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 March 31, 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 May 7, 2001, 863,167,537 shares of common stock, par value $1.00 per
share, of the Registrant were outstanding.
A07-20003
PART I - FINANCIAL INFORMATION
ITEM 1. - Financial Statements.
Alcoa and subsidiaries
Condensed Consolidated Balance Sheet
(in millions)
(unaudited)
March 31 December 31
ASSETS 2001 2000
----------- -----------
Current assets:
Cash and cash equivalents $ 421 $ 315
Short-term investments 34 56
Receivables from customers, less allowances of
$72 in 2001 and $69 in 2000 3,265 3,461
Other receivables 326 354
Inventories (C) 2,869 2,703
Deferred income taxes 372 385
Prepaid expenses and other current assets 599 304
------- -------
Total current assets 7,886 7,578
------- -------
Properties, plants and equipment, at cost 22,216 22,600
Less: accumulated depreciation, depletion and
amortization 9,765 9,750
------- -------
Net properties, plants and equipment 12,451 12,850
------- -------
Goodwill, net of accumulated amortization of $404 in
2001 and $344 in 2000 6,058 6,003
Other assets, including assets held for sale (G) 3,572 5,260
------- -------
Total assets $29,967 $31,691
======= =======
LIABILITIES
Current liabilities:
Short-term borrowings $ 1,700 $ 2,719
Accounts payable, trade 1,815 1,876
Accrued compensation and retirement costs 775 928
Taxes, including taxes on income 856 702
Other current liabilities 1,575 1,302
Long-term debt due within one year 225 427
------- -------
Total current liabilities 6,946 7,954
------- -------
Long-term debt, less amount due within one year 4,918 4,987
Accrued postretirement benefits 2,667 2,719
Other noncurrent liabilities and deferred credits 2,192 2,126
Deferred income taxes 909 969
------- -------
Total liabilities 17,632 18,755
------- -------
MINORITY INTERESTS 1,316 1,514
------- -------
CONTINGENT LIABILITIES (D) - -
SHAREHOLDERS' EQUITY
Preferred stock 56 56
Common stock 925 925
Additional capital 5,939 5,927
Retained earnings 7,227 7,127
Treasury stock, at cost (1,871) (1,717)
Accumulated other comprehensive loss (E and H) (1,257) (896)
------- -------
Total shareholders' equity 11,019 11,422
------- -------
Total liabilities and shareholders' equity $29,967 $31,691
======= =======
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)
First quarter ended
March 31
---------------------------------
2001 2000*
---------- ----------
Sales $6,176 $4,509
Cost of goods sold 4,713 3,314
Selling, general administrative and other
expenses 323 227
Research and development expenses 49 39
Provision for depreciation, depletion and
amortization 321 225
Interest expense 115 51
Other income, net (92) (41)
------ ------
5,429 3,815
Income before taxes on income 747 694
Provision for taxes on income 247 237
------ ------
Income from operations 500 457
Less: Minority interests' share 96 105
------ ------
Income before accounting change 404 352
Cumulative effect of accounting change
for revenue recognition (H) - (5)
------ ------
NET INCOME $ 404 $ 347
====== ======
EARNINGS PER SHARE (F)
Basic $ .47 $ .47
====== ======
Diluted $ .46 $ .47
====== ======
Dividends paid per common share $ .150 $ .125
====== ======
The accompanying notes are an integral part of the financial statements.
