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, 2001 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 212-836-2674
Office of the Secretary 412-553-4707
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
As of August 7, 2001, 857,667,051 shares of common stock, par value $1.00 per
share, of the Registrant were outstanding.
A07-20004
PART I - FINANCIAL INFORMATION
ITEM 1. - Financial Statements.
Alcoa and subsidiaries
Condensed Consolidated Balance Sheet
(in millions)
(unaudited)
June 30 December 31
ASSETS 2001 2000
------- -------
Current assets:
Cash and cash equivalents $ 385 $ 315
Short-term investments 13 56
Receivables from customers, less allowances of
$83 in 2001 and $69 in 2000 3,015 3,461
Other receivables 310 354
Inventories (C) 2,790 2,703
Deferred income taxes 350 385
Prepaid expenses and other current assets 499 304
------- -------
Total current assets 7,362 7,578
------- -------
Properties, plants and equipment, at cost 22,028 22,600
Less: accumulated depreciation, depletion and
amortization 10,033 9,750
------- -------
Net properties, plants and equipment 11,995 12,850
------- -------
Goodwill, net of accumulated amortization of $433 in
2001 and $344 in 2000 5,763 6,003
Other assets, including assets held for sale (H) 3,303 5,260
------- -------
Total assets $28,423 $31,691
======= =======
LIABILITIES
Current liabilities:
Short-term borrowings $ 101 $ 2,719
Accounts payable, trade 1,648 1,876
Accrued compensation and retirement costs 749 928
Taxes, including taxes on income 689 702
Other current liabilities 1,329 1,302
Long-term debt due within one year 217 427
------- -------
Total current liabilities 4,733 7,954
------- -------
Long-term debt, less amount due within one year (D) 5,977 4,987
Accrued postretirement benefits 2,561 2,719
Other noncurrent liabilities and deferred credits 2,111 2,126
Deferred income taxes 748 969
------- -------
Total liabilities 16,130 18,755
------- -------
MINORITY INTERESTS 1,251 1,514
------- -------
CONTINGENT LIABILITIES (E) - -
SHAREHOLDERS' EQUITY
Preferred stock 56 56
Common stock 925 925
Additional capital 6,109 5,927
Retained earnings 7,533 7,127
Treasury stock, at cost (2,341) (1,717)
Accumulated other comprehensive loss (F and J) (1,240) (896)
------- -------
Total shareholders' equity 11,042 11,422
------- -------
Total liabilities and shareholders' equity $28,423 $31,691
======= =======
The accompanying notes are an integral part of the financial statements.
Alcoa and subsidiaries
Condensed Statement of Consolidated Income (unaudited)
(in millions, except per share amounts)
Second quarter ended Six months ended
June 30 June 30
---------------------- ------------------
2001 2000 2001 2000 *
------ ------ ------- -------
Sales $5,991 $5,569 $12,167 $10,078
Cost of goods sold 4,607 4,216 9,320 7,530
Selling, general administrative
and other expenses 326 272 649 499
Research and development expenses 55 48 104 87
Provision for depreciation,
depletion and amortization 309 290 630 515
Special items (B) 212 - 212 -
Interest expense 93 95 208 146
Other income, net (107) (52) (199) (93)
------ ------ ------- -------
5,495 4,869 10,924 8,684
------ ------ ------- -------
Income before taxes on income 496 700 1,243 1,394
Provision for taxes on income 157 238 404 475
------ ------ ------- -------
Income from operations 339 462 839 919
Less: Minority interests' share 32 85 128 190
------ ------ ------- -------
Income before accounting change 307 377 711 729
Cumulative effect of accounting change
for revenue recognition (J) - - - (5)
------ ------ ------- -------
NET INCOME $ 307 $ 377 $ 711 $ 724
====== ====== ======= =======
EARNINGS PER SHARE (G)
Basic $ .36 $ .47 $ .82 $ .94
====== ====== ======= =======
Diluted $ .35 $ .47 $ .81 $ .93
====== ====== ======= =======
Dividends paid per common share $ .150 $ .125 $ .300 $ .250
====== ====== ======= =======
The accompanying notes are an integral part of the financial statements.
*Restated, see Note J
Alcoa and subsidiaries
Condensed Statement of Consolidated Cash Flows (unaudited)
(in millions)
Six months ended
June 30
-------------------------------
2001 2000 *
------- -------
CASH FROM OPERATIONS
Net income $ 711 $ 724
Adjustments to reconcile net income to cash from operations:
Depreciation, depletion and amortization 636 520
Change in deferred income taxes (57) 47
Equity income, net of dividends (17) (17)
Noncash special items 208 -
(Gains)losses from investing activities - sale of assets (81) 3
Minority interests 128 190
Accounting change - 5
Other 77 17
Changes in assets and liabilities, excluding effects of
acquisitions and divestitures:
Reduction (increase) in receivables 203 (256)
Increase in inventories (174) (41)
Increase in prepaid expenses and other
current assets (138) (3)
Reduction in accounts payable and accrued expenses (432) (153)
Increase in taxes, including taxes on income 32 161
Net change in noncurrent assets and liabilities (158) (91)
------- -------
CASH PROVIDED FROM OPERATIONS 938 1,106
------- -------
FINANCING ACTIVITIES
Net changes to short-term borrowings (2,612) 1,311
Common stock issued for stock compensation plans 587 152
Repurchase of common stock (1,028) (670)
Dividends paid to shareholders (260) (201)
Dividends paid to minority interests (239) (164)
Net change in commercial paper (392) 1,516
Additions to long-term debt 1,782 1,607
Payments on long-term debt (542) (1,611)
------- -------
CASH (USED FOR) PROVIDED FROM FINANCING ACTIVITIES (2,704) 1,940
------- -------
INVESTING ACTIVITIES
Capital expenditures (496) (408)
Acquisitions, net of cash acquired (I) (87) (2,534)
Proceeds from the sale of assets 2,471 4
Additions to investments (49) (19)
Changes in minority interests (4) 4
Changes in short-term investments 43 1
Other (10) (9)
------- -------
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 1,868 (2,961)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (32) (2)
------- -------
Net change in cash and cash equivalents 70 83
Cash and cash equivalents at beginning of year 315 237
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 385 $ 320
======= =======
The accompanying notes are an integral part of the financial statements.
* Restated, see Note J
Notes to Condensed Consolidated Financial Statements
(dollars and shares in millions, except per share amounts)
A. BASIS OF PRESENTATION - The Condensed Consolidated Financial Statements are
unaudited. These statements include all adjustments, consisting of normal
recurring accruals, considered necessary by management to fairly present the
results of operations, financial position and cash flows. The results reported
in these statements are not necessarily indicative of the results that may be
expected for the entire year.
This Form 10-Q report should be read in conjunction with Alcoa's annual report
on Form 10-K for the year ended December 31, 2000.
B. SPECIAL ITEMS - In the second quarter of 2001, Alcoa recorded a charge of
$212 ($114 after tax and minority interest) as part of its ongoing segment
review to optimize assets and lower costs. This charge consisted of asset write-
downs ($172 pre-tax), employee termination and severance costs ($32 pre-tax) and
exit costs ($8 pre-tax). The charge was primarily due to actions taken in
Alcoa's Primary Products businesses (within the Alumina and Chemicals segment
and the Primary Metals segment) because of economic and competitive conditions.
