EXHIBIT 13
To Alcoa Shareholders
Despite an extremely challenging business environment, 2001 proved to be the
second best year in the company's history in terms of earnings before special
charges, and the fourth best year after such charges. As compared with the Dow
Jones 30 Industrials, which had a total shareholder return of minus 5.4%,
Alcoa's total shareholder return was 7.8%.
Net income for the year was $908 million, or $1.05 per share, including special
after-tax charges of $355 million, or 41 cents per share, compared with $1.484
billion, or $1.80 per share, in 2000. Excluding the special charges, earnings
for 2001 were $1.263 billion, or $1.46 per share. This was a drop of 42% on a
post-special items basis and 19% on a pre-special items basis. We operated in a
deteriorating environment. Demand in our markets weakened as a consequence of
the U.S. recession, the European slowdown, and the continued recession in Japan.
London Metal Exchange prices for aluminum decreased by 13%, from a closing price
of $1,550 a metric ton (mt) on January 2, 2001, to $1,355/mt at closing on
December 28, 2001. The price decrease occurred despite a 4% reduction in global
output, as reported by the International Aluminium Institute, between December
2000 and December 2001. Power shortages in the U.S. and Brazil reduced Alcoa's
own output by 316,000 mtpy, or 7.6% of our total consolidated annual capacity.
All of Alcoa's major markets were affected by the economy - aerospace,
automotive, housing and construction, packaging, and industrial.
We did what you have to do in circumstances like these. We contained capital
expenditures, paid down debt, controlled expenses, and closed high cost
facilities. Several of these actions were started in the second half of year
2000. As a consequence, we will have reduced our workforce by some 10,000, or
8%; permanently closed 18 locations, mostly in Europe and the U.S.; and reduced
our costs by $348 million. Our actions blunted the impact of greatly reduced
market activity but could not eliminate it.
In addition to our ongoing cost controls, in 2001 we completed strategic reviews
of our global market positions in primary and fabricated aluminum and addressed
the results. Though our restructuring activities had a negative impact on
earnings in the second and fourth quarters, they now are contributing to cost
savings.
We believe Alcoa is better positioned to do business in the currently depressed
economy and to benefit when it rebounds.
Meanwhile, we continued to work for long-term shareholder value by investing in
research and development, pursuing appropriate energy self-sufficiency,
evaluating and making acquisitions, and strengthening our balance sheet. We
continued to safeguard our people and to invest in our communities and
protection of the environment.
The Growth Challenge
Striving to grow - top line and bottom line - is a requirement and an ingrained
attitude at Alcoa, challenging everyone to do more, better and faster. In a
business environment where change is the only certainty, we are guided by proven
strategies and competencies to nurture organic growth, preserve shareholder
value in difficult times, and grow value when the times are right. In 2001, we
walked away from several opportunities because they did not, after analysis,
meet our criteria for profitable growth. We have consistently demonstrated the
ability to choose strategic partners and buy wisely, and to integrate
acquisitions to the mutual benefit of Alcoa and the businesses we acquire. We
will continue to do so.
In addition to a number of relatively small alliances, acquisitions, and
divestitures reported in the News section of this report, Alcoa undertook a
major growth initiative in 2001. We began a long-term strategic relationship
with Chalco (Aluminum Corporation of China) that establishes us strongly in the
fastest-growing aluminum market in the world. Our future participation as a 50%
partner in Chalco's Pingguo primary aluminum and alumina facility will support
our plans for further growth in fabricated products in China. We anticipate
future mutually beneficial joint ventures with Chalco.
Customers First
Recognizing that our customers' world is changing as much as Alcoa's, as many
consolidate and some become global enterprises, we have begun to implement a
major shift in the way we manage our relationships with our customers and among
our business units. This customer-focused change grows from the Alcoa Business
System (ABS) and our recently developed Market Sector Lead Teams (MSLTs).
Connecting with our customers through ABS is enabling us to selectively deliver
to them just in time and better manage the supply chain. MSLTs provide a
simplified, powerful means to coordinate the sale and delivery of various
products and services from our geographically and market-diverse businesses to
the same customer, anywhere that customer does business, bringing to bear the
full advantage of our global capabilities.
Maintaining Our Strengths
The events of 2001, whether tragic, uplifting, or simply part of everyday
business, brought me increased appreciation of Alcoa's strength and flexibility
as an organization, and of its people in responding to whatever an occasion
demands of them. In 2001, the company adopted a new Vision - "Alcoa aspires to
be the best company in the world." We reaffirmed our commitment to our Values
that have guided the company for many years, revising them only to place
appropriate emphasis on what we owe to our customers and people.
The safety of our people and communities always is our highest priority.
Excluding recent acquisitions, Alcoa locations achieved a 2001 Lost Workday
(LWD) rate of 0.16, which translates to only one Lost Workday injury per 1.25
million work hours. We are proud of our record of continuous improvement, but
our goal is to become completely accident-free. In 2001, we intensified our
efforts to raise safety performance at locations
acquired in 2000 to the levels expected at other Alcoa operations, and undertook
a company-wide effort to eliminate workplace fatalities.
Wherever we operate, Alcoa will strive to reward its shareholders by remaining
true to its stated goals - profitability, integrity in how we operate,
leadership in technology and manufacturing practices, and respect and honesty in
all of our relationships.
Looking Ahead
Are we satisfied with our performance for you? No. While our 2001 financial
results were better than those of most of our competitors in our diverse
markets, they did not advance in closing the gap between our performance and our
stated objective: standing among the industrial companies in the first quintile
of return on capital among Standard and Poor's Industrials in 2003. We still
intend to meet that objective.
Overall, the near-term business climate will be difficult. Nevertheless, we
believe that Alcoans have the will, the resources, and the competencies to
control our destiny and meet the key financial goals we have set. In this
regard, I invite your attention to the special section in this report entitled
Alcoa's Way: Five Defining Strategies.
Recently, the Board welcomed three new directors whose outstanding
qualifications and experience strengthen Alcoa now, and will contribute greatly
in the future. Kathryn S. Fuller, president of the World Wildlife Fund, brings
extensive knowledge and international experience in conservation and
environmental law to support Alcoa's commitment to sustainable development. Dr.
Ernesto Zedillo, former president of Mexico and an expert on international trade
and economics, will help us to move confidently in setting our agenda for global
growth. Carlos Ghosn, president and CEO of Nissan Motor Co., Ltd. and former
head of Michelin North America, brings to our Board a keen understanding of the
automotive market and an impressive track record in cost-cutting and
restructuring to improve corporate performance.
On behalf of Alcoa and the Board of Directors, thank you for the confidence you
demonstrate with your continued trust and investment.
/s/ Alain J. P. Belda
Alain J. P. Belda
Chairman and Chief Executive Officer
February 15, 2002
Alliances
A Big Step in China
In 2001, Alcoa completed agreements for a strategic alliance with Aluminum
Corporation of China Ltd. (Chalco), marking the beginning of a long-term
strategic partnership. The companies are forming a 50/50 joint venture at
Chalco's facility at Pingguo, one of the most efficient alumina and aluminum
plants in China. Alcoa will gain a strong position in China's aluminum market,
the fastest growing in the world, while Chalco will benefit from Alcoa's
management skills, operational and technical expertise, and best practices.
Alcoa's participation in the primary sector will also support Alcoa's further
growth in fabricated products in China.
Venture plans include a significant increase in refining and smelting
capacities at Pingguo, doubling the 450,000-mtpy alumina refining capacity by
2003 and expanding the 135,000-mtpy smelter to 355,000 mtpy by 2006. Alcoa is
the strategic investor in Chalco's global offering and listing on the New York
Stock Exchange and The Stock Exchange of Hong Kong. The alliance is expected to
lead to additional joint ventures in China.
New Business for Howmet
Alcoa's Howmet Castings business strengthened its ties with two major customers.
In 2001, Howmet and Siemens AG began a multiyear, several hundred million dollar
agreement for the supply of Howmet turbine airfoil castings. In January 2002,
Boeing awarded Howmet Castings $8 million in new contracts for its F-22
aircraft.
Hydropower in Brazil
Alcoa Aluminio is engaged in several hydropower projects with other Brazilian
companies that will increase its energy self-sufficiency and cost-stability
while also meeting Alcoa and Brazilian standards for socially and
environmentally sound development.
. In 2002, Aluminio began receiving its own energy from the Machadinho plant, in
which Aluminio has a 27.23% stake. The plant has a total installed capacity of
1,140 megawatts (MW) and is expected to supply 55% of the energy requirements of
Aluminio's Pocos de Caldas smelter.
. A consortium including Aluminio won an auction for construction of the Santa
Isabel plant. The facility will have a total installed capacity of 1,087 MW, and
will supply 30% of the Alumar smelter's needs. Aluminio owns a 20% share,
corresponding to 106.5 MW of firm power. Start-up is expected in 2008.
Aluminio also participates in the Barra Grande and Serra do Facao
hydropower projects.
. Barra Grande construction has begun and is expected to be completed in 2005,
with total installed capacity of 690 MW. The facility will provide 45% of the
energy for Pocos de Caldas and a smaller percentage of Alumar's needs. Aluminio
has a 35.30% stake.
. Construction of the Serra do Facao facility, in which Aluminio has a 39.46%
stake, will begin in 2002 and is scheduled for completion by 2005. It will have
total installed capacity of 210 MW, and supply 26% of Alumar's needs.
Closures for India and Nepal
Alcoa Closure Systems International (CSI) and Nilkamal Plastics Group of Mumbai,
India, the leading supplier of plastic beverage crates to bottlers in Asia,
formed a joint venture to produce plastic closures for beverage markets in India
and Nepal. The venture was granted foreign investment approval from the Nepal
government to build a plant in Hetauda, a border town between Nepal and India.
New Metals Distributor
Alcoa and BHP Billiton formed a North American metals-distribution joint
venture, with each of the partners owning 50%. Named Integris Metals, it is a
Minneapolis-based, independently managed company with projected annual revenues
of more than $2 billion. The venture combines Reynolds Aluminum Supply Co. with
BHP Billiton's Vincent
Metal Goods in the U.S. and Atlas Ideal Metals in Canada.
Bigger Stake in Korea
Korea Packaging System was renamed Alcoa CSI Korea, reflecting Alcoa's purchase
of an additional 26% interest in the company from Maro Corp. Alcoa now holds 51%
of this leading producer of plastic beverage closures.
Acquisitions
. Alcoa increased its equity in Elkem ASA to more than 40% and made a cash
tender offer for the remaining shares, as required by Norwegian securities law.
Elkem, through its partnership with Alcoa, is Norway's second largest aluminum
producer and the world's largest supplier of silicon metal.
. Alcoa and Dooray Air Metal Co. signed a definitive agreement for Alcoa to
acquire Dooray's aluminum extrusion assets in Changwon, marking Alcoa's entrance
into the aluminum market in Korea.
. AFL acquired four wire harness plants from Siemens VDO Automotive AG of
Germany. The facilities, located in Europe and Mexico, have helped AFL expand
its customer base and made it a significant supplier to Volkswagen AG.
. Alcoa Wheel Products purchased the remaining 25% ownership of Reynolds-Lemmerz
Industries, a producer of cast aluminum wheels.
. AFL Telecommunications acquired Laser Armor Tech Corp. and ISAC, enhancing
AFL's position in optical ground wire and extending its family of engineer,
furnish and install companies. AFL also acquired majority ownership in Pacific
17, which designs and operates wireless communications sites.
. Alcoa Engineered Products acquired REDD Team Mfg., Inc., a privately held
maker of extruded aluminum products.
. Alcoa Packaging Machinery, Inc. (APMI) acquired some assets of Didde Web Press
Corp., a producer of narrow web offset printing presses, and the assets of
Preferred Machinery Corp., a manufacturer of food and beverage handling
equipment.