* Restated, see Note H
3
Alcoa and subsidiaries
Condensed Statement of Consolidated Cash Flows (unaudited)
(in millions)
Three months ended
March 31
---------------------------------
2001 2000*
---------- ----------
CASH FROM OPERATIONS
Net income $ 404 $ 347
Adjustments to reconcile net income to cash from operations:
Depreciation, depletion and amortization 324 228
Change in deferred income taxes 5 17
Equity income before additional taxes, net of dividends 4 (4)
(Gains)losses from investing activities - sale of assets (47) 3
Minority interests 96 105
Accounting change - 5
Other ( 9) 10
Changes in assets and liabilities, excluding effects of
acquisitions and divestitures:
Reduction (increase) in receivables 166 (197)
Increase in inventories (202) (18)
(Increase) reduction in prepaid expenses and other
current assets (222) 9
Reduction in accounts payable and accrued expenses (260) (74)
Increase in taxes, including taxes on income 209 51
Net change in noncurrent assets and liabilities (126) (21)
------- -------
CASH PROVIDED FROM OPERATIONS 342 461
------- -------
FINANCING ACTIVITIES
Net changes to short-term borrowings (1,014) 341
Common stock issued for stock compensation plans 134 247
Repurchase of common stock (276) (670)
Dividends paid to shareholders (130) (91)
Dividends paid to minority interests (139) (49)
Additions to long-term debt 208 13
Payments on long-term debt (434) (25)
------- -------
CASH USED FOR FINANCING ACTIVITIES (1,651) (234)
------- -------
INVESTING ACTIVITIES
Capital expenditures (241) (176)
Acquisitions, net of cash acquired (76) (72)
Proceeds from the sale of assets 1,777 4
Additions to investments (44) -
Changes in minority interests - (3)
Changes in short-term investments 23 (4)
Other (9) (8)
------- -------
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 1,430 (259)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (15) 3
------- -------
Net change in cash and cash equivalents 106 (29)
Cash and cash equivalents at beginning of year 315 237
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 421 $ 208
======= =======
The accompanying notes are an integral part of the financial statements.
* Restated, see Note H
4
Notes to Condensed Consolidated Financial Statements
(in millions, except per share amounts)
A. 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 Condensed
Consolidated Financial 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. Common Stock Split - In the second quarter of 2000, a two-for-one stock split
was approved and distributed to shareholders. In this report, all per-share
amounts and number of shares have been restated to reflect the stock split.
C. Inventories
March 31 December 31
2001 2000
-------- -----------
Finished goods $ 875 $ 814
Work in process 869 806
Bauxite and alumina 352 311
Purchased raw materials 593 562
Operating supplies 180 210
------ ------
$2,869 $2,703
====== ======
Approximately 51% of total inventories at March 31, 2001 and December 31,
2000 were valued on a LIFO basis. If valued on an average cost basis, total
inventories would have been $671 and $658 higher at March 31, 2001 and December
31, 2000, respectively.
D. 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 materially 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 34% of the project's total debt of
approximately $380. 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.
E. Comprehensive Income
First quarter ended
March 31
-------------------
2001 2000
-------- --------
Net income $ 404 $ 347
Other comprehensive loss:
Unrealized translation adjustments (238) (79)
Unrealized gains/(losses) on derivatives:
Cumulative effect of accounting change
for derivatives (4) -
Net change from periodic revaluations (95) -
Net amount reclassified to income (24) -
----- -----
Total unrealized gains/(losses) on derivatives (123) -
----- -----
Comprehensive income $ 43 $ 268
===== =====
5
F. Earnings Per Share - The detail of basic and diluted EPS follows:
First quarter ended
March 31
-------------------
2001 2000*
-------- --------
Income before cumulative effect $ 404 $ 352
Less: Preferred stock dividends - -
----- -----
Income available to common stockholders
before cumulative effect $ 404 $ 352
Cumulative effect of accounting change - (5)
Income available to common stockholders
after cumulative effect $ 404 $ 347
Average shares outstanding - basic 865 733
Effect of dilutive securities:
Shares issuable upon exercise of
dilutive outstanding stock options 9 12
----- -----
Average shares outstanding - diluted 874 745
Basic EPS (before cumulative effect) $ .47 $ .48
===== =====
Basic EPS (after cumulative effect) $ .47 $ .47
===== =====
Diluted EPS (before cumulative effect) $ .46 $ .48
===== =====
Diluted EPS (after cumulative effect) $ .46 $ .47
===== =====
* Restated, see Note H
Options to purchase 29 million shares of common stock at an average exercise
price of $39.00 were outstanding as of March 31, 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. The
contract, which matures in 2002, allows Alcoa to repurchase up to 10 million
shares from a financial institution. Alcoa may elect to settle the contract on a
net share basis in lieu of physical settlement. The contract permits early
settlement. As of March 31, 2001, 4.4 million shares had been committed at an
average price of $31.90 per share.