These actions include the shutdown of the company's magnesium plant in Addy,
Washington and closing the company's alumina refinery on St. Croix, U.S. Virgin
Islands, its smelter in Suriname, and a chemical plant located in Louisiana.
Asset write-downs of $172 were recorded as a direct result of the company's
decision to close certain operations, as well as the closing of MetalSpectrum,
the online marketplace for specialty metals in which Alcoa had an investment.
The asset write-downs, primarily consisting of structures, machinery and
equipment, and associated selling costs, were based on management's estimates of
salvage value and anticipated proceeds upon sale of certain of the affected
assets. The remaining carrying amount of these long-term assets was
approximately $10 at June 30, 2001. These assets are expected to be removed from
service by October 2001 and either sold or vacated within 12 months. The results
of operations related to these assets were not material.
Employee termination and severance costs of $32 were recorded as management
implemented workforce reductions of approximately 3,100 employees at various
manufacturing facilities-primarily located outside of the U.S.-due to weak
market conditions, and approximately 320 additional employees as a direct result
of the shutdowns mentioned above. These workforce reductions primarily consisted
of a combination of early retirement incentives and involuntary severance
programs. As of June 30, 2001, approximately $4 of the severance costs had been
paid and 2,260 employees had been terminated.
The remaining $8 of the special items charge relates to exit cost activities
associated with the shutdowns above, which will be substantially complete within
12 months. No significant costs were incurred in the second quarter of 2001.
C. INVENTORIES
June 30 December 31
2001 2000
------- -----------
Finished goods $ 861 $ 814
Work in process 820 806
Bauxite and alumina 390 311
Purchased raw materials 552 562
Operating supplies 167 210
------ ------
$2,790 $2,703
====== ======
Approximately 52% of total inventories at June 30, 2001, was valued on a LIFO
basis. If valued on an average cost basis, total inventories would have been
$636 and $658 higher at June 30, 2001, and December 31, 2000, respectively.
D. LONG-TERM DEBT - On May 23, 2001, Alcoa issued $1,500 of callable notes. Of
these notes, $1,000 mature in 10 years and carry a coupon rate of 6.50%, and
$500 mature in 5 years and carry a coupon rate of 5.875%. The proceeds from
these borrowings were used to refinance debt and for general corporate purposes.
In 2000, Alcoa entered into a $2,490 revolving-credit facility that expired
in April 2001 and a $510 revolving credit-facility that expires in April 2005.
In April 2001, these facilities were refinanced into a $2,000 revolving credit
agreement that expires in April 2002 and a $1,000 revolving credit agreement
that expires in April 2005.
E. COMMITMENTS AND CONTINGENCIES - Various lawsuits, claims and proceedings have
been or may be instituted or asserted against Alcoa, including those pertaining
to environmental, product liability and safety and health matters. While the
amounts claimed might be substantial, the ultimate liability cannot now be
determined because of the considerable uncertainties that exist. Therefore, it
is possible that results of operations or liquidity in a particular period could
be materially affected by certain contingencies. However, based on facts
currently available, management believes that the disposition of matters that
are pending or asserted will not have a material adverse impact on the financial
position of the company.
Alcoa Aluminio S.A. (Aluminio) is a participant in a hydroelectric
construction project in Brazil and has guaranteed up to 36% of the project's
total debt of approximately $300. Approximately 50% of the long-term financing
for the project was obtained in April 2001. If other participants fail to meet
obligations, Aluminio may be required to fund a portion of the deficiency and
would be entitled to an increase in the output of the project.
F. COMPREHENSIVE INCOME
Second quarter ended Six months ended
June 30 June 30
--------------------- --------------------
2001 2000 2001 2000*
------ ----- ----- -----
Net income $ 307 $ 377 $ 711 $ 724
Other comprehensive loss:
Unrealized translation adjustments 21 (41) (217) (120)
Unrealized gains/(losses) on derivatives:
Cumulative effect of accounting change - - (4) -
Net change from periodic revaluations (19) - (114) -
Net amount reclassified to income 15 - (9) -
------ ----- ----- -----
Total unrealized gains/(losses) on derivatives (4) - (127) -
------ ----- ----- -----
Comprehensive income $ 324 $ 336 $ 367 $ 604
====== ===== ===== =====
* Restated, see Note J
G. EARNINGS PER SHARE - The detail of basic and diluted EPS follows:
Second quarter ended Six months ended
June 30 June 30
-------------------- ----------------
2001 2000 2001 2000*
----- ----- ----- -----
Income before cumulative effect $ 307 $ 377 $ 711 $ 729
Less: Preferred stock dividends - - 1 1
----- ----- ----- -----
Income available to common stockholders
before cumulative effect $ 307 $ 377 $ 710 $ 728
Cumulative effect of accounting change - - - (5)
----- ----- ----- -----
Income available to common stockholders
after cumulative effect $ 307 $ 377 $ 710 $ 723
Average shares outstanding - basic 862 797 863 770
Effect of dilutive securities:
Shares issuable upon exercise of
dilutive outstanding stock options 10 8 10 10
----- ----- ----- -----
Average shares outstanding - diluted 872 805 873 780
Basic EPS (before cumulative effect) $ .36 $ .47 $ .82 $ .95
===== ===== ===== =====
Basic EPS (after cumulative effect) $ .36 $ .47 $ .82 $ .94
===== ===== ===== =====
Diluted EPS (before cumulative effect) $ .35 $ .47 $ .81 $ .94
===== ===== ===== =====
Diluted EPS (after cumulative effect) $ .35 $ .47 $ .81 $ .93
===== ===== ===== =====
* Restated, see Note J
Options to purchase 20 shares of common stock at an average exercise price
of $41.00 were outstanding as of June 30, 2001, but were not included in the
computation of diluted EPS because the option exercise price was greater than
the average market price of the common shares.
In April 2000, Alcoa entered into a forward share repurchase agreement to
partially hedge the equity exposure related to its stock option program. As of
June 30, 2001, Alcoa had repurchased all 10 shares under the agreement.
H. ACQUISITIONS AND DIVESTITURES - In May of 2000, Alcoa completed a merger with
Reynolds Metals Company (Reynolds) by issuing approximately 135 shares of Alcoa
common stock. The transaction was valued at approximately $5,900, including debt
assumed of $1,297. The goodwill of approximately $2,100 resulting from the
purchase price allocation is being amortized over a 40-year period.
As part of the merger with Reynolds, Alcoa agreed to divest Reynolds'
interests in the alumina refineries in Worsley, Australia; Stade, Germany; and
Sherwin, Texas as well as 25% of Reynolds' interest in the aluminum smelter
located in Longview, Washington. Under current accounting requirements, the fair
values of the net assets to be divested have been reported as assets held for
sale in the balance sheet and the results of operations have not been included
in the statement of income. The sale of Sherwin was completed in December 2000;
the sales of Worsley and 100% of Longview were completed in the first quarter of
2001; and the sale of Stade was completed in April 2001.