Divestitures
. Alcoa sold its Thiokol Propulsion business to Alliant Techsystems Inc. (ATK).
. Alcoa Aluminio sold its 40% share of Alcoa Fios e Cabos Eletricos S.A. to the
co-owner, Phelps Dodge.
. Alcoa sold the assets of Hanover Manufacturing Corp. to
Rea Magnet Wire Co.
. Alcoa's Malakoff Industries, Inc. was sold to Baikowski International Corp.
. Alcoa divested its 50% stake in Aroaima Bauxite Co. to the Guyanan government.
Selected Financial Data
(dollars in millions, except per-share amounts and ingot prices)
2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
Sales $ 22,859 $ 22,936 $ 16,323 $ 15,340 $ 13,319
Net income 908 1,484 1,054 853 805
Earnings per common share
Basic (before cumulative effect) 1.06 1.83 1.43 1.22 1.17
Basic (after cumulative effect) 1.06 1.82 1.43 1.22 1.17
Diluted (before cumulative effect) 1.05 1.81 1.41 1.21 1.15
Diluted (after cumulative effect) 1.05 1.80 1.41 1.21 1.15
- ------------------------------------------------------------------------------------------------------------
Alcoa's average realized price per pound for
aluminum ingot .72 .77 .67 .67 .75
LME average 3-month price per pound for
aluminum ingot .66 .71 .63 .63 .73
- ------------------------------------------------------------------------------------------------------------
Cash dividends paid per common share .600 .500 .403 .375 .244
Total assets 28,355 31,691 17,066 17,463 13,071
Short-term borrowings 142 2,719 343 431 348
Long-term debt 6,491 5,414 2,724 3,058 1,604
- ------------------------------------------------------------------------------------------------------------
See Management's Discussion and Analysis of Financial Condition and Results of
Operations for a discussion of special items, gains on asset sales and various
charges to cost of goods sold and selling and general administrative expenses
that impacted net income in 2001. In 2000, net income included the cumulative
effect of accounting change for revenue recognition of $(5).
Net Income Dividends Paid per
million of dollars Common share
dollars
[GRAPH APPEARS HERE] [GRAPH APPEARS HERE]
33
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. 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. 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 Notes J and T to the
financial statements and the disclosures included below under Segment
Information and Market Risks.
Alcoa is the world's leading producer of primary aluminum, fabricated
aluminum and alumina, and is active in all major aspects of the industry:
technology, mining, refining, smelting, fabricating and recycling. Aluminum is a
commodity that is traded on the London Metal Exchange (LME) and priced daily
based on market supply and demand. Aluminum and alumina represent approximately
two-thirds of Alcoa's revenues, and the price of aluminum influences the
operating results of Alcoa. Nonaluminum products include precision castings,
industrial fasteners, vinyl siding, food service and flexible packaging
products, plastic bottles and closures, fiber-optic cables, electrical
distribution systems for cars and trucks, and packaging machinery.
Alcoa is a global company operating in 38 countries. North America,
including Canada and the United States, is the largest market with 68% of
Alcoa's revenues. Europe is also a significant market with 20% of the company's
revenues. Alcoa also has investments and activities in Asia and Latin America
that present opportunities for substantial growth, including Brazil, China,
India, Korea and Mexico. Governmental policies and other economic factors,
including inflation and fluctuations in foreign currency exchange rates and
interest rates, affect the results of operations in these emerging markets.
Earnings Summary
- ----------------
Alcoa's net income for 2001 was $908, or $1.05 per diluted share, compared
with $1,484, or $1.80 per share, in 2000. Net income in 2001 included special
after-tax charges of $355 related to the strategic restructuring of Alcoa's
primary and fabricating businesses to optimize assets and lower costs. Excluding
these special after-tax charges, net income was $1,263, or $1.46 per share, a
decrease of 15% from 2000 results. Revenues in 2001 of $22,859 were essentially
flat compared with revenues of $22,936 in 2000. Overall, 2001 results were
negatively affected by lower realized prices and lower volumes due to weak
market conditions in the transportation, building and construction and
distribution markets. Also impacting earnings in 2001 were costs incurred for
contract losses, customer claims and bad debts. These negative factors were
partially offset by cost savings and gains on the sales of businesses. In 2001,
Alcoa announced a goal to reduce costs by $1,000 by December 2003.
Alcoa had a record year in 2000, with net income the highest in the
company's 112-year history. The acquisitions of Reynolds and Cordant were
completed in 2000. Net income of $1,484, or $1.80 per share, in 2000 was up 41%
compared with 1999 net income of $1,054, or $1.41 per share. Revenues of $22,936
in 2000 also increased 41% from 1999 revenues of $16,323. Improved financial
results for 2000 relative to 1999 were the result of higher volumes, aided by
the Reynolds and Cordant acquisitions, an increase in aluminum prices and
continued operating improvements. Additionally, in 2000, Alcoa achieved the cost
reduction target initiated in 1998 to eliminate $1,100 in costs through the
continued implementation of the Alcoa Business System. Partially offsetting
these positive factors in 2000 were higher energy costs, a higher effective tax
rate and softening in the transportation, building and construction and
distribution markets.
Return on average shareholders' equity for 2001 was 8.3% (11.4% excluding
special items) compared with 16.8% in 2000 and 17.2% in 1999. The decrease in
2001 was due to the earnings decline mentioned above, special items recorded in
2001 and a larger average number of shares outstanding during the period
primarily resulting from the Reynolds acquisition.
Percent Return on Average
Shareholders' Equity
[GRAPH APPEARS HERE]
COST OF GOODS SOLD--COGS as a percentage of sales was 78.1% in 2001, an increase
of 2.5 percentage points from 2000. The increase was primarily due to lower
realized prices, lower volumes and a full year's impact of the higher cost of
sales ratios of the acquired Reynolds and Cordant businesses. Additionally, COGS
was impacted by a pretax charge of $56 for contract losses, customer claims and
the power failure at the company's Warrick (Ind.) smelter. Partially offsetting
these negative factors were cost savings and operating improvements.
34
Cost of Goods Sold
as a percent of sales
[GRAPH APPEARS HERE]
COGS as a percentage of sales was 75.6% in 2000, down 1.2 percentage points
from 1999, due primarily to higher sales prices resulting from a stronger LME
and cost-cutting efforts, somewhat offset by higher cost of sales at acquired
entities and higher energy costs.
Selling And General Administrative Expenses--S&GA expenses were $1,276, or 5.6%
of sales, in 2001 compared with S&GA expenses of $1,108, or 4.8% of sales, in
2000. The increase in 2001 was primarily due to customer bad debt write-offs of
$78 and the full-year impact of the acquisitions of Reynolds and Cordant, as
well as lower sales volumes in 2001.
S&GA expenses increased from $851 in 1999 to $1,108 in 2000. The increase
in 2000 was due primarily to acquisitions and higher personnel costs related to
pay for performance, partially offset by cost-cutting improvements. S&GA as a
percentage of sales decreased from 5.2% in 1999 to 4.8% in 2000, primarily due
to higher sales prices.
Research And Development Expenses--in 2001, R&D expenses increased $9 to $203
from 2000 primarily due to the full- year impact of acquisitions made in 2000
and an increase in spending in the Primary Metals segment related to inert anode
technology.
In 2000, R&D expenses increased $66 to $194 from 1999 with acquisitions
accounting for half of the increase. The remaining increase was due to corporate
spending and increases in the Primary Metals and Flat-Rolled Products segments
as well as at Alcoa Fujikura Ltd. (AFL).
Special Items--During 2001, Alcoa recorded charges of $566 ($355 after tax and
minority interests) as a result of a restructuring plan. The company completed a
strategic review of its primary products and fabricating businesses aimed at
optimizing and aligning its manufacturing systems with customer needs, while
positioning the company for stronger profitability. The charge of $566 consisted
of a charge of $212 ($114 after tax and minority interests) in the second
quarter of 2001 and a charge of $354 ($241 after tax and minority interests) in
the fourth quarter of 2001. These charges consisted of asset write-downs ($372
pretax), employee termination and severance costs ($178 pretax) related to
workforce reductions of approximately 10,400 employees, and exit costs ($16
pretax). The second quarter charge was primarily due to actions taken in Alcoa's
primary products businesses because of economic and competitive conditions.
These actions included the shutdown of three facilities in the U.S. Alcoa
expects to complete these actions by mid-2002. The fourth quarter charge was
primarily due to actions taken in Alcoa's fabricating businesses. These actions
included the shutdown of 15 facilities in the U.S. and Europe. Alcoa expects to
complete these actions by the end of 2002. These charges were not recorded in
the segment results. The impact to the segments would have been a pretax charge
of $94 in Alumina and Chemicals, $157 in Primary Metals, $105 in Flat-Rolled
Products, $126 in Engineered Products and $63 in the Other group. Additional
unaccruable employee termination costs of approximately $30 related to the
restructuring plan are expected to be recognized in 2002. As a result of the
restructuring, management anticipates stronger profitability through lower
depreciation, employee and other costs.
Interest Expense--Interest expense decreased $56 from 2000 to $371 in 2001, due
to lower interest rates as well as the pay down of debt, primarily short-term
borrowings.
Interest expense rose $232 from 1999 to $427 in 2000, primarily as a result
of the Reynolds and Cordant acquisitions.
Other Income/Foreign Currency--Other income increased $154 to $308 in 2001. The
increase was primarily due to $114 ($93 after tax) of gains on asset sales
related primarily to the sales of Thiokol Propulsion (Thiokol), Alcoa Proppants,
Inc. and Alcoa's interest in a Latin American cable business, as well as the
impact of foreign currency exchange adjustments.
In 2000, other income increased $30 to $154. The increase was due to a $59
increase in equity income and higher interest and dividend income, offset by the
negative impact of foreign currency exchange adjustments.
Selling and General
Administrative Expenses
as a pecent of sales
[GRAPH APPEARS HERE]
35
Foreign exchange losses included in other income were $11 in 2001, $82 in
2000 and $19 in 1999.
Effective July 1, 1999, the Brazilian real became the functional currency
for translating the financial statements of Alcoa's 59%-owned Brazilian
subsidiary, Alcoa Aluminio S.A. (Aluminio). As a result of the change, Alcoa's
accumulated other comprehensive loss (unrealized translation adjustments) and
minority interests accounts were reduced by $156 and $108, respectively. These
amounts were driven principally by a reduction in fixed assets and resulted in
decreases in Aluminio's depreciation expense of $30 in 2001 and 2000 and $15 in
1999.
Income Taxes--Alcoa's effective tax rate was 32% in 2001 and 33.5% in 2000,
which differed from the statutory rate of 35%, primarily due to lower taxes on
foreign income. Alcoa's effective tax rate in 1999 was 29.9%, primarily driven
by lower taxes on foreign income including a reduction in the Australian
corporate income tax rate. In the 1999 fourth quarter, Australia reduced its
corporate income tax rate from 36% to 34% for 2000 and to 30% for 2001.
Minority Interests--Minority interests' share of income from operations
decreased $173 to $208 in 2001. The decrease was primarily due to lower earnings
at AFL, Alcoa World Alumina and Chemicals (AWAC) and Aluminio, as well as the
impact of special charges of $42. In 2000, minority interests' share of income
from operations increased $139 from 1999 to $381. The increase was due to higher
earnings at Alcoa of Australia, AFL and Aluminio.
Segment Information
- -------------------
Alcoa's operations consist of five worldwide segments: Alumina and Chemicals,
Primary Metals, Flat-Rolled Products, Engineered Products and Packaging and
Consumer. Alcoa businesses that are not reported to management as part of one of
these five segments are aggregated and reported as "Other." Alcoa's management
reporting system measures the after-tax operating income (ATOI) of each segment.