G. Acquisitions and Divestitures - In May of 2000, Alcoa completed a merger
with Reynolds Metals Company (Reynolds) by issuing approximately 135 million
shares of Alcoa common stock. The transaction was valued at approximately
$5,900, including debt assumed of $1,297. The purchase price allocation is
preliminary; the final allocation of the purchase price will be based upon
valuation and other studies, including environmental and other contingencies
that will be completed in the second quarter of 2001. Alcoa does not believe
that the completion of these studies will have a material impact on the purchase
price allocation. The goodwill of $2,100 resulting from the preliminary 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
value 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. (Howmet), a majority
owned company of Cordant. The transactions were valued at approximately $3,300,
including debt assumed of $826. The purchase price allocation is preliminary;
the final allocation of the purchase price will be based upon valuation and
other studies, including environmental and other contingencies that will be
completed in the second quarter of 2001. Alcoa does not believe that the
completion of these studies will have a material impact on the purchase price
allocation. The goodwill of
6
approximately $2,500 resulting from the preliminary purchase price allocation 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.
Three months ended
March 31, 2000
------------------
Sales $6,388
Net Income 390
Basic EPS $ .45
======
Diluted EPS $ .44
======
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.
H. Recently Adopted Accounting Standards - In 2000, Alcoa changed its method of
accounting for revenue recognition in accordance with Staff Accounting Bulletin
(SAB) 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 2000 first
quarter amounts have been restated for the effect of the change in accounting
for revenue recognition. Amounts originally reported were as follows: Sales,
$4,531; Income from operations, $460; Net income, $355; Earnings per share,
basic and diluted, $.48.
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 (not material in the first quarter
of 2001). 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 the
first quarter of 2001).
Changes in the fair value of derivatives are recorded in current earnings or
in other comprehensive income, depending on whether a derivative is designated
as a fair value or cash flow hedge.
Fair Value Hedges
- ------------------
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
7
portion of its firm commitments. These contracts cover exposures, generally
within 3 years.
Hedges of these 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 are recorded each period in sales
and are generally offset. There were no firm commitments that ceased to qualify
as a fair value hedge in the first quarter of 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 and fuel oil for its operations. Alcoa enters into futures and options
contracts to eliminate volatility in the price of these commodities.
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 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.
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 the first quarter
of 2001). These contracts cover periods commensurate with known or expected
exposures, generally within 3 years. Of the $123 loss recognized in other
comprehensive income for all cash flow hedges as of March 31, 2001, $82 of the
loss is expected to be recognized in earnings over the next twelve months.
I. Reclassifications - Certain amounts have been reclassified to conform to
current year presentation.
J. Segment Information - The following details sales and after-tax operating
income (ATOI) for each reportable segment for the three-month periods ended
March 31, 2001 and 2000. As a result of acquisitions in 2000, Alcoa changed its
internal management reporting structure. Previously reported data has been
restated to reflect this change. 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.