In May and June of 2000, Alcoa completed the acquisitions of Cordant
Technologies Inc. (Cordant) and Howmet International Inc., a majority owned
company of Cordant. The transactions were valued at approximately $3,300,
including debt assumed of $826. The goodwill of approximately $2,500 resulting
from the above transactions is being amortized over a 40-year period.
The following unaudited pro forma information assumes that the acquisitions
of Reynolds and Cordant had occurred at the beginning of 2000. Adjustments that
have been made to arrive at the pro forma totals primarily include those related
to acquisition financing, the amortization of goodwill, the elimination of
transactions between Alcoa, Reynolds, and Cordant, and additional depreciation
related to the increase in basis that resulted from the transactions. Tax
effects from the pro forma adjustments noted above also have been included at
the 35% U.S. statutory rate.
Six months ended
June 30, 2000
---------------------
Sales $12,882
Net Income 777
Basic EPS $ .90
=======
Diluted EPS $ .89
=======
The pro forma results are not necessarily indicative of what actually would
have occurred if the transactions had been in effect for the entire period
presented, are not intended to be a projection of future results, and do not
reflect any cost savings that might have been achieved from the combined
operations.
Alcoa completed a number of other acquisitions in 2001 and 2000. None of
these transactions had a material impact on Alcoa's financial statements.
On April 20, 2001, Alcoa sold Thiokol, a business acquired in the Cordant
transaction, to Alliant Techsystems Inc. for $685 in cash and recognized a $38
pre-tax gain.
I. CASH FLOW INFORMATION - The details of cash payments related to acquisitions
follow.
Six months ended
June 30, 2000
---------------------------
Fair value of assets $14,283
Liabilities (7,002)
Stock issued (4,649)
-------
Cash paid 2,632
Less: cash acquired (98)
-------
Net cash paid for acquisitions $ 2,534
=======
J. RECENTLY ADOPTED ACCOUNTING STANDARDS - In 2000, Alcoa changed its method of
accounting for revenue recognition in accordance with Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements". Under the new
accounting method, adopted retroactive to January 1, 2000, Alcoa recognizes
revenue upon the passage of title, ownership and risk of loss to the customer.
The cumulative effect adjustment of $43 in revenue ($5 in net income) as of
January 1, 2000, was recognized during the first quarter of 2000. The six months
ended June 30, 2000, amounts have been restated for the effect of the change in
accounting for revenue recognition. Amounts originally reported were as follows:
Sales, $10,100; Income from operations, $923; Net income, $732; Earnings per
share, basic $.95 and diluted, $.94.
Effective January 1, 2001, Alcoa adopted Statement of Financial Accounting
Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging
Activities", as amended. The fair values of all outstanding derivative
instruments are now recorded on the balance sheet. The transition adjustment on
January 1, 2001, resulted in a net charge of $4 (after tax and minority
interest), which was recorded in other comprehensive income.
Derivatives are held as part of a formally documented risk management
(hedging) program and are held for purposes other than trading. Alcoa measures
hedge effectiveness by formally assessing, at least quarterly, the historical
and probable future high correlation of changes in the fair value or expected
future cash flows of the hedged item. The ineffective portions are recorded in
other income or expense in the current period and are not material. If the
hedging relationship ceases to be highly effective or it becomes probable that
an expected transaction will no longer occur, gains or losses on the derivative
are recorded in other income or expense (none in 2001).
Changes in the fair value of derivatives are recorded in current earnings if
the derivative is designated as a fair value hedge or in other comprehensive
income if the derivative is designated as a cash flow hedge.
Fair Value Hedges
- ------------------
Aluminum
--------
Customers often require Alcoa to enter into long-term fixed-price
commitments. These commitments expose Alcoa to the risk of fluctuating
aluminum prices between the time the order is committed and the time that
the order is shipped. Alcoa's commodity risk management policy is to hedge,
through the use of futures and option contracts, the aluminum price risk for
a portion of its firm commitments. These contracts cover exposures,
generally within three years.
Interest Rates
--------------
Alcoa attempts to maintain a reasonable balance between fixed- and floating-
rate debt and uses interest rate swaps and caps to manage this balance. The
company has entered into pay floating, receive fixed interest rate swaps to
effectively convert the interest rate from fixed to floating on $1,500 of
debt.
Hedges of these existing assets, liabilities and firm commitments qualify as
"fair value" hedges. As a result, the fair values of derivatives and changes in
the fair values of the underlying hedged items are reported in the balance
sheet. Changes in the fair values of these derivatives and underlying hedged
items generally offset and are recorded each period in sales or interest
expense. There were no transactions that ceased to qualify as a fair value hedge
in 2001.
Cash Flow Hedges
- ----------------
Currencies
----------
Alcoa is subject to exposure from fluctuations in foreign currencies.
Foreign currency exchange contracts are used to hedge the variability in
cash flows from the forecasted payment or receipt of currencies other than
the functional currency.
Commodities
-----------
Alcoa may elect to sell forward a portion of its anticipated primary
aluminum and alumina production. In addition, Alcoa also anticipates the
continued requirement to purchase aluminum and other commodities such as
natural gas, fuel oil and electricity for its operations. Alcoa enters into
futures and options contracts to reduce volatility in the price of these
commodities.
Interest Rates
--------------
In addition to fair value interest rate hedges, Alcoa has also entered into
pay fixed, receive floating interest rate swaps to hedge the interest rate
risk exposure of forecasted interest payments on $168 of variable rate debt.
For these cash flow hedge transactions, the fair values of the derivatives
are recorded on the balance sheet. The effective portion of the changes in the
fair values of these derivatives are recorded in other comprehensive income and
are reclassified to sales, cost of goods sold or interest expense in the period
in which earnings are impacted by the hedged items or in the period that the
transaction no longer qualifies as a cash flow hedge (none in 2001). These
contracts cover periods commensurate with known or expected exposures, generally
within three years. Assuming market rates remain constant with the rates at
June 30, 2001, $74 of the $127 loss included in other comprehensive income is
expected to be recognized in earnings over the next twelve months.
K. RECENTLY ISSUED ACCOUNTING STANDARDS - In June 2001, the Financial Accounting
Standards Board (FASB) issued SFAS No. 141 "Business Combinations" and SFAS No.
142 "Goodwill and Other Intangible Assets". These standards require that all
business combinations be accounted for using the purchase method and that
goodwill and intangible assets with indefinite useful lives should not be
amortized but should be tested for impairment at least annually, and they
provide guidelines for new disclosure requirements. These standards outline the
criteria for initial recognition and measurement of intangibles, assignment of
assets and liabilities including goodwill to reporting units and goodwill
impairment testing. Additionally, under the provisions of these standards, the
unamortized balance of negative goodwill will be written off and recognized as a
change in accounting principle. The provisions of SFAS Nos. 141 and 142 will
apply to all business combinations after June 30, 2001. The provisions of SFAS
No. 142 for existing goodwill and other intangible assets are required to be
implemented effective January 1, 2002. The company is currently evaluating the
impact of these standards on the consolidated financial statements.
In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations". This statement establishes standards for accounting for
obligations associated with the retirement of tangible long-lived assets. The
standard is required to be adopted by Alcoa beginning on January 1, 2003.
Management is currently assessing the details of the standard and is preparing a
plan of implementation.
L. RECLASSIFICATIONS - Certain amounts have been reclassified to conform to
current year presentation.