Nonoperating items, such as interest income, interest expense, foreign exchange
gains/losses, the effects of last-in, first-out (LIFO) inventory accounting,
minority interests and special items are excluded from segment ATOI. In
addition, certain expenses, such as corporate general administrative expenses,
and depreciation and amortization on corporate assets, are not included in
segment ATOI. Segment assets exclude cash, cash equivalents, short-term
investments and all deferred taxes. Segment assets also exclude items such as
corporate fixed assets, LIFO reserves, goodwill allocated to corporate and other
amounts.
ATOI for all segments totaled $2,043 in 2001, compared with $2,389 in 2000
and $1,489 in 1999. See Note L to the financial statements for additional
information. The following discussion provides shipment, revenue and ATOI data
for each segment for the years 1999 through 2001.
Alumina Production
thousands of metric tons
[GRAPH APPEARS HERE]
Alumina and Chemicals
2001 2000 1999
- ------------------------------------------------------------------
Alumina production (mt) 12,527 13,968 13,273
Third-party alumina shipments (mt) 7,217 7,472 7,054
Third-party sales $ 1,908 $ 2,108 $ 1,842
Intersegment sales 1,021 1,104 925
- ------------------------------------------------------------------
Total sales $ 2,929 $ 3,212 $ 2,767
- ------------------------------------------------------------------
After-tax operating income $ 471 $ 585 $ 307
- ------------------------------------------------------------------
This segment consists of Alcoa's worldwide alumina and chemicals system, that
includes the mining of bauxite, which is then refined into alumina. Alumina is
sold directly to internal and external smelter customers worldwide or is
processed into industrial chemical products. The industrial chemical products
are sold to a broad spectrum of markets including refractories, ceramics,
abrasives, chemicals processing and other specialty applications. Slightly more
than half of Alcoa's alumina production is sold under supply contracts to third
parties worldwide, while the remainder is used internally. Alumina comprises
approximately two-thirds of total third-party sales.
In 2001, third-party sales of alumina decreased 13% compared with 2000,
primarily due to a decrease in shipments of 3% and a decrease in realized prices
of 10%. In 2000, third-party sales of alumina increased 19% compared with 1999
as a result of a 6% increase in shipments along with a 13% increase in prices.
The increased shipments were driven by increased production with the completion
of the 440,000-mt expansion of Alcoa's Wagerup, Australia alumina refinery as
well as increased production levels at Kwinana and Pinjarra, also in Australia,
and San Ciprian, Spain.
Third-party sales of alumina-based chemical products were down 31% in 2001
compared with 2000, primarily due to lower volumes. In 2000, third-party sales
of alumina-based chemical products were up 2% compared with 1999, primarily
attributable to increased volume in Alcoa's Latin American chemical operations.
Segment ATOI in 2001 fell 20% from 2000 to $471 due to lower volumes,
resulting from production curtailments at Point Comfort
36
(Tex.) and Brazil and the shutdown of the alumina refinery in St. Croix, as well
as lower prices. Segment ATOI in 2000 rose 91% over 1999 due to higher alumina
prices, higher shipment volumes and continued cost reductions, partially offset
by higher energy costs.
Primary Metals
2001 2000 1999
- -------------------------------------------------------------------------
Aluminum production (mt) 3,488 3,539 2,851
Third-party aluminum shipments (mt) 1,873 2,071 1,442
Third-party sales $3,432 $3,756 $2,241
Intersegment sales 3,300 3,504 2,793
- -------------------------------------------------------------------------
Total sales $6,732 $7,260 $5,034
- -------------------------------------------------------------------------
After-tax operating income $ 905 $1,000 $ 535
- -------------------------------------------------------------------------
This segment consists of Alcoa's worldwide smelter system. Primary Metals
receives alumina primarily from the Alumina and Chemicals segment and produces
aluminum ingot to be used by Alcoa's fabricating businesses, as well as sold to
external customers, aluminum traders and commodity markets. Results from the
sale of aluminum powder, scrap and excess power are also included in this
segment, as well as the results of aluminum derivative contracts. Aluminum ingot
produced by Alcoa and used internally is transferred to other segments at
prevailing market prices. The sale of ingot represents approximately 80% of this
segment's third-party sales.
Third-party sales in 2001 decreased $324, or 9%, from 2000. The decrease
was primarily due to a 10% decrease in shipments and lower realized prices,
partially offset by power sales and the full-year results of the Reynolds
acquisition. In 2000, third-party sales rose $1,515, or 68%. Approximately
two-thirds of this increase was the result of the Reynolds acquisition. The
remaining increase was due to a 7% increase in shipments and higher realized
prices for ingot in 2000. Alcoa's average third-party realized price for ingot
in 2001 was 72 cents per pound, a decrease of 7% from the average realized price
of 77 cents per pound in 2000. In 1999, the average realized price
Aluminum Production
thousands of metric tons
[GRAPH APPEARS HERE]
was 67 cents. This compares with average 3-month prices on the LME of 66 cents
per pound in 2001, 71 cents per pound in 2000 and 63 cents per pound in 1999.
Primary Metals ATOI decreased by $95, or 10%, in 2001 from 2000. The
decrease is primarily attributed to lower volumes and lower prices, partially
offset by power sales. The year-over-year impact of power sales, net of volume-
related decreases, was approximately $50. ATOI increased by $465, or 87%, in
2000 from 1999. Higher metal prices in 2000 were responsible for approximately
two-thirds of the increase, while the Reynolds acquisition accounted for
approximately one-fourth of the increase. The remainder of the increase was due
to increased volumes and cost reductions, offset somewhat by higher energy
prices.
Alcoa announced various capacity curtailments and restarts. After the
curtailment and restart of capacity, Alcoa will have approximately 635,000 mt
per year of idle capacity. Additionally, in December 2001, approximately
two-thirds of the capacity at the company's Warrick (Ind.) smelter was impacted
by power failures. The total financial impact of approximately $45 (pretax)
associated with the power failures and related restart of capacity at Warrick is
expected to be incurred primarily in the first quarter of 2002.
Flat-Rolled Products
2001 2000 1999
- --------------------------------------------------------------
Third-party aluminum shipments (mt) 1,818 1,960 1,982
Third-party sales $4,999 $5,446 $5,113
Intersegment sales 64 97 51
- --------------------------------------------------------------
Total sales $5,063 $5,543 $5,164
- --------------------------------------------------------------
After-tax operating income $ 262 $ 299 $ 281
- --------------------------------------------------------------
This segment's principal business is the production and sale of aluminum plate,
sheet and foil. This segment includes rigid container sheet (RCS), which is sold
directly to customers in the packaging and consumer market and is used to
produce aluminum beverage cans. Seasonal increases in RCS sales are generally
experienced in the second and third quarters of the year. This segment also
includes sheet and plate used in transportation and distributor markets, of
which approximately two-thirds is sold directly to customers while the remainder
is sold through distributors. Approximately 60% of the third-party sales in this
segment are derived from sheet and plate, and foil used in industrial markets,
while the remaining 40% of third-party sales consists of RCS. Sales of RCS,
sheet and plate are dependent on a relatively small number of customers.
In 2001, third-party sales from this segment decreased by $447, or 8%, from
2000. This decrease was driven primarily by 7% lower shipments due to weakness
in the transportation and distribution markets in North America and Europe,
partially offset by sales increases resulting from the acquisition of British
Aluminium and improved mix on sheet and plate sales. In 2000, third-party sales
from this segment increased $333 from 1999, with rising prices offsetting a
slight decrease in shipments.
ATOI for Flat-Rolled Products decreased in 2001 by 12% due to lower volumes
in North America and Europe, which were partly offset by a more profitable
product mix for sheet and plate in the U.S. ATOI increased in 2000 by 6% from
1999 as higher prices and equity earnings offset lower shipments and higher
energy costs.
37
Engineered Products
2001 2000 1999
- --------------------------------------------------------------
Third-party aluminum shipments (mt) 932 1,061 989
Third-party sales $6,098 $5,471 $3,728
Intersegment sales 35 62 26
- --------------------------------------------------------------
Total sales $6,133 $5,533 $3,754
- --------------------------------------------------------------
After-tax operating income $ 173 $ 210 $ 180
- --------------------------------------------------------------
This segment includes hard- and soft-alloy extrusions, including architectural
extrusions, super-alloy castings, steel and aluminum fasteners, aluminum
forgings and wheels. These products serve the transportation, building and
construction and distributor markets and are sold directly to customers and
through distributors.
In 2001, third-party sales increased 11% primarily due to a full-year's
results of the 2000 acquisitions of Reynolds, Cordant and British Aluminium,
partially offset by a decrease in volume, mainly in North America, due to
weakness in the transportation and distributor markets. In 2000, third- party
sales increased 47% primarily due to the acquisitions of Reynolds and Cordant,
as well as price increases in other businesses. The aluminum shipment data for
this segment was not impacted in 2001 and 2000 by the additions of Huck and
Howmet, which produce revenues but do not have third-party aluminum shipments.
ATOI for Engineered Products decreased 18% from 2000 to $173 in 2001. This
decrease is primarily due to decreased volumes as a result of weak market
conditions and the impact of exchange rate fluctuations in Brazil, partially
offset by the positive impact of acquisitions and cost- reduction efforts. ATOI
in 2000 increased by 17% from 1999 to $210 due to the impact of acquisitions,
primarily Huck and Howmet, offset by a decline in other U.S. and European
businesses as a result of the overall decline in the transportation market.
Revenues by Segment
billion of dollars
[GRAPH APPEARS HERE]
Packaging and Consumer
2001 2000 1999
--------------------------------------------------------------
Third-party aluminum shipments (mt) 143 119 9
Third-party sales $2,720 $2,084 $ 801
--------------------------------------------------------------
After-tax operating income $ 185 $ 131 $ 68
--------------------------------------------------------------
This segment includes foodservice, flexible packaging, consumer products and
packaging graphics design, as well as closures, PET (polyethylene terephthalate)
bottles and packaging machinery. The principal products in this segment include
aluminum foil; plastic wraps and bags; metal and plastic beverage and food
closures; pre-press services; and plastic shrink film and wraps. Consumer
products are marketed under brands including Reynolds Wrap, Diamond(R), Baco and
Cut-Rite(R) wax paper. Products are sold directly to customers, consisting of
various retail chains and commercial foodservice distributors. Sales in this
segment are dependent on a relatively small number of customers.
Third-party sales were $2,720 in 2001, an increase of $636 over 2000. The
increase is primarily due to the full- year results of the Reynolds acquisition,
as well as several smaller acquisitions in 2000. Third-party sales were $2,084
in 2000, up $1,283 from 1999 due to the acquisition of Reynolds packaging and
consumer businesses in 2000.
ATOI increased 41% in 2001 from 2000 due primarily to acquisitions as well
as improved volumes in closures sales. ATOI increased by 93% in 2000 from 1999
due to the acquisition of the Reynolds packaging and consumer businesses.
Seasonal increases generally occur in the third and fourth quarters of the
year for such products as consumer foil and plastic wraps and bags, while
seasonal slowdowns for closures generally occur in the fourth quarter of the
year.
Other
2001 2000 1999
- --------------------------------------------------------------
Third-party aluminum shipments (mt) 228 187 56
Third-party sales $3,702 $4,071 $2,592
- --------------------------------------------------------------
After-tax operating income $ 47 $ 164 $ 118
- --------------------------------------------------------------
This group includes other Alcoa businesses that are not included in the segments
previously mentioned. This group includes AFL, which produces fiber-optic cable
and provides services to the telecommunications industry and produces electrical
components for the automotive industry; residential building products
operations, Alcoa Building Products (ABP); automotive parts businesses; Thiokol,
a producer of solid rocket propulsion systems (Thiokol was sold in April 2001);
and Reynolds' metal distribution business, RASCO (in November 2001, the net
assets of RASCO were contributed to a joint venture, Integris Metals, Inc., in
which Alcoa retains a 50% equity interest). Products in this segment are
generally sold directly to customers or through distributors. AFL sales are
dependent on a relatively small number of customers. Seasonal increases in the
building products business generally occur in the second and third quarters of
the year.