8
Segment Information: Alumina Flat- Engi- Pack-
& Chem- Primary Rolled neered aging &
icals Metals Products Products Consumer Other Total
March 31, 2001
Sales:
Third-party sales $547 $ 967 $1,343 $1,593 $646 $1,080 $6,176
Intersegment sales 283 867 16 9 - - 1,175
---- ------ ------ ------ ---- ------ ------
Total sales $830 $1,834 $1,359 $1,602 $646 $1,080 $7,351
==== ====== ====== ====== ==== ====== ======
After-tax operating
income $166 $ 294 $ 65 $ 40 $ 43 $ 50 $ 658
==== ====== ====== ====== ==== ====== ======
March 31, 2000
Sales:
Third-party sales $540 $ 611 $1,404 $1,053 $203 $ 698 $4,509
Intersegment sales 250 850 13 13 - - 1,126
---- ------ ------ ------ ---- ------ ------
Total sales $790 $1,461 $1,417 $1,066 $203 $ 698 $5,635
==== ====== ====== ====== ==== ====== ======
After-tax operating
income $155 $ 227 $ 73 $ 53 $ 17 $ 30 $ 555
==== ====== ====== ====== ==== ====== ======
The following table reconciles segment information to consolidated totals.
First quarter ended
March 31
-------------------
2001 2000
------ ------
Total after-tax operating income $ 658 $ 555
Elimination of intersegment loss (profit) 4 19
Unallocated amounts (net of tax):
Interest income 8 7
Interest expense (75) (33)
Minority interests (96) (105)
Corporate expense (66) (56)
Other (29) (40)
----- -----
Consolidated net income $ 404 $ 347
===== =====
K. Subsequent Event - On April 20, 2001, Alcoa sold Thiokol, a business acquired
in the Cordant transaction, to Alliant Techsystems Inc. (ATK) for $685 in cash.
Alcoa expects to recognize a gain on the sale of Thiokol; however the amount of
the gain has not yet been determined.
9
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 March 31, 2001, and the unaudited condensed
statements of consolidated income and cash flows for the three-month periods
ended March 31, 2001 and 2000, which are included in Alcoa's Form 10-Q for
the period ended March 31, 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
April 5, 2001, except for Note K,
for which the date is April 20, 2001
10
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.
Results of Operations
Principal income and operating data follow.
First quarter ended
March 31
-------------------
2001 2000*
------ ------
Sales $6,176 $4,509
Net income 404 347
Basic earnings per common share $ .47 $ .47
Diluted earnings per common share $ .46 $ .47
Shipments of aluminum products (mt) 1,315 1,133
Shipments of alumina (mt) 2,031 1,833
Alcoa's average realized ingot price $ .78 $ .79
Average 3-month LME price $ .71 $ .75
* Restated, see Note H to the financial statements
- -----------------
Earnings Summary
Alcoa achieved record-setting financial results in the 2001 first quarter as
net income rose 16% over the comparable 2000 period to $404. For the quarter,
the positive impact of acquisitions and the benefits derived from successful
cost reduction programs more than offset softness in the building and
construction, transportation and distribution markets; a 20% increase in energy
costs quarter-over-quarter for existing businesses; and lower alumina and
aluminum prices. In addition, Alcoa curtailed production at various locations
and sold several non-core businesses that increased earnings approximately 2
cents per share.
First quarter 2001 sales rose 37% from the 2000 first quarter to $6,176.
This increase resulted from higher shipment volumes due to acquisitions, offset
by a significant drop in demand from the building and construction,
transportation and distribution markets as well as lower metal and alumina
prices.
Annualized return on shareholders' equity was 13.8% for the 2001 first
quarter, compared with 21.5% for the 2000 period. The decrease was due to the
larger number of shares outstanding during the 2001 period primarily resulting
from the Reynolds acquisition.
Cost of goods sold (COGS) increased $1,399 from the prior year first
quarter, or 42%. The increase reflects higher volumes primarily due to
acquisitions, as well as $78 of higher energy costs, somewhat offset by cost-
cutting efforts. COGS as a percentage of sales in the 2001 first quarter was
76.3% versus 73.5% in the 2000 first quarter. The higher ratios in 2001 were due
to higher energy costs as well as the relatively higher cost of sales ratios of
the acquired Reynolds and Cordant businesses.