M. SEGMENT INFORMATION - The following details sales and after-tax operating
income (ATOI) for each reportable segment for the three-month and six-month
periods ended June 30, 2001 and 2000. For more information on segments, see
Management's Discussion and Analysis and the segment disclosures included in
Alcoa's Form 10-K for the year ended December 31, 2000.
Segment Information: Alumina Flat- Engi- Pack-
& Chem- Primary Rolled neered aging &
icals Metals Products Products Consumer Other Total
Second quarter ended
June 30, 2001
Sales:
Third-party sales $ 490 $ 972 $1,255 $1,582 $ 701 $ 991 $ 5,991
Intersegment sales 275 887 15 8 - - 1,185
------ ------ ------ ------ ------ ------ -------
Total sales $ 765 $1,859 $1,270 $1,590 $ 701 $ 991 $ 7,176
====== ====== ====== ====== ====== ====== =======
After-tax operating
income $ 130 $ 264 $ 74 $ 60 $ 47 $ 45 $ 620
====== ====== ====== ====== ====== ====== =======
Second quarter ended
June 30, 2000
Sales:
Third-party sales $ 515 $ 852 $1,394 $1,296 $ 524 $ 988 $ 5,569
Intersegment sales 274 832 29 15 - - 1,150
------ ------ ------ ------ ------ ------ -------
Total sales $ 789 $1,684 $1,423 $1,311 $ 524 $ 988 $ 6,719
====== ====== ====== ====== ====== ====== =======
After-tax operating
income $ 140 $ 225 $ 74 $ 62 $ 35 $ 46 $ 582
====== ====== ====== ====== ====== ====== =======
Six months ended
June 30, 2001
Sales:
Third-party sales $1,037 $1,939 $2,598 $3,175 $1,347 $2,071 $12,167
Intersegment sales 558 1,754 31 17 - - 2,360
------ ------ ------ ------ ------ ------ -------
Total sales $1,595 $3,693 $2,629 $3,192 $1,347 $2,071 $14,527
====== ====== ====== ====== ====== ====== =======
After-tax operating
income $ 296 $ 558 $ 139 $ 100 $ 90 $ 95 $ 1,278
====== ====== ====== ====== ====== ====== =======
Six months ended
June 30, 2000 *
Sales:
Third-party sales $1,055 $1,463 $2,798 $2,349 $ 727 $1,686 $10,078
Intersegment sales 524 1,682 42 28 - - 2,276
------ ------ ------ ------ ------ ------ -------
Total sales $1,579 $3,145 $2,840 $2,377 $ 727 $1,686 $12,354
====== ====== ====== ====== ====== ====== =======
After-tax operating
income $ 295 $ 452 $ 147 $ 115 $ 52 $ 76 $ 1,137
====== ====== ====== ====== ====== ====== =======
* Restated, see Note J
The following table reconciles segment information to consolidated totals.
Second quarter ended Six months ended
June 30 June 30
---------------------- ------------------
2001 2000 2001 2000
----- ----- ------ ------
Total after-tax operating income $ 620 $ 582 $1,278 $1,137
Elimination of intersegment loss (profit) (8) (10) (4) 9
Unallocated amounts (net of tax):
Interest income 12 19 20 26
Interest expense (61) (69) (136) (102)
Minority interests (32) (85) (128) (190)
Corporate expense (66) (51) (132) (107)
Special items (148) - (148) -
Other (10) (9) (39) (49)
----- ----- ------ ------
Consolidated net income $ 307 $ 377 $ 711 $ 724
===== ===== ====== ======
The following table represents segment assets.
Segment assets: June 30 December 31
2001 2000
------- -----------
Alumina and chemicals $ 2,749 $ 2,924
Primary metals 7,355 7,700
Flat-rolled products 3,641 3,657
Engineered products 6,428 6,455
Packaging and consumer 2,617 2,457
Other 2,228 3,376
------- -------
Total Segment Assets $25,018 $26,569
======= =======
The change in segment assets within the Other group is primarily due to the sale
of Thiokol in April 2001.
N. SUBSEQUENT EVENT - In accordance with the accounting requirements for
subsequent events, Alcoa recorded a charge of $12 ($8 after tax) in its second
quarter 2001 earnings as a result of customer bankruptcy filings in early
August.
Report of Independent Accountants
---------------------------------
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, 2001, and the unaudited condensed
statements of consolidated income for the three-month and six-month periods
ended June 30, 2001 and 2000, and the unaudited condensed statement of
consolidated cash flows for the six-month periods ended June 30, 2001 and
2000, which are included in Alcoa's Form 10-Q for the period ended June 30,
2001. These financial statements are the responsibility of Alcoa's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with auditing standards generally accepted in the
United States of America, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we
do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred to
above for them to be in conformity with accounting principles generally
accepted in the United States of America.
We have previously audited, in accordance with auditing standards
generally accepted in the United States of America, the consolidated balance
sheet of Alcoa and subsidiaries as of December 31, 2000, 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,
2001, except for Note U, for which the date is January 31, 2001, 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, 2000, 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 6, 2001, except for Note N,
for which the date is August 6, 2001
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(dollars in millions, except per share amounts and ingot prices; shipments in
thousands of metric tons (mt))
Certain statements in this report under this caption and elsewhere relate to
future events and expectations and, as such, constitute forward-looking
statements. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements of Alcoa to be different from those expressed or implied in the
forward-looking statements. For discussion of some of the specific factors that
may cause such a difference, see Note E to the financial statements; the
disclosures included below under Segment Information, Market Risks and
Environmental Matters; and the Business section and Management's Discussion and
Analysis in Alcoa's Form 10-K for the year ended December 31, 2000.
RESULTS OF OPERATIONS
Principal income and operating data follow.
Second quarter ended Six months ended
June 30 June 30
-------------------- ----------------
2001 2000 2001 2000 *
------ ------ ------- -------
Sales $5,991 $5,569 $12,167 $10,078
Net income 307 377 711 724
Basic earnings per common share $ .36 $ .47 $ .82 $ .94
Diluted earnings per common share $ .35 $ .47 $ .81 $ .93
Shipments of aluminum products (mt) 1,292 1,361 2,612 2,494
Shipments of alumina (mt) 1,730 1,801 3,761 3,634
Alcoa's average realized ingot price $ .73 $ .74 $ .75 $ .76
Average 3-month LME price $ .69 $ .68 $ .70 $ .72
* Restated, see Note J to the financial statements
___________________
EARNINGS SUMMARY
Alcoa reported quarterly earnings in the 2001 second quarter and 2001 six-
month period of $307 and $711, respectively, a decrease of 19% and 2%,
respectively, when compared to the corresponding 2000 periods. Second quarter
2001 earnings include special charges of $114 (after tax and minority interest).
Excluding special charges, net income grew to $421 or 12% quarter-over-quarter
and to $825 or 14% year-over-year as continued cost savings coupled with
additional volumes due to acquisitions and gains on the sales of businesses and
power outweighed unfavorable price variances.
Second quarter 2001 sales increased 8% versus the 2000 second quarter, while
on a year-to-date basis sales rose 21% over the corresponding 2000 period. These
increases resulted from higher shipment volumes due to acquisitions as well as
power sales, offset by lower realized metal and alumina prices and lower demand
from the building and construction, transportation and distribution markets.