In 2001, third-party sales were down 9% due primarily to the sale of
Thiokol in 2001, as well as lower volumes and prices in the AFL automotive and
telecommunications businesses. These decreases
38
were somewhat offset by improved demand for residential building products. In
2000, third-party sales were up 57% due primarily to the RASCO, Thiokol and AFL
telecommunications acquisitions, partially offset by a sales decrease at ABP.
The decline in ABP sales in 2000 was due to softness in the overall housing and
construction market.
In 2001, ATOI for this group decreased $117 primarily as a result of volume
and price declines at AFL, partially offset by improved sales of building
products and gains totaling $87 from the sales of Thiokol, Alcoa Proppants, Inc.
and Alcoa's interest in a Latin American cable business. In 2000, ATOI for this
group increased by 39% from 1999 primarily due to the RASCO, Thiokol and AFL
telecommunications acquisitions, offset by a decrease at ABP, due to lower
volumes and higher resin costs.
Reconciliation of ATOI to Consolidated Net Income
- -------------------------------------------------
The following reconciles segment ATOI to Alcoa's consolidated net income and
explains each line item in the reconciliation:
2001 2000 1999
- --------------------------------------------------------------------------
Total after-tax operating income $ 2,043 $ 2,389 $ 1,489
Impact of intersegment profit eliminations (20) 24 (24)
Unallocated amounts (net of tax):
Interest income 40 40 26
Interest expense (242) (278) (126)
Minority interests (208) (381) (242)
Special items (397) -- --
Corporate expense (261) (227) (171)
Other (47) (83) 102
- --------------------------------------------------------------------------
Consolidated net income $ 908 $ 1,484 $ 1,054
- --------------------------------------------------------------------------
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;
> Special items (excluding minority interests) related to the strategic
restructuring in 2001;
Revenues by
Geographic Area
billion of dollars
[GRAPH APPEARS HERE]
> Corporate expense, comprised of 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, differences between estimated tax
rates used in the segments and the corporate effective tax rate and other
nonoperating items such as foreign exchange.
The variance in Other between 1999 and 2000 was due to LIFO adjustments in
1999 and adjustments to deferred taxes in 1999 that resulted from a change in
the Australian corporate income tax rate.
Market Risks
- ------------
In addition to the risks inherent in its operations, Alcoa is exposed to
financial, market, political and economic risks. The following discussion
provides additional detail regarding Alcoa's exposure to the risks of changing
commodity prices, foreign exchange rates and interest rates.
Derivatives
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.
All of the aluminum and other commodity contracts, as well as various types
of derivatives, are held for purposes other than trading. They are used
primarily to mitigate uncertainty and volatility, and cover underlying
exposures. The company is not involved in energy-trading activities or weather
derivatives or to any material extent in other nonexchange commodity trading
activities.
The following discussion includes sensitivity analyses for hypothetical
changes in the commodity price, exchange rate or interest rate contained in the
various derivatives used for hedging certain exposures. In all cases, the
hypothetical change was calculated based on a parallel shift in the forward
price curve existing at December 31, 2001. The forward curve takes into account
the time value of money and the future expectations regarding the value of the
underlying commodity, currency and interest rate.
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 manage, through the
use of futures and options contracts, the aluminum price risk associated with a
portion of its fixed price firm commitments. At December 31, 2001, these
contracts totaled approximately 802,000 mt with a fair value loss of
approximately $65 ($42 after tax). A hypothetical 10% increase (or decrease) in
aluminum ingot prices from the year-end 2001 level of $1,355 per mt would result
in a pretax gain (or loss) of $108 related to these positions.
39
Past accounting convention required that certain long positions be marked
to market. As a result of the change in accounting under Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," these contracts were re-designated and qualified as hedges
on January 1, 2001.
Alcoa sells products to various third parties at prices that are influenced
by changes in LME aluminum prices. From time to time, the company may elect to
sell forward a portion of its anticipated primary aluminum and alumina
production to reduce the risk of fluctuating market prices on these sales.
Toward this end, Alcoa may enter into short positions using futures and options
contracts. At December 31, 2001, these contracts totaled 28,000 mt. The fair
value of these contracts at December 31, 2001 was not material. These contracts
act to fix a portion of the sales price related to these sales contracts. A
hypothetical 10% increase (or decrease) in aluminum ingot prices from the
year-end 2001 level of $1,355 per mt would result in a pretax loss (or gain) of
$4 related to these positions.
Alcoa is required to purchase natural gas to meet its production
requirements. These purchases expose the company to the risk of higher natural
gas prices. To hedge this risk, Alcoa enters into long positions, principally
using futures and options. Alcoa follows a stable pattern of purchasing natural
gas; therefore, it is highly likely that anticipated natural gas purchases will
occur. The fair value of the contracts for natural gas was a loss of
approximately $30 ($18 after tax and minority interests) at December 31, 2001. A
hypothetical 50% increase (or decrease) in the market price of natural gas from
the year-end 2001 level would result in a pretax gain (or loss) to future
earnings of $26.
Alcoa also purchases certain other commodities, such as fuel oil and
electricity, for its operations and may enter into futures and options contracts
to eliminate volatility in the prices of such products. None of these contracts
were material.
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. The fair value
of these contracts was a loss of approximately $132 ($51 after tax and minority
interests) at December 31, 2001.
A hypothetical 10% strengthening (or weakening) of the U.S. dollar at
December 31, 2001, would result in a pretax loss (or gain) of approximately $114
related to these positions.
Interest Rates--alcoa uses interest rate swaps to help maintain a reasonable
balance between fixed- and floating- rate debt and to keep financing costs as
low as possible. The company has entered into pay floating, receive fixed
interest rate swaps to change the interest rate risk exposure of its outstanding
debt. The fair value of these swaps was a gain of $34 ($23 after tax) at
December 31, 2001.
At December 31, 2001 and 2000, Alcoa had $6,633 and $8,133 of debt
outstanding at effective interest rates of 5.0% for 2001 and 7.6% for 2000,
after the impact of interest rate swaps is taken into account. A hypothetical
change of 10% in Alcoa's effective interest rate from year-end 2001 levels would
increase or decrease interest expense by $33.
Material Limitations--The disclosures with respect to commodity prices and
foreign exchange risk do not take into account the underlying anticipated
purchase obligations and the underlying transactional foreign exchange
exposures. If the underlying items were included in the analysis, the gains or
losses on the futures and options contracts may be offset. Actual results will
be determined by a number of factors that are not under Alcoa's control and
could vary significantly from those factors disclosed.
Alcoa is exposed to credit loss in the event of nonperformance by
counterparties on the above instruments, as well as credit or performance risk
with respect to its hedged customers' commitments. Although nonperformance is
possible, Alcoa does not anticipate nonperformance by any of these parties.
Futures and options contracts are with creditworthy counterparties and are
further supported by cash, treasury bills or irrevocable letters of credit
issued by carefully chosen banks. In addition, various master netting
arrangements are in place with counterparties to facilitate settlement of gains
and losses on these contracts.
For additional information on derivative instruments, see Notes A and S to
the financial statements.
Environmental Matters
- ---------------------
Alcoa continues to participate in environmental assessments and cleanups at a
number of locations. These include approximately 31 owned or operating
facilities and adjoining properties, approximately 28 previously owned or
operated 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. For additional information, see Notes A and T to the
financial statements.
As assessments and cleanups proceed, the liability is adjusted based on
progress in determining the extent of remedial actions and related costs and
damages. The liability can change substantially due to factors such as the
nature and extent of contamination, changes in remedial requirements and
technological changes. Therefore, it is not possible to determine the outcomes
or to estimate with any degree of accuracy the potential costs for certain of
these matters. For example, there are issues related to Alcoa's Massena, New
York and Point Comfort, Texas sites where investigations have been ongoing and
where natural resource damage or off-site contaminated sediments have been
alleged. In the case of Massena, the company submitted a revised draft Analysis
of Alternatives Report to the EPA in February 2002 which included remedial
alternatives required by the EPA related to PCB contamination of the Grasse
River, adjacent to Alcoa's Massena, New York plant site. The range of costs
associated with the remedial alternatives evaluated in the 2002 report is
between $2 and $525. Alcoa believes that several of those alternatives,
involving the largest amounts of sediment removal, should not be selected for
the Grasse River remedy. Alcoa believes the alternatives that should be selected
are those ranging from monitored natural recovery ($2) to a combination of
moderate dredging and capping
40
($90). A reserve of $2 has been recorded for any probable losses, as no one of
the alternatives is more likely to be selected than any other.
Based on these facts, 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 the end of 2001 was $431, of which
$74 was classified as a current liability, and reflects the most probable costs
to remediate identified environmental conditions for which costs can be
reasonably estimated. Of the 2001 reserve balance, approximately 8% relates to
the Massena, New York plant sites, 6% relates to the Troutdale, Oregon plant
site, and 23% relates to the Sherwin, Texas site. Remediation expenses charged
to the reserve were $72 in 2001, $77 in 2000, and $47 in 1999. These 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 $56,
primarily as a result of acquisitions and the shutdown of the company's
magnesium plant in Addy, Washington.
Included in annual operating expenses are the recurring costs of managing
hazardous substances and environmental programs. These costs are estimated to be
about 2% of cost of goods sold.
Liquidity and Capital Resources
Cash from Operations
- --------------------
Cash from operations decreased 15% to $2,411, following an increase of 20% to
$2,851 in 2000 from $2,381 in 1999. The decrease in 2001 is primarily the result
of lower earnings. The increase in cash from operations in 2000 relative to 1999
was primarily due to the impact of acquisitions, higher aluminum prices
resulting in increased earnings, and an increase in depreciation and
amortization, partially offset by changes in noncurrent assets and liabilities.
Cash from Operations
millions of dollars
[GRAPH APPEARS HERE]
Financing Activities
- --------------------
Cash used for financing activities was $3,127 in 2001 compared with cash
provided from financing activities of $1,552 in 2000. The increase in cash used
was primarily due to debt repayments that were funded by the proceeds from the
sales of operations required to be divested from the Reynolds merger, the sale
of Thiokol and issuing additional debt. In 2000, cash provided from financing
activities was $1,552, versus cash used for financing activities of $1,311 in
1999. The increase in cash in 2000 was due to increases in short-term
borrowings, commercial paper and long-term debt. This was partially offset by a
decrease in common stock issued for employee stock compensation plans.
In 2001 and 2000, additions to long-term debt exceeded payments on
long-term debt by $1,112 and $571, respectively. In May 2001, Alcoa issued
$1,500 of notes. Of these notes, $1,000 mature in 2011 and carry a coupon rate
of 6.50%, and $500 mature in 2006 and carry a coupon rate of 5.875%. In December
2001, Alcoa issued an additional $1,500 of notes. This issue consisted of $1,000
of notes that mature in 2012 and carry a coupon rate of 6% and $500 of floating-
rate notes that mature in 2004. In 2000, Alcoa issued $1,500 of notes. Of these
notes, $1,000 mature in 2010 and carry a coupon rate of 7.375%, and $500 mature
in 2005 and carry a coupon rate of 7.25%.
Free Cash Flow to Debt Coverage
times covered
[GRAPH APPEARS HERE]
In April 2001, Alcoa refinanced the $2,490 revolving-credit facility that
was to expire in April 2001 and the $510 revolving-credit facility that expires
in April 2005. 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. The revolving-credit facilities are used to support
Alcoa's commercial paper program.
