87.6
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This segment includes Alcoa Fujikura Ltd. (AFL), which produces
electrical components for the automotive industry as well as
telecommunications products. In addition, Alcoa's aluminum and
plastic closures operations and residential building products
operations are included in this group.
Revenues for this segment were $861 in the 1999 second quarter,
up 2% from the 1998 quarter. AFL, which generates approximately
half of the revenues reported in this segment, experienced a 5%
increase in revenues as higher volumes offset lower prices. In
addition, revenues from the sale of plastic closures increased
14% from the 1998 quarter. More than offsetting these revenue
gains were lower revenues from Alcoa Aluminio's packaging
operations, which were negatively impacted by the recent currency
devaluation and economic conditions in Brazil.
ATOI for this segment in the 1999 second quarter was $70.2, up
45% from 1998. Improved results at AFL and from closure
operations, which were both helped by cost improvements,
generated the increase. Year-to-date, improved results from
these same businesses were partly offset by losses from packaging
operations in Brazil.
Costs and Other
Cost of Goods Sold - Cost of goods sold increased $352.9, or 13%,
from the 1998 second quarter. The increase reflects higher
volumes, which were aided by acquisitions, partially offset by
lower material costs and improved cost performance. Cost of
goods sold as a percentage of sales in the 1999 second quarter
was 77.9% versus 77.7% in the 1998 quarter. The higher ratio in
1999 is primarily due to lower metal prices, partly offset by
cost performance. On a year-to-date basis, this percentage was
up .9% from 1998 to 78.2%, again due to lower metal prices partly
offset by cost improvements.
Selling and General Administrative Expenses - Selling, general
and administrative (SG&A) expenses were up $46.2, or 29%, from
the 1999 second quarter and $81.1, or 26%, on a year-to-date
basis. These increases were due to acquisitions; on a pre-
acquisition basis these costs were nearly unchanged. SG&A as a
percentage of revenue rose to 5.0% in the 1999 second quarter,
compared with 4.4% in the 1998 period. The increase was due to
the acquisition-related increase in SG&A noted above along with
lower metal prices that reduced revenues. Alcoa's objective is
to maintain SG&A costs below 5.0% of revenues.
Interest Expense - Interest expense totaled $49.5 in the 1999
second quarter, an increase of 18% over the comparable 1998
period. The increase is due to the issuance of debt in 1998 to
fund acquisitions. These borrowings include $300 of thirty-year
6.75% bonds due 2028, $250 of 6.5% term debt due in 2018 and
$200 of 6.125% term debt due in 2005. Alcoa also issued $1,100
of commercial paper in 1998, a portion of which has since been
repaid.
Income Taxes - The income tax provision for the period is based
on the effective tax rate expected to be applicable for the full
year. The 1999 second quarter rate of 32% differs from the
statutory rate primarily because of lower taxes on foreign
income.
Other Income - Other income rose to $42.8 in the 1999 second
quarter from $18.3 in the comparable 1998 period. The increase
was due to income from marking-to-market aluminum commodity
contracts versus losses in the 1998 quarter. Offsetting this
gain was a decline in interest income due to lower cash and short-
term investment balances. On a year-to-date basis other income
fell $7.2 to $39.2. The decline was the result of lower equity
and interest income and higher foreign currency losses, partly
offset by mark-to-market gains in the 1999 period versus losses
in 1998.
Foreign Currency - Effective July 1, 1999, the Brazilian Real
became the functional currency for translating the financial
statements of Alcoa's 59%-owned Brazilian subsidiary, Alcoa
Aluminio. Economic factors and circumstances related to
Aluminio's operations have changed significantly since the
devaluation of the Real in the 1999 first quarter. Under SFAS 52,
-14-
Foreign Currency Translation, the change in these facts and
circumstances requires a change to Aluminio's functional
currency.
As a result of the change, at July 1, 1999, Alcoa's shareholders'
equity and minority interests accounts were reduced by $156 and
$108, respectively. These amounts were driven principally by a
reduction in fixed assets.
One of the factors affecting the change in Aluminio's functional
currency was Alcoa's recent purchase of approximately $185 of
Aluminio's 7.5% secured export notes. The repurchase of these
notes is consistent with Alcoa's recent policy change regarding
the manner in which large subsidiaries are capitalized, and will
result in lower overall financing costs to the company.
Minority Interests - Minority interests' share of income from
operations fell 40% from the 1998 year-to-date period to $79.4.
The decrease is due primarily to lower earnings from Aluminio,
which was negatively impacted by the Brazilian currency
devaluation and resulting economic events in the 1999 first
quarter. In addition, lower earnings at Alcoa World Alumina also
contributed to the decline.
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 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 June
30, 1999 and 1998, these contracts totaled approximately 548,000
and 452,000 mt, respectively. These contracts act to fix the
purchase price for these metal purchase requirements, thereby
reducing Alcoa's risk to rising metal prices.
The futures and options contracts noted above are with
creditworthy counterparties and are further supported by cash,
treasury bills or irrevocable letters of credit issued by
carefully chosen banks.