Selling and general administrative expenses (S&GA) were up $96 from the
2000 first quarter, and S&GA as a percentage of sales was 5.2% for the 2001
first quarter, up slightly from 5.0% in the 2000 first quarter. These increases
were predominantly due to Reynolds and Cordant costs that were not present in
the 2000 first quarter.
Research and development expenses for the 2001 first quarter increased $10
or 26% over the 2000 first quarter, primarily due to spending at Reynolds and
Cordant that was not included in the 2000 first quarter.
11
Interest expense was up $64 from the 2000 first quarter due to the higher
debt levels resulting from the acquisitions as well as higher interest rates.
Approximately 86% of these increases are due to higher debt levels, with the
remainder due to higher interest rates.
The income tax provision of 33% differs from the statutory rate and the 2000
first quarter rate of 34% primarily because of taxes on foreign income.
Other income increased to $92 in the 2001 first quarter, up $51 over the
comparable 2000 period. First quarter 2001 results benefited from $47 in net
gains on the sale of various assets, as well as $11 higher equity income in the
2001 first quarter.
Minority interests' share of income from operations decreased 9% from the
2000 first quarter. The decrease was primarily due to lower income at Alcoa
Fujikura Limited (AFL), Alcoa World Alumina and Chemicals, and Aluminio, offset
by higher earnings at Alcoa of Australia.
Segment Information
I. Alumina and Chemicals
First quarter ended
March 31
-------------------
2001 2000
------ ------
Alumina production 3,330 3,477
Third-party alumina shipments 2,031 1,833
Third-party sales $ 547 $ 540
Intersegment sales 283 250
------ ------
Total sales $ 830 $ 790
====== ======
After-tax operating income $ 166 $ 155
====== ======
Third-party sales for this segment increased 1% from the 2000 quarter due
to higher shipments, partially offset by lower prices. Third-party alumina
shipments increased 11% while the realized price for alumina decreased 7%.
Intersegment sales increased 13% due mainly to increased internal alumina
sourcing to newly acquired smelters and the restart of smelting capacity at
Warrick, Indiana, partially offset by the curtailment of aluminum production
capacity at smelters in the northwestern U.S.
ATOI for this segment increased 7% to $166 for the 2001 first quarter. This
increase was primarily due to alumina production shifting from higher to lower
cost facilities, offset by an after-tax increase in energy costs of $14 quarter-
to-quarter.
II. Primary Metals
First quarter ended
March 31
-------------------
2001 2000
------ ------
Aluminum production 917 710
Third-party aluminum shipments 471 339
Third-party sales $ 967 $ 611
Intersegment sales 867 850
------ ------
Total sales $1,834 $1,461
====== ======
After-tax operating income $ 294 $ 227
====== ======
Third-party sales and shipments for the first quarter increased 58% and 39%,
respectively, from the 2000 first quarter due primarily to the addition of
Reynolds' smelters. Excluding these locations, third-party sales increased 6%
quarter-over-quarter. Energy sales made possible by production curtailments in
plants located in the northwestern U.S. contributed to the increase, partially
offset by lower shipments and prices. Alcoa's average realized third-party price
for ingot declined 1% to 78 cents per pound from the 2000 first quarter.
12
Primary Metals first quarter ATOI rose $67 or 30% from the 2000 quarter. Of
this increase, $56 was due to the impact of acquired Reynolds facilities. Also
impacting ATOI for the quarter were the positive impacts of power sales net of
increased energy and curtailment costs and price decreases.
III. Flat-Rolled Products
First quarter ended
March 31
-------------------
2001 2000
------ ------
Third-party aluminum shipments 470 507
Third-party sales $1,343 $1,404
Intersegment sales 16 13
------ ------
Total sales $1,359 $1,417
====== ======
After-tax operating income $ 65 $ 73
====== ======
Third-party flat-rolled product sales for the 2001 first quarter decreased
4% from the comparable 2000 quarter, driven by 7% lower overall shipments. North
American sales fell 14% on 22% lower shipments, primarily in sheet and plate,
reflecting the continued softness in the automotive, commercial transportation
and distribution markets. This decrease was offset by 17% higher sales 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 11% in the 2001 first quarter
from the corresponding 2000 quarter due to lower volumes in North America,
higher conversion costs, principally energy, in rigid container sheet, offset
somewhat by a more profitable product mix for sheet and plate in the U.S. and
Europe.