The increase in cash used for financing activities in 2001 was also
attributed to the repurchase of 39,348,136 shares of the company's common stock
for $1,452 at an average price of $36.87 per share.
41
In 2000, Alcoa used $763 to repurchase 21,742,600 shares of the company's common
stock at an average price of $35.08 per share. Stock repurchases in 2001 and
2000 were partially offset by stock issued for employee stock compensation plans
of 21,412,772 shares for $552 in 2001 and 16,579,158 shares for $251 in 2000.
Debt as a percentage of invested capital was 35.7% at the end of 2001,
compared with 38.6% for 2000 and 28.3% for 1999.
In 2001, dividends paid to shareholders increased by $100 to $518. The
increase was primarily due to an increase in the total common stock dividend
paid from 50 cents per share in 2000 to 60 cents per share in 2001, due to the
payout of a variable dividend in addition to Alcoa's base dividend in 2001.
Alcoa had a variable dividend program that provided for the distribution, in the
following year, of 30% of Alcoa's annual earnings in excess of $1.50 per basic
share. In January 2002, the Board of Directors approved eliminating the variable
dividend and declared a quarterly dividend of 15 cents per common share, which
represents a 20% increase in the quarterly dividend from the prior 12.5 cents
per common share. In 2000, dividends paid to shareholders increased by $120 to
$418. The increase was due to a higher number of shares outstanding as well as
an increase in the dividend per share in 2000, with a total payout of 50 cents
per share versus 40.3 cents per share in 1999.
Debt as a Percent of Invested Capital
[GRAPH APPEARS HERE]
Investing Activities
- --------------------
Cash provided from investing activities in 2001 totaled $939, compared with cash
used for investing activities of $4,309 in 2000. The increase of $5,248 was
partly due to $2,507 of proceeds from asset sales in 2001 due to dispositions of
assets required to be divested from the Reynolds merger, as well as proceeds
from the sale of Thiokol. Additionally, cash paid for acquisitions in 2001 was
$159, while in 2000, cash paid for acquisitions was $3,121, primarily
attributable to the acquisition of Cordant.
Capital Expenditures and Depreciation
millions of dollars
[GRAPH APPEARS HERE]
Capital expenditures totaled $1,177 in 2001, compared with $1,121 and $920
in 2000 and 1999, respectively. Of the total capital expenditures in 2001, 37%
related to capacity expansion, primarily in the Engineered Products segment.
Also included are costs of new and expanded facilities for environmental control
in ongoing operations totaling $80 in 2001, $96 in 2000, and $91 in 1999.
Capital expenditures related to environmental control are anticipated to be
approximately $123 in 2002.
Alcoa added $270, $94 and $96 to its investments in 2001, 2000 and 1999,
respectively. The increase of $176 in 2001 was primarily due to Alcoa's purchase
of an 8% interest in Aluminum Corporation of China (Chalco) for approximately
$150, as part of a strategic alliance to form a 50/50 joint venture at Chalco's
facility in Pingguo, China. The increase in investments is also due to Alcoa's
increased investment in the Norwegian metals producer, Elkem ASA. On January 9,
2002, Alcoa raised its equity stake in Elkem above 40% which, under Norwegian
law, required Alcoa to initiate an unconditional cash tender offer for the
remaining outstanding shares of Elkem. Under the tender offer, which will expire
on February 22, 2002, Alcoa will pay approximately $17.40 for each outstanding
share of Elkem. Alcoa's potential cash commitment if all outstanding shares are
tendered is approximately $515. Additions to investments in 2000 and 1999 were
primarily related to Elkem.
42
Contractual Obligations and Commercial Commitments
- --------------------------------------------------
The company is obligated to make future payments under various contracts such as
debt agreements, lease agreements and unconditional purchase obligations and has
certain contingent commitments such as debt guarantees. The following tables
represent the significant contractual cash obligations and other commercial
commitments of Alcoa as of December 31, 2001.
Contractual Cash Obligations Total Due in 2002 Due in 2003 Due in 2004 Due in 2005 Due in 2006 Thereafter
- --------------------------------------------------------------------------------------------------------------------------------
Long-term debt (including $44
of capital lease obligations) $ 6,491 $ 103 $ 91 $ 563 $ 979 $ 586 $ 4,169
Operating leases 650 128 98 77 64 60 223
Unconditional purchase obligations 3,116 176 180 185 178 154 2,243
- --------------------------------------------------------------------------------------------------------------------------------
Total contractual cash obligations $10,257 $ 407 $ 369 $ 825 $ 1,221 $ 800 $ 6,635
================================================================================================================================
See Notes H, J, and Q to the Consolidated Financial Statements for additional
information regarding these obligations.
Amount of commitment expiration per period
Total Amounts -------------------------------------------------------------------
Other Commercial Commitments Committed Less than 1 year 1-3 years 4-5 years Over 5 years
- --------------------------------------------------------------------------------------------------------------------------------
Standby letters of credit $181 $181 $ -- $ -- $ --
Guarantees 136 -- -- -- 136
- --------------------------------------------------------------------------------------------------------------------------------
Total commercial commitments $317 $181 $ -- $ -- $136
================================================================================================================================
The standby letters of credit are related to environmental, insurance and other
activities. See Note J to the Consolidated Financial Statements for additional
information regarding guarantees.
Critical Accounting Policies
- ----------------------------
Alcoa's significant accounting policies are described in Note A to the
Consolidated Financial Statements. The application of these policies may require
management to make judgments and estimates about the amounts reflected in the
financial statements. Management uses historical experience and all available
information to make these estimates and judgments, and different amounts could
be reported using different assumptions and estimates. In addition to the
information described in Note A to the Consolidated Financial Statements, a
discussion of the judgments and uncertainties associated with accounting for
derivatives and environmental matters can be found in the Market Risks and
Environmental Matters sections.
Related Party Transactions
- --------------------------
Alcoa buys products from and sells products to various related companies,
consisting of entities in which Alcoa retains a 50% or less equity interest, at
negotiated prices between the two parties. These transactions were not material
to the financial position or results of operations of Alcoa at December 31,
2001.
Recently Adopted and Recently Issued Accounting Standards
- ---------------------------------------------------------
The Financial Accounting Standards Board has recently issued various new
accounting standards, including SFAS No. 141, "Business Combinations," SFAS No.
142, "Goodwill and Other Intangible Assets," SFAS No. 143, "Accounting for Asset
Retirement Obligations," and SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." See Note A to the Consolidated Financial
Statements for additional information on these standards, including a
description of the new standards and the timing of adoption.
43
Management's Report to Alcoa Shareholders
The accompanying financial statements of Alcoa and consolidated subsidiaries
were prepared by management, which is responsible for their integrity and
objectivity. The statements were prepared in accordance with generally accepted
accounting principles and include amounts that are based on management's best
judgments and estimates. The other financial information included in this annual
report is consistent with that in the financial statements.
The company maintains a system of internal controls, including accounting
controls, and a strong program of internal auditing. The system of controls
provides for appropriate procedures that are consistent with high standards of
accounting and administration. The company believes that its system of internal
controls provides reasonable assurance that assets are safeguarded against
losses from unauthorized use or disposition and that financial records are
reliable for use in preparing financial statements.
Management also recognizes its responsibility for conducting the company's
affairs according to the highest standards of personal and corporate conduct.
This responsibility is characterized and reflected in key policy statements
issued from time to time regarding, among other things, conduct of its business
activities within the laws of the host countries in which the company operates
and potentially conflicting outside business interests of its employees. The
company maintains a systematic program to assess compliance with these policies.
/s/ Alain J. P. Belda
Alain J. P. Belda
Chairman and Chief Executive Officer
/s/ Richard B. Kelson
Richard B. Kelson
Executive Vice President and
Chief Financial Officer/
Chief Compliance Officer
Report of Independent Accountants
To the Shareholders and Board of Directors Alcoa Inc. (Alcoa)
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income and shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Alcoa at
December 31, 2001 and 2000, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of Alcoa's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Notes A and S to the consolidated financial statements,
Alcoa changed its method of accounting for derivatives in 2001.
/s/ PricewaterhouseCoopers LLP
600 Grant St., Pittsburgh, Pa.
January 9, 2002
44
Statement Of Consolidated Income Alcoa and subsidiaries
(in millions, except per-share amounts)
For the year ended December 31 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------
Sales (A and L) $ 22,859 $ 22,936 $ 16,323
- -----------------------------------------------------------------------------------------------------------
Cost of goods sold 17,857 17,342 12,536
Selling, general administrative and other expenses 1,276 1,108 851
Research and development expenses 203 194 128
Provision for depreciation, depletion and amortization 1,253 1,207 888
Special items (B) 566 -- --
Interest expense (R) 371 427 195
Other income, net (308) (154) (124)
- -----------------------------------------------------------------------------------------------------------
21,218 20,124 14,474
- -----------------------------------------------------------------------------------------------------------
Income before taxes on income 1,641 2,812 1,849
Provision for taxes on income (O) 525 942 553
- -----------------------------------------------------------------------------------------------------------
Income from operations 1,116 1,870 1,296
Less: Minority interests' share 208 381 242
Income before accounting change 908 1,489 1,054
Cumulative effect of accounting change (A) -- (5) --
- -----------------------------------------------------------------------------------------------------------
Net Income $ 908 $ 1,484 $ 1,054
- -----------------------------------------------------------------------------------------------------------
Earnings Per Share (N)
Basic (before cumulative effect) $ 1.06 $ 1.83 $ 1.43
Basic (after cumulative effect) 1.06 1.82 1.43
Diluted (before cumulative effect) 1.05 1.81 1.41
Diluted (after cumulative effect) 1.05 1.80 1.41
- -----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements
45
Consolidated Balance Sheet Alcoa and subsidiaries
(in millions)
December 31 2001 2000
- -----------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents (S) $ 512 $ 315
Short-term investments (S) 15 56
Receivables from customers, less allowances: 2001- $129; 2000-$69 2,577 3,461
Other receivables 288 354
Inventories (D) 2,531 2,703
Deferred income taxes (O) 410 385
Prepaid expenses and other current assets 459 304
- -----------------------------------------------------------------------------------------------------
Total current assets 6,792 7,578
Properties, plants and equipment (E) 11,982 12,850
Goodwill, net of accumulated amortization of $524 in 2001 and $344 in 2000 (C) 5,733 6,003
Other assets (F) 3,848 5,260
- -----------------------------------------------------------------------------------------------------
Total Assets $ 28,355 $ 31,691
- -----------------------------------------------------------------------------------------------------
Liabilities
Current liabilities:
Short-term borrowings (H and S) $ 142 $ 2,719
Accounts payable, trade 1,630 1,876
Accrued compensation and retirement costs 889 928
Taxes, including taxes on income 903 702
Other current liabilities 1,336 1,302
Long-term debt due within one year (H and S) 103 427
- -----------------------------------------------------------------------------------------------------
Total current liabilities 5,003 7,954
Long-term debt, less amount due within one year (H and S) 6,388 4,987
Accrued postretirement benefits (P) 2,513 2,719
Other noncurrent liabilities and deferred credits (G) 1,968 2,126
Deferred income taxes (O) 556 969
- -----------------------------------------------------------------------------------------------------
Total liabilities 16,428 18,755
- -----------------------------------------------------------------------------------------------------
Minority Interests (I) 1,313 1,514
- -----------------------------------------------------------------------------------------------------
Commitments and Contingencies (J)
Shareholders' Equity
Preferred stock (M) 56 56
Common stock (M) 925 925
Additional capital 6,114 5,927
Retained earnings 7,517 7,127
Treasury stock, at cost (2,706) (1,717)
Accumulated other comprehensive loss (1,292) (896)
- -----------------------------------------------------------------------------------------------------