Annualized return on shareholders' equity was 13.1% (14.0% excluding special
items) for the 2001 six-month period, compared with 17.0% for the 2000 period.
The decrease was due to a larger average number of shares outstanding during the
2001 period primarily resulting from the Reynolds acquisition, as well as the
special items recorded in the 2001 second quarter.
COGS as a percentage of sales in the 2001 second quarter and six-month period
was 76.9% and 76.6%, respectively, versus 75.7% and 74.7% in the corresponding
2000 periods. The higher percentages in 2001 were due to higher energy costs of
$21 quarter-over-quarter and $80 year-over-year, as well as the relatively
higher cost of sales ratios of the acquired Reynolds and Cordant businesses,
offset somewhat by cost-cutting efforts.
Selling and general administrative expenses (S&GA) were up $54 from the 2000
second quarter and $150 from the 2000 six-month period. S&GA as a percentage of
sales was 5.4% and 5.3% for the 2001 second quarter and six-month period,
respectively, up slightly from 4.9% and 5.0% in the corresponding 2000 periods.
These increases were predominantly due to Reynolds and Cordant costs that were
not present in the 2000 periods, as well as lower sales volumes at existing
locations.
Research and development expenses increased $7 and $17 over the 2000 second
quarter and six-month periods, respectively, due to spending at Reynolds and
Cordant that was not included in the corresponding 2000 period results, as well
as the timing of project expenses.
In the second quarter of 2001, Alcoa recorded a charge of $212 ($114 after
tax and minority interest) as part of its ongoing segment review to optimize
assets and lower costs. This charge consisted of asset write-downs ($172 pre-
tax), employee termination and severance costs ($32 pre-tax) and exit costs ($8
pre-tax). The charge was primarily due to actions taken in Alcoa's Primary
Products businesses (within the Alumina and Chemicals segment and the Primary
Metals segment) because of economic and competitive conditions. These actions
include the shutdown of the company's magnesium plant in Addy, Washington and
closing the company's alumina refinery on St. Croix, U.S. Virgin Islands, its
smelter in Suriname, and a chemical plant located in Louisiana.
Interest expense was up $62 from the 2000 six-month period due to higher
average debt levels in 2001 resulting from acquisitions.
Other income rose $55 in the 2001 second quarter and $106 in the 2001 six-
month period versus the comparable 2000 periods. Quarter-over-quarter results
benefited from a $32 improvement in foreign currency exchange adjustments and a
net increase of $28 in gains on sales of assets due primarily to the gain of $38
on the sale of Thiokol. The year-over-year increase was due to $77 higher gains
on asset sales as well as $29 improvement in foreign currency exchange
adjustments and $14 increase in equity earnings, offset by $10 lower mark-to-
market gains in 2000 that do not exist in 2001 due to the implementation of SFAS
No. 133.
Income taxes have been provided at a rate of 31.7% for the 2001 second
quarter and 32.5% for the 2001 six-month period. These rates differ from the
statutory rate of 35.0% and the effective rate of 34.0% for the 2000 periods due
to taxes on foreign income, the sale of Thiokol and adjustments to prior year
taxes.
Minority interests' share of income from operations decreased 62% from the
2000 second quarter and 33% from the 2000 six-month period. These decreases were
primarily due to the impact of special charges of $34, as well as lower income
at Alcoa Fujikura Ltd. (AFL), Alcoa World Alumina and Chemicals (AWAC), and
Aluminio.
SEGMENT INFORMATION
I. Alumina and Chemicals
Second quarter ended Six months ended
June 30 June 30
-------------------- ----------------
2001 2000 2001 2000
------ ------ ------ ------
Alumina production 3,258 3,495 6,588 6,972
Third-party alumina shipments 1,730 1,801 3,761 3,634
Third-party sales $ 490 $ 515 $1,037 $1,055
Intersegment sales 275 274 558 524
------ ------ ------ ------
Total sales $ 765 $ 789 $1,595 $1,579
====== ====== ====== ======
After-tax operating income $ 130 $ 140 $ 296 $ 295
====== ====== ====== ======
In the 2001 second quarter, this segment's third-party sales decreased 5%
from the 2000 quarter due to 4% lower shipments and lower realized prices. For
the 2001 six-month period, third-party revenues decreased 2% due to lower
prices, partially offset by 3% higher shipments. Year-to-date 2001 intersegment
sales increased 6% over the 2000 six-month period due mainly to increased
internal alumina sourcing to newly acquired smelters, partially offset by the
curtailment of aluminum production at smelters in the northwestern U.S.
ATOI for this segment in the 2001 second quarter decreased 7% from the 2000
quarter while remaining essentially unchanged year-over-year. The quarter-over-
quarter decrease was due to purchased alumina costs and lower volumes and
profits due to the curtailments at Point Comfort and the shutdown of St. Croix.
Year-over-year, ATOI was flat as the benefit from alumina production shifting
from higher to lower cost facilities was offset by higher curtailment and energy
costs.
II. Primary Metals
Second quarter ended Six months ended
June 30 June 30
-------------------- ----------------
2001 2000 2001 2000
------ ------ ------ ------
Aluminum production 891 881 1,808 1,591
Third-party aluminum shipments 494 493 970 832
Third-party sales $ 972 $ 852 $1,939 $1,463
Intersegment sales 887 832 1,754 1,682
------ ------ ------ ------
Total sales $1,859 $1,684 $3,693 $3,145
====== ====== ====== ======
After-tax operating income $ 264 $ 225 $ 558 $ 452
====== ====== ====== ======
Total third-party sales for this segment increased 14% in the 2001 second
quarter and 33% in the 2001 six-month period versus the corresponding 2000
periods. Acquisitions as well as power sales contributed to the increase,
partially offset by lower shipments from existing facilities and lower prices.
Alcoa's average realized third-party price for ingot declined 1% from both the
2000 second quarter and 2000 six-month period to 73 cents and 75 cents per
pound, respectively.
Primary Metals 2001 second-quarter and year-to-date ATOI increased 17% from
the 2000 quarter and 23% from the 2000 six-month period, respectively. The
increases were driven by acquisitions, which contributed $10 for the quarter and
$63 for the six-month period as compared to the prior year periods. Power sales
in the Pacific Northwest, net of power and other contractually required costs
and the impact of lost aluminum sales, positively impacted the Primary Metals
segment in the first and second quarters of 2001, contributing approximately $35
in each quarter, which was somewhat offset by the financial losses associated
with related curtailments in the Alumina and Chemicals segment.
The company entered into additional agreements to curtail production and to
sell power during the second quarter of 2001. These new agreements significantly
reduce the realized price for power sales to the extent that Alcoa will only be
reimbursed for employee related costs at the curtailed facilities. Due to the
expiration of existing contracts and the impact of the agreements signed in the
second quarter, the positive impacts experienced in the first half of 2001 will
not be realized in the second half of 2001. Additionally, in the second half of
2001, volume will decline as a result of the aforementioned curtailments.
For the full year 2001, the impact of the power sales agreements, after
considering the lost profits on aluminum sales and the costs of related
curtailments in the Alumina and Chemicals segment, is not expected to be
material.