IV. Engineered Products
First quarter ended
March 31
-------------------
2001 2000
------ ------
Third-party aluminum shipments 254 266
Third-party sales $1,593 $1,053
Intersegment Sales 9 13
------ ------
Total sales $1,602 $1,066
====== ======
After-tax operating income $ 40 $ 53
====== ======
Engineered Products third-party sales improved 51% in the 2001 first quarter
over the corresponding 2000 quarter due to the acquisitions of Reynolds, Cordant
and BA. Excluding these acquisitions, third-party sales and shipments decreased
15% and 19%, respectively, quarter-to-quarter, reflecting the softening in the
transportation market, primarily in extruded products.
ATOI for the segment decreased 25% for the 2001 first quarter versus the
corresponding 2000 period. This resulted from a decline in volumes and profits
due to lower demand for wheels and extrusions in the most recent quarter, as
well as increased energy and fuel costs, partially offset by the impact of
acquisitions.
V. Packaging and Consumer
First quarter ended
March 31
-------------------
2001 2000
------ ------
Third-party aluminum shipments 42 2
Third-party sales $ 646 $ 203
After-tax operating income $ 43 $ 17
First quarter third-party sales for this segment rose $443 compared with the
first quarter of 2000, due primarily to the acquisitions of Reynolds and several
smaller businesses. Excluding these acquisitions, third-party sales rose 7%
versus the 2000 first quarter due to increased sales in closures.
13
Segment ATOI was $43 in the 2001 first quarter, up $26 over the comparable
2000 period. This increase was primarily due to the acquisitions noted earlier
as well as the increase in closure sales and equity income.
VI. Other
First quarter ended
March 31
-------------------
2001 2000
------ ------
Third-party aluminum shipments 78 19
Third-party sales $1,080 $698
After-tax operating income $ 50 $ 30
Third-party sales for this group were $1,080 in the 2001 first quarter, up
55% from the 2000 first quarter. Excluding the Thiokol, Reynolds' metal
distribution business (RASCO) and AFL telecommunications acquisitions that were
made in 2000, the growth rate adjusts to 2% quarter-to-quarter. The increase was
due to growth in AFL telecommunications sales, offset by decreases in automotive
and residential building products as these markets declined.
ATOI for this group in the 2001 first quarter was $50, up 67% from the 2000
first quarter. This increase was due to gains of $32 from the sales of Alcoa
Proppants Inc. and of Alcoa's interest in a Latin American cable business, as
well as higher earnings from the telecommunications businesses. Offsetting these
positive factors were weaker ATOI results for businesses serving the automotive
and truck markets due to lower sales.
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; 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.
The elimination of intersegment profit for the 2001 first quarter decreased
$15 from the 2000 first quarter due to the decrease in alumina and primary
aluminum prices. Interest expense increased because of higher debt related to
acquisitions. Corporate expenses increased from the 2000 first quarter due to
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.
14
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 quarter-to-date, after-tax charge to earnings of $1
at March 31, 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
March 31, 2001, contracts qualifying as fair value hedges totaled approximately
636,000 tons with a fair value of approximately zero.