Total shareholders' equity 10,614 11,422
- -----------------------------------------------------------------------------------------------------
Total Liabilities And Equity $ 28,355 $ 31,691
- -----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
46
Statement of Consolidated Cash Flows Alcoa and subsidiaries
(in millions)
For the year ended December 31 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
Cash from Operations
Net income $ 908 $ 1,484 $ 1,054
Adjustments to reconcile net income to cash from operations:
Depreciation, depletion and amortization 1,265 1,219 901
Change in deferred income taxes (24) 135 54
Equity income, net of dividends (56) (66) (10)
Noncash special items (B) 526 -- --
Gains from investing activities--sale of assets (114) (7) (12)
Provision for doubtful accounts 78 10 11
Accounting change -- 5 --
Minority interests 208 381 242
Other 9 32 31
Changes in assets and liabilities, excluding effects of acquisitions and divestitures:
Reduction (increase) in receivables 605 (456) (67)
(Increase) reduction in inventories (13) 117 253
(Increase) reduction in prepaid expenses and other current assets (69) 6 (36)
Reduction in accounts payable and accrued expenses (419) (88) (79)
(Reduction) increase in taxes, including taxes on income (60) 407 171
Change in deferred hedging gains/losses -- 7 (63)
Net change in noncurrent assets and liabilities (433) (335) (69)
- ------------------------------------------------------------------------------------------------------------------------
Cash provided from operations 2,411 2,851 2,381
- ------------------------------------------------------------------------------------------------------------------------
Financing Activities
Net changes to short-term borrowings (2,570) 2,123 (89)
Common stock issued for stock compensation plans 552 251 464
Repurchase of common stock (1,452) (763) (838)
Dividends paid to shareholders (518) (418) (298)
Dividends paid to minority interests (251) (212) (122)
Net change in commercial paper (1,290) 530 --
Additions to long-term debt 3,343 1,918 572
Payments on long-term debt (941) (1,877) (1,000)
- ------------------------------------------------------------------------------------------------------------------------
Cash (used for) provided from financing activities (3,127) 1,552 (1,311)
- ------------------------------------------------------------------------------------------------------------------------
Investing Activities
Capital expenditures (1,177) (1,121) (920)
Acquisitions, net of cash acquired (K) (159) (3,121) (122)
Proceeds from the sale of assets 2,507 22 45
Additions to investments (270) (94) (96)
Changes in short-term investments 41 21 (37)
Other (3) (16) (37)
- ------------------------------------------------------------------------------------------------------------------------
Cash provided from (used for) investing activities 939 (4,309) (1,167)
- ------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (26) (16) (8)
- ------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 197 78 (105)
Cash and cash equivalents at beginning of year 315 237 342
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 512 $ 315 $ 237
- ------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
47
Statement of Shareholders' Equity Alcoa and subsidiaries
(in millions, except per-share amounts)
Accumulated
other Total
Comprehensive Preferred Common Additional Retained Treasury comprehensive shareholders'
December 31 income stock stock capital earnings stock loss equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of 1998 $ 56 $ 395 $ 1,676 $ 5,305 $ (1,029) $ (347) $ 6,056
Comprehensive income--1999:
Net income--1999 $1,054 1,054 1,054
Other comprehensive loss:
Unrealized translation
adjustments (A) (291) (291) (291)
------
Comprehensive income $ 763
------
Cash dividends: Preferred @ $3.75 per share (2) (2)
Common @ $.403 per share (296) (296)
Treasury shares purchased (838) (838)
Stock issued: compensation plans 28 607 635
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of 1999 56 395 1,704 6,061 (1,260) (638) 6,318
Comprehensive income--2000:
Net income--2000 $1,484 1,484 1,484
Other comprehensive income (loss):
Change in minimum pension liability,
net of $(3) tax expense 5
Unrealized translation adjustments (263) (258) (258)
------
Comprehensive income $1,226
------
Cash dividends: Preferred @ $3.75 per share (2) (2)
Common @ $.500 per share (416) (416)
Treasury shares purchased (763) (763)
Stock issued: Reynolds acquisition 135 4,367 4,502
Stock issued: compensation plans 251 306 557
Stock issued: two-for-one split 395 (395) --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of 2000 56 925 5,927+ 7,127 (1,717) (896) 11,422
Comprehensive income--2001:
Net income--2001 $ 908 908 908
Other comprehensive income (loss):
Change in minimum pension liability,
net of $27 tax benefit (51)
Unrealized translation adjustments (241)
Unrecognized gains/(losses) on
derivatives, net of tax and minority
interests of $124 (S):
Cumulative effect of accounting
change (4)
Net change from periodic
revaluations (175)
Net amount reclassified to income 75
Total unrecognized gains/(losses)
------
on derivatives (104) (396) (396)
------
Comprehensive income $ 512
------
Cash dividends: Preferred @ $3.75 per share (2) (2)
Common @ $.600 per share (516) (516)
Treasury shares purchased (1,452) (1,452)
Stock issued: compensation plans 187 463 650
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of 2001 $ 56 $ 925 $ 6,114+ $ 7,517 $ (2,706) $ (1,292) * $ 10,614
- ------------------------------------------------------------------------------------------------------------------------------------
*Comprised of unrealized translation adjustments of $(1,127), minimum pension
liability of $(61) and unrecognized gains/(losses) on derivatives of $(104)
+Includes stock to be issued under options of $138 and $182 in 2001 and 2000,
respectively
Share Activity
(number of shares) Common stock
---------------------------------------------------------------
Preferred stock Issued Treasury Net outstanding
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of 1998 557,649 789,391,852 (55,773,696) 733,618,156
Treasury shares purchased (31,211,044) (31,211,044)
Stock issued: compensation plans 33,090,884 33,090,884
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of 1999 557,649 789,391,852 (53,893,856) 735,497,996
Treasury shares purchased (21,742,600) (21,742,600)
Stock issued: Reynolds acquisition 135,182,686 135,182,686
Stock issued: compensation plans 16,579,158 16,579,158
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of 2000 557,649 924,574,538 (59,057,298) 865,517,240
Treasury shares purchased (39,348,136) (39,348,136)
Stock issued: compensation plans 21,412,772 21,412,772
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of 2001 557,649 924,574,538 (76,992,662) 847,581,876
- ---------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
48
Notes To Consolidated Financial Statements
(dollars in millions, except per-share amounts)
A. Summary Of Significant Accounting Policies
- ---------------------------------------------
Principles Of Consolidation. The consolidated financial statements include the
accounts of Alcoa and companies more than 50% owned. Investments in other
entities are accounted for principally on the equity basis.
The consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America and
require management to make certain estimates and assumptions. These may affect
the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements. They may also
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates upon subsequent
resolution of identified matters.
Cash Equivalents. Cash equivalents are highly liquid investments purchased
with an original maturity of three months or less.
Inventory Valuation. Inventories are carried at the lower of cost or
market, with cost for a substantial portion of U.S. and Canadian inventories
determined under the last-in, first-out (LIFO) method. The cost of other
inventories is principally determined under the average-cost method. See Note D
for additional detail.
Properties, Plants And Equipment. Properties, plants and equipment are
recorded at cost. Depreciation is recorded principally on the straight-line
method at rates based on the estimated useful lives of the assets, averaging 33
years for structures and between 5 and 25 years for machinery and equipment.
Profits or losses from the sale of assets are included in other income. Repairs
and maintenance are charged to expense as incurred. Interest related to the
construction of qualifying assets is capitalized as part of the construction
costs. Depletion is taken over the periods during which the estimated mineral
reserves are extracted. See Notes E and R for additional detail.
Amortization Of Intangibles. The excess purchase price over the net
tangible assets of businesses acquired is reported as goodwill in the
Consolidated Balance Sheet. Goodwill and other intangibles have been amortized
on a straight-line basis over not more than 40 years. The carrying value of
goodwill and other intangibles is evaluated periodically in relation to the
operating performance and future undiscounted cash flows of the underlying
businesses. Adjustments are made if the sum of expected future net cash flows is
less than book value. See Note F for additional information. See Recently
Adopted Accounting Standards regarding the accounting for goodwill and
intangibles amortization effective January 1, 2002.
Revenue Recognition. Alcoa recognizes revenue when title, ownership and
risk of loss pass to the customer. In 2000, Alcoa changed its method of
accounting for revenue recognition in accordance with the provisions of Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements." The
application of this method of accounting for revenue recognition resulted in a
cumulative effect charge to income of $5 (net of taxes and minority interests of
$3) in 2000. The change did not have a significant effect on revenues or results
of operations for the year ended December 31, 2000. The pro forma amounts,
assuming that the new revenue recognition method was applied retroactively to
prior periods, were not materially different from the amounts shown in the
Statement of Consolidated Income for the year ended December 31, 1999.
Environmental Expenditures. Expenditures for current operations are
expensed or capitalized, as appropriate. Expenditures relating to existing
conditions caused by past operations, and which do not contribute to future
revenues, are expensed. Liabilities are recorded when remedial efforts are
probable and the costs can be reasonably estimated. The liability may include
costs such as site investigations, consultant fees, feasibility studies, outside
contractor and monitoring expenses. Estimates are not discounted or reduced by
potential claims for recovery. Claims for recovery are recognized when received.
The estimates also include costs related to other potentially responsible
parties to the extent that Alcoa has reason to believe such parties will not
fully pay their proportionate share. The liability is periodically reviewed and
adjusted to reflect current remediation progress, prospective estimates of
required activity and other factors that may be relevant, including changes in
technology or regulations. See Note T for additional information.
Stock-based Compensation. Alcoa accounts for stock-based compensation in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost is not recognized on options granted. Disclosures
required with respect to alternative fair value measurement and recognition
methods prescribed by Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation," are presented in Note M.
Derivatives And Hedging. Effective January 1, 2001, Alcoa adopted SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities," as amended.
The fair values of all outstanding derivative instruments are recorded on the
balance sheet in other current and noncurrent assets and liabilities at December
31, 2001. The transition adjustment on January 1, 2001 resulted in a net charge
of $4 (after tax and minority interests), which was recorded in other
comprehensive income.
Derivatives are held as part of a formally documented risk management
(hedging) program. Alcoa's hedging 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 may select from time to
time. SRMC reports to the Board of Directors on the scope of its derivative
activities. All derivatives are straightforward 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. To the
extent that Alcoa uses options contracts as hedging instruments, effectiveness
is assessed based on changes in the intrinsic value of the option. 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.
49
Changes in the fair value of derivatives are recorded in current earnings
along with the change in the fair value of the underlying hedged item 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. If no hedging relationship
is designated, the derivative is marked to market through earnings.
Cash flows from financial instruments are recognized in the statement of
cash flows in a manner consistent with the underlying transactions.
Prior to the adoption of SFAS No. 133, gains and losses related to
transactions that qualified for hedge accounting, including closed futures
contracts, were deferred and reflected in earnings when the underlying physical
transactions took place. The deferred gains or losses were reflected on the
balance sheet in other current and noncurrent assets and liabilities.
Past accounting convention also required that certain positions be marked
to market. Mark-to-market gains and losses were recorded in other income. As a
result of the change in accounting under SFAS No. 133, these contracts were
re-designated and qualified as hedges on January 1, 2001. See Note S for
additional information.
Foreign Currency. The local currency is the functional currency for Alcoa's
significant operations outside the U.S., except in Canada, where the U.S. dollar
is used as the functional currency. The determination of the functional currency
for Alcoa's operations is made based on the appropriate economic and management
indicators.