III. Flat-Rolled Products
Second quarter ended Six months ended
June 30 June 30
-------------------- ----------------
2001 2000 2001 2000
------ ------ ------ ------
Third-party aluminum shipments 450 504 920 1,011
Third-party sales $1,255 $1,394 $2,598 $2,798
Intersegment sales 15 29 31 42
------ ------ ------ ------
Total sales $1,270 $1,423 $2,629 $2,840
====== ====== ====== ======
After-tax operating income $ 74 $ 74 $ 139 $ 147
====== ====== ====== ======
Third-party flat-rolled product sales decreased 10% in the 2001 second
quarter and 7% in the 2001 six-month period from the comparable 2000 periods.
These decreases were driven by lower shipments of 11% quarter-over-quarter and
9% year-over-year. The decrease in third-party sales is also reflective of the
continued weakness in the automotive, commercial transportation and distribution
markets in North America, partially offset by sales increases in Europe, due
primarily to the acquisition of British Aluminium Limited (BA), and improved mix
on sheet and plate sales.
ATOI for the Flat-Rolled Products segment fell $8 in the 2001 six-month
period from the corresponding 2000 period due to lower volumes in North America
and higher conversion costs, principally energy, in rigid container sheet. These
factors were offset somewhat by a more profitable product mix for sheet and
plate in the U.S. and Europe due to the continued strength in the aerospace
market, as well as cost savings. ATOI remained flat quarter-over-quarter, as the
acquisition of BA, an improved mix in Europe, and cost savings offset reductions
in the U.S. due to lower volumes.
IV. Engineered Products
Second quarter ended Six months ended
June 30 June 30
-------------------- ----------------
2001 2000 2001 2000
------ ------ ------ ------
Third-party aluminum shipments 242 282 496 548
Third-party sales $1,582 $1,296 $3,175 $2,349
Intersegment Sales 8 15 17 28
------ ------ ------ ------
Total sales $1,590 $1,311 $3,192 $2,377
====== ====== ====== ======
After-tax operating income $ 60 $ 62 $ 100 $ 115
====== ====== ====== ======
Engineered Products' third-party sales improved 22% and 35% in the 2001
second quarter and six-month period, respectively, over the corresponding 2000
periods due to the acquisitions of Reynolds, Cordant and BA. Excluding these
acquisitions, third-party sales decreased 18% quarter-to-quarter and year-to-
year, reflecting the continuing weakness in the transportation market in North
America and softening market conditions in Europe.
ATOI for the segment decreased 3% for the 2001 second quarter and 13% for
the 2001 year-to-date period versus the corresponding 2000 periods. These
decreases resulted from a decline in volumes and profits due to lower demand for
wheels and extrusions, the impact from exchange rate fluctuations in Brazil, as
well as increased energy and fuel costs on a year-over-year basis. These factors
were partially offset by the positive impact of the acquisitions and conversion
cost reductions.
V. Packaging and Consumer
Second quarter ended Six months ended
June 30 June 30
-------------------- ----------------
2001 2000 2001 2000
----- ----- ------ -----
Third-party aluminum shipments 41 32 83 34
Third-party sales $ 701 $ 524 $1,347 $ 727
After-tax operating income $ 47 $ 35 $ 90 $ 52
Third-party sales for this segment for the 2001 second quarter and six-month
period rose $177 and $620 compared with the 2000 second quarter and six-month
periods, respectively. These increases were due primarily to the acquisitions
of Reynolds and several smaller businesses. Excluding these acquisitions, third-
party sales rose $8, or 4%, versus the 2000 quarter and $23, or 5%, versus the
2000 six-month period due to increased closures sales.
For this segment, ATOI rose $12 in the 2001 second quarter and $38 in the
2001 year-to-date period from the comparable 2000 periods. These increases were
due to the acquisitions noted above, which contributed $6 of the quarter-over-
quarter and $31 of the year-over-year ATOI increase, as well as the increase in
closure sales noted earlier, offset by exchange rate fluctuations in the
closures business.
VI. Other
Second quarter ended Six months ended
June 30 June 30
-------------------- ----------------
2001 2000 2001 2000 *
----- ----- ------ -------
Third-party aluminum shipments 65 50 143 69
Third-party sales $ 991 $ 988 $2,071 $ 1,686
After-tax operating income $ 45 $ 46 $ 95 $ 76
* Restated, see Note J to the financial statements
For this group, third-party sales were $991 in the 2001 second quarter and
$2,071 for the 2001 six-month period, flat quarter-over-quarter and up 23% year-
over-year. After excluding the Thiokol, Reynolds' metal distribution business
(RASCO) and AFL telecommunications acquisitions made in 2000, sales decreased 4%
quarter-over-quarter and 2% year-over-year. The quarter-over-quarter decrease
was due to lower AFL automotive sales, partially offset by improved residential
building product sales. On a year-over-year basis, the decrease in sales by AFL
automotive was partially offset by AFL telecommunications acquisitions.
ATOI for this group was $45 for the 2001 second quarter, down 2% from the
2000 second quarter. Lower earnings from AFL due to weak automotive markets and
slower telecommunications growth were offset by the gain on the sale of Thiokol.
ATOI improved year-over-year, as gains of $70 from the sales of Thiokol, Alcoa
Proppants Inc. and Alcoa's interest in a Latin American cable business were
offset by decreases in ATOI at businesses serving the automotive and truck
markets.
RECONCILIATION OF ATOI TO CONSOLIDATED NET INCOME
Items required to reconcile ATOI to consolidated net income include:
corporate adjustments to eliminate any remaining profit or loss between
segments; the after-tax impact of interest income and expense at the statutory
rate; minority interests; corporate expense, comprised of the general
administrative and selling expenses of operating the corporate headquarters and
other global administrative facilities along with depreciation on corporate-
owned assets; special items; and other, which includes the impact of LIFO
inventory accounting, differences between estimated tax rates used in each
segment and the corporate effective tax rate, and other non-operating items such
as foreign exchange.
Special items of $148 (after-tax, before minority interests) were recorded
in the second quarter of 2001. Interest expense increased in the 2001 six-month
period over the same period in 2000 because of higher average debt outstanding
related to acquisitions. The decrease in interest expense quarter-over-quarter
was due to lower commercial paper rates. Minority interests decreased quarter-
over-quarter and year-over-year primarily due to special charges of $34 and
lower income at AFL, AWAC and Aluminio. Corporate expense increased from the
2000 period due to the impact of acquisitions.
MARKET RISKS
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. Forward-looking
statements also include those containing such words as "anticipates, believes,
estimates, expects, hopes, targets, should, will, will likely result, forecast,
outlook, projects" or similar expressions. 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 enter into long-term fixed-price commitments. These commitments expose
Alcoa to the risk of fluctuating aluminum prices between the time the order is
committed and the time that the order is shipped.
Alcoa's aluminum commodity risk management policy is to hedge, through the
use of futures and options contracts, the aluminum price risk for a portion of
its firm commitments.
Past accounting convention required that certain long positions be marked to
market, which resulted in a year-to-date, after-tax charge to earnings of $7 at
June 30, 2000. As a result of the change in accounting under SFAS No. 133, these
contracts were re-designated as qualified hedges on January 1, 2001. At June 30,
2001, contracts qualifying as fair value hedges totaled approximately 631,000
tons with a fair value loss of approximately $6.