The expiration dates of the options and the delivery dates
of the futures contracts noted above do not always coincide
exactly with the dates on which Alcoa is required to purchase
metal to meet its contractual commitments with customers.
Accordingly, some of the futures and options positions will be
rolled forward. This may result in significant cash inflows if
the hedging contracts are "in-the-money" at the time they are
rolled forward. Conversely, there could be significant cash
outflows if metal prices fall below the price of contracts being
rolled forward.
In addition to the above noted aluminum positions, Alcoa had
75,000 mt and 157,000 mt of futures and options contracts
outstanding at June 30, 1999 and 1998, 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 an after-tax
credit (charge) to earnings of $6.3 and $(19.8) at June 30, 1999
and 1998, respectively.
-15-
Alcoa also purchases certain other commodities, such as gas
and copper, for its operations and enters into futures contracts
to eliminate volatility in the prices of such products. None of
these contracts are material.
Financial Risk - Alcoa is subject to significant exposure from
fluctuations in foreign currencies. As a matter of company
policy, foreign currency exchange contracts, including forwards
and options, are sometimes used to limit the risk of fluctuating
exchange rates. In addition, Alcoa also attempts to maintain a
reasonable balance between fixed and floating rate debt and uses
interest rate swaps and caps to keep financing costs as low as
possible.
Risk Management - All of the aluminum and other commodity
contracts, as well as the various types of financial instruments,
are straightforward and held for purposes other than trading.
They are used primarily to mitigate uncertainty and volatility,
and principally cover underlying exposures.
Alcoa's commodity and derivative activities are subject to
the management, direction and control of the Strategic Risk
Management Committee (SRMC). SRMC is composed of the chief
executive officer, the 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.
Environmental Matters
Alcoa continues to participate in environmental assessments
and cleanups at a number of locations, including at operating
facilities and adjoining properties, at previously owned or
operated facilities and at Superfund and other waste sites.
A liability is recorded for environmental remediation costs
or damages when a cleanup program becomes probable and the
costs or damages can be reasonably estimated.
As assessments and cleanups proceed, the liability is
adjusted based on progress in determining the extent of
remedial actions and related costs and damages. The
liability can change substantially due to factors such as the
nature and extent of contamination, changes in remedial
requirements and technological changes. 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.
-16-
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.
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 the
1999 second quarter was $194.2 (of which $62.3 was classified
as a current liability) and reflects the most probable costs
to remediate identified environmental conditions for which
costs can be reasonably estimated. About 21% of the reserve
relates to Alcoa's Massena, New York plant site, and 15%
relates to Alcoa's Pt. Comfort, Texas plant site.
Remediation expenses charged to the reserve during the 1999
second quarter were $12.5. 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
Cash from Operations
Cash from operations during the 1999 year-to-date period totaled
$911.9, compared with $921.0 in the 1998 period. The decrease
reflects a lower level of noncurrent assets and liabilities and a
decrease in minority interests' share of income. Partially
offsetting these items were lower working capital requirements
along with higher net income.
Financing Activities
Financing activities used $530.6 of cash in the 1999 year-to-date
period, compared with $807.7 of cash generated in the 1998
period. The primary reason for the difference was Alcoa's
issuance of debt in the 1998 period, which was used primarily to
fund acquisitions. In the 1999 year-to-date period, Alcoa used
$603.3 to repurchase 11,891,034 shares of the Company's common
stock, versus $293.5 used in the 1998 period. These repurchases
were partially offset by $427.3 and $23.8 in the 1999 and 1998
periods, respectively, of stock issued for employee stock option
plans. In July 1999, Alcoa announced that the board of directors
had authorized the repurchase of 20 million shares of Alcoa
common stock. This action replaces a similar authorization
approved by the board in January 1999. Approximately 12 million
shares were repurchased under the prior authorization.
-17-
Dividends paid to shareholders were $148.6 in the 1999 six-month
period, an increase of $22.6 over the 1998 period. The increase
was primarily due to Alcoa's variable dividend program, which
paid out 40.25 cents in the first half of 1999. This compares
with 37.5 cents per share in the 1998 six-month period.
Investing Activities
Investing activities in 1998 used $1,694.5 of cash, $1,218.2 more
than the 1999 requirement of $476.3. Capital expenditures were
the majority of the 1999 spending, totaling $387.7, up 6% from
1998 levels.
Acquisitions represented the bulk of investing activities in the
1998 period. These include Alcoa's purchase of 51% of the
outstanding stock of Alumax in the 1998 second quarter and
Alcoa's purchase of Inespal in the 1998 first quarter. Alcoa
purchased the remaining 49% of Alumax in the 1998 third quarter.
During the 1999 period, Alcoa acquired the bright products
business of Pechiney's Rhenalu rolling plant located near
Toulouse, France and Reynolds' aluminum extrusion plant in
Irurzun, Spain.
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 and financial
officers. 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 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, mini-computer 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
June 30, 1999, the remediation phase had been completed for 98%
of Alcoa's critical components with 96% of all critical
components having completed compliance testing. It is presently
expected that compliance testing will be completed for 99% of
critical systems by the end of the third quarter.