Effective July 1, 1999, the Brazilian real became the functional currency
for translating the financial statements of Alcoa's 59%-owned Brazilian
subsidiary, Alcoa Aluminio S.A. (Aluminio). Economic factors and circumstances
related to Aluminio's operations had changed significantly due to the
devaluation of the real in the 1999 first quarter. Under SFAS No. 52, "Foreign
Currency Translation," the change in these facts and circumstances required a
change in Aluminio's functional currency. As a result of the change, Alcoa's
accumulated other comprehensive loss (unrealized translation adjustments) and
minority interests accounts were reduced by $156 and $108, respectively. These
amounts were driven principally by a reduction in fixed assets and resulted in
decreases in Aluminio's depreciation expense of $30 in 2001 and 2000 and $15 in
1999.
Recently Adopted Accounting Standards. Alcoa adopted SFAS No. 141,
"Business Combinations" for all business combinations after June 30, 2001. This
standard requires that all business combinations be accounted for using the
purchase method, and it further clarifies the criteria for recognition of
intangible assets separately from goodwill. Since June 30, 2001, there have been
no material business combinations.
Effective January 1, 2002, Alcoa will adopt SFAS No. 142, "Goodwill and
Other Intangible Assets" for existing goodwill and other intangible assets. This
standard eliminates the amortization of goodwill and intangible assets with
indefinite useful lives and requires annual testing for impairment. This
standard requires the assignment of assets acquired and liabilities assumed,
including goodwill, to reporting units for purposes of goodwill impairment
testing. Under the provisions of this standard, any impairment of goodwill as
well as the unamortized balance of negative goodwill will be written off and
recognized as a cumulative effect of a change in accounting principle effective
January 1, 2002. Alcoa had unamortized goodwill of $5,733 at December 31, 2001,
and had recorded net goodwill amortization expense of $170, $122 and $39 for the
years ended December 31, 2001, 2000 and 1999, respectively. The company is
currently evaluating the cumulative effect and ongoing impact of the application
of SFAS No. 142 on the consolidated financial statements.
Effective January 1, 2002, Alcoa will adopt SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." This statement supersedes or
amends existing accounting literature related to the impairment and disposal of
long-lived assets. Management is currently developing a plan to apply the
provisions of this standard to its operations on an ongoing basis.
Recently Issued Accounting Standards. In June 2001, the Financial
Accounting Standards Board 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.
Reclassification. Certain amounts in previously issued financial statements
were reclassified to conform to 2001 presentations.
B. Special Items
- ----------------
During 2001, Alcoa recorded charges of $566 ($355 after tax and minority
interests) as a result of a restructuring plan. The company completed a
strategic review of its primary products and fabricating businesses aimed at
optimizing and aligning its manufacturing systems with customer needs, while
positioning the company for stronger profitability. The total charge of $566
consisted of a charge of $212 ($114 after tax and minority interests) in the
second quarter of 2001 and a charge of $354 ($241 after tax and minority
interests) in the fourth quarter of 2001. These charges consisted of asset
write-downs ($372 pretax), employee termination and severance costs ($178
pretax) related to workforce reductions of approximately 10,400 employees, and
exit costs ($16 pretax). The second quarter charge was primarily due to actions
taken in Alcoa's primary products businesses because of economic and competitive
conditions. These actions included the shutdown of three facilities in the U.S.
Alcoa expects to complete these actions by mid-2002. The fourth quarter charge
was primarily due to actions taken in Alcoa's fabricating businesses. These
actions included the shutdown of 15 facilities in the U.S. and Europe. Alcoa
expects to complete these actions by the end of 2002.
Pretax restructuring charges consisted of:
Employee
Termina-
Asset tion and
Write- Severance
Downs Costs Other Total
- ---------------------------------------------------------------------------
2001:
Total restructuring charges $ 372 $ 178 $ 16 $ 566
Cash payments (3) (32) (5) (40)
Noncash charges (314) -- -- (314)
- ---------------------------------------------------------------------------
Reserve balance at
December 31, 2001 $ 55 $ 146 $ 11 $ 212
- ---------------------------------------------------------------------------
50
Asset write-downs of $372 were primarily recorded as a direct result of the
company's decision to close certain facilities. The asset write-downs consisted
primarily of structures and machinery and equipment, as well as related selling
or disposal costs, and were comprised of $145 related to assets that will be
phased out and $227 of assets that could be disposed of immediately. Assets to
be phased out consisted of $46 of assets in the Flat-Rolled Products segment,
$78 of assets in the Engineered Products segment and $21 at corporate. Assets to
be disposed of consisted of $110 of assets in the Alumina and Chemicals segment,
$84 of assets in the Primary Metals segment, $23 of assets in the Engineered
Products segment, $4 in the Other group and $6 at corporate.
Assets to be phased out will be removed from service by mid-2002. Fair
values of assets were determined based on expected future cash flows or
appraised values. Expected operating cash flows during the phaseout period were
not significant and did not have a material impact on the determination of the
amount of the write-down.
Assets that could be disposed of immediately will be sold or vacated by the
end of 2002. The remaining carrying amount of these assets was approximately $80
at December 31, 2001. The results of operations related to these assets were not
material.
Employee termination and severance costs of $178 were recorded as
management implemented workforce reductions of 10,400 hourly and salaried
employees at various manufacturing facilities--primarily located outside of the
U.S.-due to weak market conditions and the shutdowns of several manufacturing
facilities. These workforce reductions primarily consisted of a combination of
early retirement incentives and involuntary severance programs. As of December
31, 2001, approximately 4,000 employees had been terminated.
The $16 of exit costs were recorded for activities associated with the
shutdowns above, which will be substantially complete by the end of 2002.
C. 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 at a value of
$33.30 per share to Reynolds stockholders. The transaction was valued at
approximately $5,900, including debt assumed of $1,297. The purchase price
included the conversion of outstanding Reynolds options to Alcoa options as well
as other direct costs of the acquisition. The goodwill of approximately $2,100
resulting from the purchase price allocation was 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.
The consolidated financial statements have been prepared in accordance with
Emerging Issues Task Force (EITF) 87- 11, "Allocation of Purchase Price to
Assets to be Sold." Under EITF 87-11, at December 31, 2000, the fair value of
net assets to be divested were reported as assets held for sale in the balance
sheet, and the results of operations from these assets of $19 (after tax) were
not included in the Statement of Consolidated Income. In 2001, the results of
operations from these assets were not material, and there were no significant
adjustments to the purchase price allocation as a result of these divestitures.
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 the second quarter of 2001. There were no gains or
losses on the sales of these assets.
In November of 2001, Alcoa contributed net assets of approximately $200 of
Reynolds Aluminum Supply Company (RASCO), the metals distribution business
acquired in the Reynolds acquisition, to a joint venture in which Alcoa retains
a 50% equity interest.
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. Under the agreement and tender offer, Alcoa
paid $57 for each outstanding share of Cordant common stock and $21 for each
outstanding share of Howmet common stock. The total value of the transactions
was approximately $3,300, including the assumption of debt of $826. The purchase
price includes the conversion of outstanding Cordant and Howmet options to Alcoa
options as well as other direct costs of the acquisition. In April of 2001,
Alcoa completed the sale of Thiokol, a business acquired in the Cordant
transaction, to Alliant Techsystems Inc. for net proceeds of $698 in cash, which
included a working capital adjustment, and recognized a $55 pretax gain that is
included in other income. The goodwill of approximately $2,200 resulting from
the purchase price allocation, after considering the impact of the Thiokol sale,
was being amortized over a 40-year period.
The following unaudited pro forma information for the years ended December
31, 2000 and 1999 assumes that the acquisitions of Reynolds and Cordant had
occurred at the beginning of 2000 and 1999. Adjustments that have been made to
arrive at the pro forma totals include those related to acquisition financing;
the amortization of goodwill; the elimination of transactions among 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 previously noted have been included at the 35% U.S. statutory rate.
(Unaudited) 2000 1999
- -----------------------------------------------------------
Sales $ 25,636 $ 23,369
Net income 1,514 1,148
- -----------------------------------------------------------
Earnings per share:
Basic $ 1.86* $ 1.32
Diluted 1.84* 1.30
- -----------------------------------------------------------
*Includes the cumulative effect adjustment of the accounting change for revenue
recognition
The pro forma results are not necessarily indicative of what actually would have
occurred if the transactions had been in effect for the periods presented, are
not intended to be a projection of future results and do not reflect any cost
savings that might be achieved from the combined operations.
In October of 2000, Alcoa completed the acquisition of Luxfer Holdings
plc's aluminum plate, sheet and soft-alloy extrusion manufacturing operations
and distribution businesses of British Aluminium
51
Limited, a wholly owned subsidiary of Luxfer. Alcoa paid approximately $271 in
cash. The allocation of the purchase price resulted in goodwill of approximately
$121, which was being amortized over a 40-year period. Had the British Aluminium
acquisition occurred at the beginning of 2000 or 1999, net income for those
years would not have been materially different.
Alcoa completed a number of other acquisitions in 2001, 2000 and 1999. Net
cash paid for other acquisitions was $159, $488 and $122 in 2001, 2000 and 1999,
respectively. None of these transactions had a material impact on Alcoa's
financial statements.
Alcoa's acquisitions have been accounted for using the purchase method. The
purchase price has been allocated to the assets acquired and liabilities assumed
based on their estimated fair market values. Any excess purchase price over the
fair market value of the net assets acquired has been recorded as goodwill. For
all of Alcoa's acquisitions, operating results have been included in the
Statement of Consolidated Income since the dates of the acquisitions.
D. Inventories
- --------------
December 31 2001 2000
- ----------------------------------------------------------------
Finished goods $ 691 $ 814
Work in process 734 806
Bauxite and alumina 410 311
Purchased raw materials 531 562
Operating supplies 165 210
- ----------------------------------------------------------------
$ 2,531 $ 2,703
- ----------------------------------------------------------------
Approximately 47% of total inventories at December 31, 2001
were valued on a LIFO basis. If valued on an average-cost
basis, total inventories would have been $605 and $658
higher at the end of 2001 and 2000, respectively. During
2000, LIFO inventory quantities were reduced, which resulted
in a partial liquidation of the LIFO bases. The impact of
this liquidation increased net income by $31, or four cents
per share, in 2000.
E. Properties, Plants and Equipment, at Cost
- --------------------------------------------
December 31 2001 2000
- --------------------------------------------------------------------
Land and land rights, including mines $ 390 $ 384
Structures 5,318 5,329
Machinery and equipment 15,779 16,063
- --------------------------------------------------------------------
21,487 21,776
Less: accumulated depreciation and depletion 10,554 9,750
- --------------------------------------------------------------------
10,933 12,026
Construction work in progress 1,049 824
- --------------------------------------------------------------------
$ 11,982 $ 12,850
- --------------------------------------------------------------------
F. Other Assets
- ---------------
December 31 2001 2000
- -----------------------------------------------------------------
Investments, principally equity $ 1,384 $ 954
investments
Assets held for sale -- 1,473
Intangibles, net of accumulated amortization
of $323 in 2001 and $238 in 2000 674 821
Noncurrent receivables 44 118
Deferred income taxes 445 360
Deferred charges and other 1,301 1,534
- -----------------------------------------------------------------
$ 3,848 $ 5,260
- -----------------------------------------------------------------
G. Other Noncurrent Liabilities and Deferred Credits
- ----------------------------------------------------
December 31 2001 2000
- -------------------------------------------------------
Deferred alumina sales revenue $ 204 $ 212
Environmental remediation 357 369
Deferred credits 278 317
Other noncurrent liabilities 1,129 1,228
- -------------------------------------------------------
$ 1,968 $ 2,126
- -------------------------------------------------------
H. Debt
- -------
December 31 2001 2000
- --------------------------------------------------------------------
Commercial paper, variable rate,
(1.9% and 6.6% average rates) $ 220 $ 1,510
5.75% Notes -- 250
6.625% Notes, due 2002 57 114
9% Bonds, due 2003 21 21
Floating-rate notes, due 2004
(2.2% average rate) 500 --
6.125% Bonds, due 2005 200 200
7.25% Notes, due 2005 500 500
5.875% Notes, due 2006 500 --
6.625% Notes, due 2008 150 150
7.375% Notes, due 2010 1,000 1,000
6.50% Notes, due 2011 1,000 --
6% Notes, due 2012 1,000 --
6.50% Bonds, due 2018 250 250
6.75% Bonds, due 2028 300 300
Tax-exempt revenue bonds ranging from
1.6% to 7.3%, due 2002-2033 341 347
Medium-term notes, due 2002-2013
(8.0% and 8.3% average rates) 224 334
Alcoa Fujikura Ltd.