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 and fuel oil for its
operations. Alcoa enters into futures and options contracts to eliminate
volatility in the price of these commodities. At March 31, 2001, the fair value
of the contracts recorded in other comprehensive income for these hedges totaled
a gain of $23 (net of tax and minority interest). These contracts cover periods
commensurate with known or expected exposures, generally within 3 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 3 years. At March 31, 2001,
the fair value of the contracts recorded in other comprehensive income for these
hedges totaled a loss of approximately $145 (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. At March 31, 2001 the fair
value of the contracts recorded in other comprehensive income for these hedges
totaled 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
15
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 and has
proposed to conduct certain new pilot tests of sediment capping techniques and
other technologies for remediation during the 2001 construction season. The EPA
is considering whether to approve these tests. 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 December 2001. 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 proposed pilot test 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 has 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 and, under a September 1995 consent
order, is working with the EPA in investigating potential environmental
contamination at the Troutdale site and promoting more efficient cleanup at the
site. Following cessation 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 March 31, 2001 was $467 (of which $81
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 first quarter
were $8. They include expenditures currently mandated, as well as those not
required by any regulatory authority or third party. In 2001, the reserve
balance was increased by $28 as a result of acquisitions.
Liquidity and Capital Resources
Cash from Operations
Cash from operations for the 2001 first quarter totaled $342, compared with $461
in the 2000 period. The decrease of $119 or 26% results primarily from a
16
net increase in working capital requirements, partly offset by higher net income
and increases in non-cash items such as depreciation and amortization.
Financing Activities
Financing activities used $1,651 of cash in the 2001 first quarter, compared
with $234 used in the 2000 period. The increase in the use of cash was due to
debt repayments in the 2001 first quarter that were funded by the proceeds from
the sales of operations to be divested from the Reynolds merger. Short-term
borrowings decreased by $1,014 in the 2001 period, compared with an increase of
$341 in the 2000 period. Payments on long-term debt exceeded additions by $226
in the 2001 first quarter, versus $12 in the 2000 period. Offsetting this was a
decrease in repurchases of common stock: $276 in the 2001 first quarter versus
$670 in the 2000 period.
Dividends paid to shareholders were $130 in the 2001 first quarter, an
increase of $39 over the 2000 period. The increase was due to a higher number of
shares outstanding as well as an increase in the dividend per share in the 2001
first quarter, with a total payout of 15.0 cents per share versus 12.5 cents per
share in the 2000 first quarter. Alcoa has a variable dividend that provides for
the distribution, in the following year, of 30% of Alcoa's annual earnings in
excess of $1.50 per basic share. Basic earnings per share for 2000 were $1.83.
The variable dividend of 10 cents per share is paid out in four equal quarterly
installments of 2.5 cents per share during 2001.
Investing Activities
Investing activities provided $1,430 during the 2001 first quarter, compared
with cash used of $259 in the 2000 period. Dispositions of assets to be divested
from the Reynolds merger accounted for the bulk of the change, returning $1,777
in the 2001 period.
Alcoa completed a number of acquisitions in the first quarter of 2001 and
the first quarter of 2000. Net cash paid for these acquisitions were $76 and
$72, respectively. None of these transactions had a material impact on Alcoa's
financial statements.
17
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.
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 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 will: (1) plead guilty to a one-count felony for violating the federal
Clean Water Act and its state analog; (2) pay a $700,000 fine to the United
States; (3) pay $50,000 in community restitution; and (4) pay $400,000 to the
State of Louisiana. Discovery anticipates being sentenced sometime in the second
quarter of 2001. 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 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
12. Computation of Ratio of Earnings to Fixed Charges
15. Report of Independent Accountants regarding unaudited financial information
(b) Reports on Form 8-K. None were filed in the first quarter of 2001.
18
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.
May 10, 2001 By /s/ RICHARD B. KELSON
------------------- ----------------------------
Date Richard B. Kelson
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
May 10, 2001 By /s/ TIMOTHY S. MOCK
--------------------- ----------------------------
Date Timothy S. Mock
Vice President and Controller
(Chief Accounting Officer)
19
EXHIBITS
--------
Page
----
12. Computation of Ratio of Earnings to Fixed Charges 21
15. Report of Independent Accountants regarding unaudited
financial information 22
20