Alcoa relies on numerous third parties 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, is
conducting follow-up activities with critical and important
suppliers. If Alcoa concludes that a third party presents a
-18-
substantial risk of a Year 2000 based business disruption, an
effort will be made to resolve the issue. If necessary, a new
vendor or supplier will be qualified and secured. Communication
with these 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 Alcoa and its EDI
trading partners, on a case-by-case basis, modify existing EDI
transaction formats. 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 does not
expect Year 2000-related disruptions to occur in these
situations.
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 will
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 order to minimize operational effects, Alcoa is utilizing a
structured contingency planning process throughout the company to
identify and analyze Year 2000 operational risks. Risk
assessments are documented and reported to the Year 2000 Global
Program Office. The specific risk scenarios are reviewed by
operational management and detailed contingency plans are
developed for the areas of greatest risk. It is expected that
detailed contingency planning will be completed by the end of the
third quarter.
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 samples local Year 2000 readiness. Each of Alcoa's
business units will receive at least one verification audit
during 1999 with more than eighty-five reviews planned.
For the 1999 six-month period, Alcoa incurred approximately $18.0
million 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.
Total direct costs for 1999 are estimated to be between $35 and
$50.
-19-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
As previously reported, in March 1998, Region V of the EPA
referred various alleged environmental violations at Alcoa's
Warrick Operations to the civil division of the U.S. Department
of Justice (DOJ). The alleged violations stem from an April 1997
multi-media environmental inspection of Warrick Operations by the
EPA relating to water permit exceedances as reported on monthly
discharge monitoring reports, wastewater toxicity issues and
alleged opacity violations. Alcoa and the DOJ have entered into
a series of tolling agreements to suspend the statute of
limitations related to the alleged violations in this matter.
While the parties have reached an agreement in principle, details
of the settlement and a consent agreement have yet to be
finalized.
As previously reported, in October 1998, Region V of the EPA
referred various alleged environmental violations at Alcoa's
Lafayette Operations to the civil division of the DOJ. The
alleged violations relate to water permit exceedances as reported
on monthly discharge monitoring reports. Alcoa and the DOJ
entered into a tolling agreement to suspend the statute of
limitations related to the alleged violations in order to
facilitate settlement discussions with the DOJ and EPA. The
parties have been unable to reach settlement on this matter. On
June 11, 1999, the DOJ and EPA filed a complaint against Alcoa in
the United States District Court for the Northern District of
Indiana.
In March 1999, two search warrants were executed by various
federal and state agencies on the Alcoa Port Allen Works of
Discovery Aluminas, Inc., a subsidiary, in Port Allen, Louisiana.
Also in March, Discovery Aluminas, Inc. was served with a grand
jury subpoena that required the production to a federal grand
jury of certain company records relating to alleged environmental
issues involving wastewater discharges and management of solid or
hazardous wastes at the plant. In April 1999, the Port Allen
plant manager was indicted for a single count of violating the
Clean Water Act. Alcoa is cooperating with the investigation and
is engaged in discussions to resolve the situation.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of Alcoa shareholders held on May 7, 1999,
Alain J. P. Belda was elected a director of Alcoa to serve for a
two-year term, and Joseph T. Gorman, Sir Ronald Hampel and Marina
v.N. Whitman were reelected to serve for three-year terms. Votes
cast for Mr. Belda were 292,353,336 and votes withheld were
2,026,329; votes cast for Mr. Gorman were 292,653,209 and votes
withheld were 1,726,456; votes cast for Sir Ronald Hampel were
292,630,878 and votes withheld were 1,748,787; votes cast for Mr.
Mulroney were 292,657,653 and votes withheld were 1,722,012; and
votes cast for Dr. Whitman were 292,609,208 and votes withheld
were 1,770,457.
Also at that annual meeting, a proposal to approve the Alcoa
Stock Incentive Plan was adopted. Total votes cast for the Alcoa
Stock Incentive Plan were 254,906,831, votes cast against were
38,128,578 and there were 1,344,256 abstentions. Abstentions are
not counted for voting purposes under Pennsylvania law, the
jurisdiction of Alcoa's incorporation.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10(g)(1) Deferred Fee Plan for Directors, as amended July 9,
1999.
10(p)(1) Alcoa Stock Incentive Plan, as amended May 6,
1999.
12. Computation of Ratio of Earnings to Fixed Charges
15. Independent Accountants' letter regarding unaudited
financial information
27. Financial Data Schedule
(b) No reports on form 8-K were filed by Alcoa during the
quarter covered by this report.
-20-
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
Alcoa Inc.
July 22, 1999 By /s/ RICHARD B. KELSON
Date Richard B. Kelson
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
July 22, 1999 By /s/ EARNEST J. EDWARDS
Date Earnest J. Edwards
Senior Vice President and
Controller
(Chief Accounting Officer)
-21-
EXHIBITS
Page
10(g)(1) Deferred Fee Plan for Directors, as amended
July 9, 1999.
10(p)(1) Alcoa Stock Incentive Plan, as amended
May 6, 1999.
12. Computation of Ratio of Earnings to Fixed
Charges 23
15. Independent Accountants' letter regarding 24
unaudited financial information
27. Financial Data Schedule
-22-