Alcoa may sell forward a portion of its forecasted primary aluminum and
alumina production. In addition, Alcoa expects the continued requirement to
purchase aluminum and other commodities such as natural gas, fuel oil and
electricity for its operations. Alcoa enters into futures and options contracts
to reduce volatility in the price of these commodities. At June 30, 2001, the
fair value of the contracts recorded in other comprehensive income for these
hedges was a loss of approximately $10 (net of tax and minority interest). These
contracts cover periods commensurate with known or expected exposures, generally
within three years.
The futures and options contracts used by Alcoa are with creditworthy
counterparties and are further supported by cash, treasury bills or irrevocable
letters of credit issued by carefully chosen banks.
FINANCIAL RISK
Currencies - Alcoa is subject to significant exposure from fluctuations in
foreign currencies. Foreign currency exchange contracts are used to hedge the
variability in cash flows from the forecasted payment or receipt of currencies
other than the functional currency. These contracts cover periods commensurate
with known or expected exposures, generally within three years. At June 30,
2001, the fair value of the contracts recorded in other comprehensive income for
these hedges was a loss of approximately $116 (net of tax and minority
interest).
Interest Rates - 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. The company has entered into pay fixed, receive
floating interest rate swaps to hedge the interest rate risk exposure of
forecasted interest payments on its outstanding debt. In addition, the company
entered into pay floating, receive fixed interest rate swaps to hedge changes in
the fair value of certain fixed-rate debt obligations. At June 30, 2001, the
fair value of the contracts recorded in other comprehensive income for these
hedges was a loss of approximately $1 (net of tax and minority interest).
Risk Management - All of the aluminum and other commodity contracts, as well as
the various types of financial instruments, are straightforward and held for
purposes other than trading. They are used primarily to mitigate uncertainty and
volatility and principally cover underlying exposures.
Alcoa's commodity and derivative activities are subject to the management,
direction and control of the Strategic Risk Management Committee (SRMC). SRMC is
composed of the chief executive officer, the chief financial officer and other
officers and employees that the chief executive officer selects. SRMC reports to
the Board of Directors on the scope of its derivative activities.
ENVIRONMENTAL MATTERS
Alcoa participates in environmental assessments and cleanups at a number of
locations. These include 31 owned or operating facilities and adjoining
properties, approximately 28 previously owned or operating facilities and
adjoining properties and approximately 91 Superfund and other waste sites. A
liability is recorded for environmental remediation costs or damages when a
cleanup program becomes probable and the costs or damages can be reasonably
estimated.
As assessments and cleanups proceed, the liability is adjusted based on
progress in determining the extent of remedial actions and related costs and
damages. The liability can change substantially due to factors such as the
nature and extent of contamination, changes in remedial requirements and
technological changes. Therefore, it is not possible to determine the outcomes
or to estimate with any degree of accuracy the potential costs for certain of
these matters. For example, there are issues related to the Massena, New York,
Pt. Comfort, Texas and Troutdale, Oregon sites where investigations are ongoing
and where natural resource damage or off-site migrations of contaminants to
sediments has been alleged. The following discussion provides additional details
regarding the current status of these sites.
MASSENA. Since 1989, Alcoa has been conducting investigations and studies of
the Grasse River, adjacent to Alcoa's Massena, New York plant site under order
from the U.S. Environmental Protection Agency (EPA) issued under the
Comprehensive Environmental Response, Compensation and Liability Act, also known
as Superfund. Sediments and fish in the river contain varying levels of
polychlorinated biphenyl (PCB).
Alcoa continues to perform studies and investigations on the river,
including ongoing pilot tests of sediment capping techniques and other
remediation technologies. Alcoa submitted a draft Analysis of Alternatives
report in December 1999 and, based on additional evaluations and information
required by the EPA, a revised report is being prepared and is currently
expected to be submitted by January 2002. Based on the 1999 report, the range of
costs associated with the potential courses of remedial action is between zero
and $53. Currently, no one of the alternatives is more likely to be selected
than any other. During meetings through April 2001, the EPA has indicated to
Alcoa that it believes additional remedial alternatives need to be included in
the revised Analysis of Alternatives. Such additional remedies involve removal
of more sediment than was included in the 1999 Analysis of Alternatives report.
The cost of such potential additional remedial alternatives cannot be estimated
at this time. The results of the pilot tests and the revised Analysis of
Alternatives should provide additional information for the selection and
approval of the appropriate remedial alternative.
Portions of the St. Lawrence River system adjacent to the former Reynolds
plant are also contaminated with PCB. Since 1989, Reynolds had been conducting
investigations and studies of the river system under order from the EPA issued
under Superfund. The dredging remedy for the St. Lawrence River has commenced
and is expected to be substantially concluded by the end of 2001 and has been
included in the reserve.
Alcoa is aware of natural resource damage claims that may be asserted by
certain federal, state and tribal natural resource trustees at these locations.
PT. COMFORT/LAVACA BAY. Since 1990, as previously reported, Alcoa has
undertaken investigations and evaluations concerning alleged releases of mercury
from its Pt. Comfort, Texas facility into the adjacent Lavaca Bay pursuant to a
Superfund order from the EPA. In March 1994, the EPA listed the "Alcoa (Point
Comfort)/Lavaca Bay Site" on the National Priorities List. The EPA is now
evaluating the site and is expected to select a final remedy in the third
quarter of 2001. The probable and estimable costs are fully reserved.
TROUTDALE, OREGON. In 1994, the EPA added Reynolds Troutdale, Oregon primary
aluminum production plant to the National Priorities List of Superfund sites.
Alcoa is cooperating with the EPA. Under a September 1995 consent order, Alcoa
is working with the EPA to identify cleanup solutions for the site. Following
curtailment of active production operations and based on further evaluation of
remedial options, the company has determined the most probable cost of clean up.
This amount has been fully reserved.
Based on the above, it is possible that Alcoa's results of operations, in a
particular period, could be materially affected by matters relating to these
sites. However, based on facts currently available, management believes that the
disposition of these matters will not have a materially adverse effect on the
financial position or liquidity of the company.
Alcoa's remediation reserve balance at June 30, 2001, was $471 (of which $80
was classified as a current liability) and reflects the most probable costs to
remediate identified environmental conditions for which costs can be reasonably
estimated. Remediation costs charged to the reserve in the 2001 second quarter
were $15. They include expenditures currently mandated, as well as those not
required by any regulatory authority or third party. In the second quarter of
2001, the reserve balance was increased by $19 primarily as a result of the
shutdown of the company's magnesium plant in Addy, Washington.
LIQUIDITY AND CAPITAL RESOURCES
Cash From Operations
Cash from operations for the 2001 year-to-date period totaled $938, compared
with $1,106 in the 2000 period. The decrease of $168, or 15%, resulted primarily
from a net increase in working capital requirements, partly offset by changes in
noncash items such as depreciation, depletion and amortization; special items
which were recorded in the second quarter of 2001; gains on the sales of assets
and minority interests.
Financing Activities
Financing activities used $2,704 of cash in the 2001 year-to-date period,
compared with $1,940 provided for in the 2000 period. The increase in cash used
was primarily due to debt repayments in the 2001 year-to-date period that were
funded by the proceeds from the sales of operations to be divested from the
Reynolds merger, the sale of Thiokol and issuing additional debt. Short-term
borrowings and commercial paper decreased by $2,612 and $392, respectively, in
the 2001 period, compared with increases of $1,311 and $1,516 in the 2000
period, respectively.
The increase in cash used was also due to the repurchase of common stock,
$1,028 in the 2001 six-month period versus $670 in the 2000 period. In July
2001, the Board of Directors of Alcoa authorized the repurchase of 50 shares of
Alcoa common stock.
Dividends paid to shareholders were $260 in the 2001 year-to-date period, an
increase of $59 over the 2000 period. The increase was due to a higher number of
shares outstanding as well as an increase in Alcoa's total dividend, which was
30 cents in the 2001 period compared with 25 cents in the 2000 period.
Investing Activities
Investing activities provided $1,868 during the 2001 year-to-date period,
compared with cash used of $2,961 in the 2000 period. Dispositions of assets to
be divested from the Reynolds merger as well as proceeds from the sale of
Thiokol accounted for approximately 51% of the change, returning $2,471 in the
2001 period.
Alcoa completed a number of acquisitions in the 2001 year-to-date period.
Net cash paid for these acquisitions was $87. None of these transactions had a
material impact on Alcoa's financial statements. For the 2000 year-to-date
period, cash paid for acquisitions was $2,534, primarily attributable to the
acquisition of Cordant.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 141 "Business Combinations" and SFAS No.
142 "Goodwill and Other Intangible Assets". These standards require that all
business combinations be accounted for using the purchase method and that
goodwill and intangible assets with indefinite useful lives should not be
amortized but should be tested for impairment at least annually, and they
provide guidelines for new disclosure requirements. These standards outline the
criteria for initial recognition and measurement of intangibles, assignment of
assets and liabilities including goodwill to reporting units and goodwill
impairment testing. Additionally, under the provisions of these standards, the
unamortized balance of negative goodwill will be written off and recognized as a
change in accounting principle. The provisions of SFAS Nos. 141 and 142 will
apply to all business combinations after June 30, 2001. The provisions of SFAS
No. 142 for existing goodwill and other intangible assets are required to be
implemented effective January 1, 2002. The company is currently evaluating the
impact of these standards on the consolidated financial statements.
In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations". This statement establishes standards for accounting for
obligations associated with the retirement of tangible long-lived assets. The
standard is required to be adopted by Alcoa beginning on January 1, 2003.
Management is currently assessing the details of the standard and is preparing a
plan of implementation.
PART II - OTHER INFORMATION
ITEM 1. Legal proceedings.
As previously reported, on October 15, 1999, Victoria Shaev, who represents that
she is an Alcoa shareholder, filed a purported derivative action on behalf of
the company in the United States District Court for the Southern District of New
York, naming as defendants the company, each member of Alcoa's Board of
Directors, certain officers of the company and PricewaterhouseCoopers LLP,
Alcoa's independent accountants. The shareholder did not make a demand on the
company before filing this lawsuit. Under relevant law, this demand is required.
The lawsuit alleged, among other things, that Alcoa's proxy statement dated
March 8, 1999, contained materially false and misleading representations and
omissions concerning the company's proposed Alcoa Stock Incentive Plan and that
the shareholder approval of the plan, based upon these alleged representations
and omissions, was defective. The plaintiff sought to invalidate the shareholder
approval of the plan and enjoin its implementation. She also requested that
Alcoa pay the costs and disbursements of the action, including the fees of her
accountants, counsel and experts. On March 19, 2001, the court granted without
prejudice the defendants' motion to dismiss the plaintiff's claims. On May 31,
2001, Ms. Shaev served an amended complaint making the same allegations as in
the previous complaint but styling the complaint as a class action on behalf of
shareholders. The company served a motion to dismiss on June 25, 2001.
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 U.S Department of Justice (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 able to reach settlement
on this matter and are in the process of finalizing the terms and conditions of
the settlement agreement.
As previously reported, in March 1999, two search warrants were executed by
various federal and state agencies on the Alcoa Port Allen works of Discovery
Aluminas, Inc. (Discovery), a subsidiary, in Port Allen, Louisiana. Also in
March, Discovery 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. In
December 2000, a plea agreement was executed between Discovery and the federal
authorities. In addition, an agreement was reached between Discovery and
state/local authorities to resolve this matter. Under these agreements together,
Discovery: (1) pleaded guilty to a one-count felony for violating the federal
Clean Water Act and its state analog; (2) paid a $700,000 fine to the United
States; (3) paid $50,000 in community restitution; and (4) paid $400,000 to the
State of Louisiana on July 13. Discovery was sentenced on May 14 to terms
consistent with the Plea Agreement. The Louisiana Department of Environmental
Quality has expressed an intention to issue a civil penalty to Discovery for
water violations and settlement discussions are ongoing.
ITEM 4. Submission of Matters to a Vote of Security Holders.
At the annual meeting of Alcoa shareholders held on April 20, 2001, Alain J. P.
Belda, Hugh M. Morgan, Henry B. Schacht and Franklin A. Thomas were re-elected
Directors of Alcoa for a term of three years. Votes cast for Mr. Belda were
738,788,441 and votes withheld were 7,427,159; votes cast for Mr. Morgan were
738,933,298 and votes withheld were 7,282,302; votes cast for Mr. Schacht were
738,837,455 and votes withheld were 7,378,145; and votes cast for Mr. Thomas
were 739,149,305 and votes withheld were 7,066,295.
Also at the annual meeting, a shareholder proposal relating to a global set of
corporate standards was not adopted. Total votes cast for the shareholder
proposal relating to a global set of corporate standards were 63,469,339; votes
cast against were 537,622,957; and there were 53,535,951 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(n) Amended and Extended Revolving Credit Agreement
(364-Day), dated as of April 27, 2001
10(o) Amended and Restated Revolving Credit Agreement
(Five-Year), dated as of April 27, 2001
12. Computation of Ratio of Earnings to Fixed Charges
15. Independent Accountants' letter regarding unaudited financial information
(b) Reports on Form 8-K. During the second quarter of 2001, Alcoa filed with the
Securities and Exchange Commission a Form 8-K, dated May 23, 2001, concerning
$1,500 of debt securities being offered and sold under the Registration
Statement on Form S-3 filed on April 16, 2001.
SIGNATURES
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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.
August 9, 2001 By /s/ RICHARD B. KELSON
----------------------- ----------------------------
Date Richard B. Kelson
Executive Vice President and
Chief Financial Officer
Chief Compliance Officer
(Principal Financial Officer)
August 9, 2001 By /s/ TIMOTHY S. MOCK
------------------------- ----------------------------
Date Timothy S. Mock
Vice President and Controller
(Chief Accounting Officer)
EXHIBITS
--------
10(n) Amended and Extended Revolving Credit Agreement
(364-Day), dated as of April 27, 2001
10(o) Amended and Restated Revolving Credit Agreement
(Five-Year), dated as of April 27, 2001
12. Computation of Ratio of Earnings to Fixed Charges
15. Independent Accountants' letter regarding unaudited
financial information