Variable-rate term loan (6.3% average rate) -- 190
Alcoa Aluminio
7.5% Export notes, due 2008 165 184
Variable-rate notes (8.2% average rate) -- 3
Other 63 61
- --------------------------------------------------------------------
6,491 5,414
Less: amount due within one year 103 427
- --------------------------------------------------------------------
$ 6,388 $ 4,987
- --------------------------------------------------------------------
The amount of long-term debt maturing in each of the next five years is $103 in
2002, $91 in 2003, $563 in 2004, $979 in 2005 and $586 in 2006.
In May 2001, Alcoa issued $1,500 of notes. Of these notes, $1,000 mature in
2011 and carry a coupon rate of 6.50%, and $500 mature in 2006 and carry a
coupon rate of 5.875%. In December 2001, Alcoa issued $1,500 of notes. This
issue consisted of $1,000 of notes that mature in 2012 and carry a coupon rate
of 6%, and $500 of floating-rate notes that mature in 2004. The proceeds from
these borrowings were used to refinance debt, primarily commercial paper, and
for general corporate purposes.
In 2000, Alcoa issued $1,500 of notes. Of these notes, $1,000 mature in
2010 and carry a coupon rate of 7.375%, and $500 mature in 2005 and carry a
coupon rate of 7.25%.
In April 2001, Alcoa refinanced the $2,490 revolving-credit facility that
was to expire in April 2001 and the $510 revolving-credit facility that expires
in April 2005. 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. Alcoa
52
also has a $1,000 revolving-credit facility that expires in August 2003. Under
these agreements, a certain ratio of indebtedness to consolidated net worth must
be maintained. Commercial paper of $220 and $1,510 at December 31, 2001 and
2000, respectively, was classified as long-term debt because it is backed by the
revolving-credit facilities. There were no amounts outstanding under these
facilities at December 31, 2001. The interest rate on these facilities, if drawn
upon, is Libor plus 19 basis points, which is subject to adjustment if Alcoa's
credit rating changes, to a maximum interest rate of Libor plus 40 basis points.
Aluminio's export notes are collateralized by receivables due under an
export contract. Certain financial ratios must be maintained, including the
maintenance of a minimum debt service ratio as well as a certain level of
tangible net worth of Aluminio and its subsidiaries.
Short-term borrowings of $142 at December 31, 2001 consisted of bank and
other borrowings. Short-term borrowings of $2,719 at December 31, 2000 consisted
of commercial paper of $2,201, extendible commercial notes of $280 and bank and
other borrowings of $238. The weighted average interest rate on short-term
borrowings was 2.5% in 2001 and 6.6% in 2000.
I. Minority Interests
- ---------------------
The following table summarizes the minority shareholders' interests in the
equity of consolidated subsidiaries.
December 31 2001 2000
- ---------------------------------------------------------------------------
Alcoa of Australia $ 431 $ 462
Alcoa Aluminio 222 256
Alcoa World Alumina and Chemicals 175 260
Alcoa Fujikura Ltd. 277 309
Other majority-owned companies 208 227
- ---------------------------------------------------------------------------
$ 1,313 $ 1,514
- ---------------------------------------------------------------------------
J. 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 may be
substantial, the ultimate liability cannot now be determined because of the
considerable uncertainties that exist. Therefore, it is possible that results of
operations or liquidity in a particular period could be materially affected by
certain contingencies. However, based on facts currently available, management
believes that the disposition of matters that are pending or asserted will not
have a materially adverse effect on the financial position of the company.
Aluminio is a 27.23% participant in Machadinho, a hydroelectric
construction project in Brazil. Aluminio has guaranteed up to 39% of the
project's total debt of approximately $315. Beginning in February 2002, Aluminio
is committed to taking a share of the output of the completed project for 30
years at cost, including cost of financing the project. In the event that other
participants in this project fail to fulfill their financial responsibilities,
Aluminio may be required to fund a portion of the deficiency. In accordance with
the agreement, if Aluminio funds any such deficiency, its participation and
share of the output from the project will increase proportionately.
Aluminio also entered into agreements to participate in four additional
hydroelectric construction projects in Brazil that are scheduled to be completed
at various dates ranging from 2005 to 2008. Aluminio's share of the output from
the hydroelectric facilities, when completed, ranges from 20% to 39.5%. Total
costs for all four projects are estimated at $1,400, with Aluminio's share of
total project costs totaling approximately 30%. The plans for financing these
projects have not yet been finalized. Aluminio may be required to provide
guarantees of project financing or commit to additional investments as these
projects progress. At December 31, 2001, Aluminio had provided $13 of guarantees
on two of the hydroelectric construction projects in the form of performance
bonds.
Aluminio accounts for its investments in these hydroelectric projects on
the equity method. Aluminio's investment in these projects was $108 and $48 at
December 31, 2001 and 2000, respectively.
Alcoa of Australia (AofA) is party to a number of natural gas and
electricity contracts that expire between 2002 and 2020. Under these take-or-pay
contracts, AofA is obligated to pay for a minimum amount of natural gas or
electricity even if these commodities are not required for operations.
Commitments related to these contracts total $176 in 2002, $180 in 2003, $185 in
2004, $178 in 2005, $154 in 2006 and $2,243 thereafter. Expenditures under these
contracts totaled $179 in 2001, $188 in 2000 and $179 in 1999.
On January 9, 2002, Alcoa raised its equity stake in Elkem ASA, a Norwegian
metals producer, above 40% which, under Norwegian law, required Alcoa to
initiate an unconditional cash tender offer for the remaining outstanding shares
of Elkem. Under the tender offer, which expires on February 22, 2002, Alcoa will
pay approximately $17.40 for each outstanding share of Elkem. Alcoa's potential
cash commitment if all outstanding shares are tendered is approximately $515.
Alcoa has standby letters of credit related to environmental, insurance and
other activities. The total amount committed under these letters of credit,
which expire at various dates in 2002, was $181 at December 31, 2001.
K. Cash Flow Information
- ------------------------
Cash payments for interest and income taxes follow.
2001 2000 1999
- ---------------------------------------------------------------------------
Interest $ 418 $ 388 $ 225
Income taxes 548 419 394
- ---------------------------------------------------------------------------
The details of cash payments related to acquisitions follow.
2001 2000 1999
- ---------------------------------------------------------------------------
Fair value of assets acquired $ 184 $ 14,991 $ 282
Liabilities assumed (24) (7,075) (159)
Stock options issued -- (182) --
Stock issued -- (4,502) --
- ---------------------------------------------------------------------------
Cash paid 160 3,232 123
Less: cash acquired 1 111 1
- ---------------------------------------------------------------------------
Net cash paid for acquisitions $ 159 $ 3,121 $ 122
- ---------------------------------------------------------------------------
53
L. Segment and Geographic Area Information
- ------------------------------------------
Alcoa is primarily a producer of aluminum products. Its segments are organized
by product on a worldwide basis. Alcoa's management reporting system evaluates
performance based on a number of factors; however, the primary measure of
performance is the after-tax operating income (ATOI) of each segment.
Nonoperating items such as interest income, interest expense, foreign exchange
gains/losses, the effects of LIFO inventory accounting, minority interests and
special items are excluded from segment ATOI. In addition, certain expenses,
such as corporate general administrative expenses, and depreciation and
amortization on corporate assets, are not included in segment ATOI. Segment
assets exclude cash, cash equivalents, short-term investments and all deferred
taxes. Segment assets also exclude items such as corporate fixed assets, LIFO
reserves, goodwill allocated to corporate and other amounts.
The accounting policies of the segments are the same as those described in
the Summary of Significant Accounting Policies (Note A). Transactions among
segments are established based on negotiation among the parties. Differences
between segment totals and Alcoa's consolidated totals for line items not
reconciled are primarily due to corporate allocations.
Alcoa's products are used primarily by packaging, consumer products,
transportation (including aerospace, automotive, truck trailer, rail and
shipping), building and construction and industrial customers worldwide. Total
exports from the U.S. were $2,066 in 2001, compared with $1,687 in 2000 and
$1,309 in 1999. Alcoa's reportable segments follow.
Packaging
Alumina and Primary Flat-Rolled Engineered and
Segment information Chemicals Metals Products Products Consumer Other Total
- ----------------------------------------------------------------------------------------------------------------------------
2001
Sales:
Third-party sales $ 1,908 $ 3,432 $ 4,999 $ 6,098 $ 2,720 $ 3,702 $ 22,859
Intersegment sales 1,021 3,300 64 35 -- -- 4,420
- ----------------------------------------------------------------------------------------------------------------------------
Total sales $ 2,929 $ 6,732 $ 5,063 $ 6,133 $ 2,720 $ 3,702 $ 27,279
- ----------------------------------------------------------------------------------------------------------------------------
Profit and loss:
Equity income (loss) $ 1 $ 52 $ (2) $ -- $ 28 $ 16 $ 95
Depreciation, depletion and
amortization 144 327 191 268 137 113 1,180
Income taxes 184 434 94 111 79 -- 902
After-tax operating income 471 905 262 173 185 47 2,043
- ----------------------------------------------------------------------------------------------------------------------------
Assets:
Capital expenditures $ 129 $ 209 $ 221 $ 259 $ 94 $ 84 $ 996
Equity investments 170 319 47 -- 128 317 981
Total assets 2,797 7,122 3,453 6,231 2,498 1,883 23,984
- ----------------------------------------------------------------------------------------------------------------------------
2000
Sales:
Third-party sales $ 2,108 $ 3,756 $ 5,446 $ 5,471 $ 2,084 $ 4,071 $ 22,936
Intersegment sales 1,104 3,504 97 62 -- -- 4,767
- ----------------------------------------------------------------------------------------------------------------------------
Total sales $ 3,212 $ 7,260 $ 5,543 $ 5,533 $ 2,084 $ 4,071 $ 27,703
- ----------------------------------------------------------------------------------------------------------------------------
Profit and loss:
Equity income $ 3 $ 50 $ 6 $ 1 $ -- $ 32 $ 92
Depreciation, depletion and
amortization 163 311 188 221 105 127 1,115
Income taxes 279 505 126 124 70 93 1,197
After-tax operating income 585 1,000 299 210 131 164 2,389
- ----------------------------------------------------------------------------------------------------------------------------
Assets:
Capital expenditures $ 154 $ 232 $ 185 $ 234 $ 112 $ 100 $ 1,017
Equity investments 176 274 90 6 1 139 686
Total assets 2,924 7,700 3,657 6,455 2,457 3,376 26,569
- ----------------------------------------------------------------------------------------------------------------------------
1999
Sales:
Third-party sales $ 1,842 $ 2,241 $ 5,113 $ 3,728 $ 801 $ 2,592 $ 16,317
Intersegment sales 925 2,793 51 26 -- -- 3,795
- ----------------------------------------------------------------------------------------------------------------------------
Total sales $ 2,767 $ 5,034 $ 5,164 $ 3,754 $ 801 $ 2,592 $ 20,112
- ----------------------------------------------------------------------------------------------------------------------------
Profit and loss:
Equity income (loss) $ -- $ 42 $ (9) $ -- $ -- $ 10 $ 43
Depreciation, depletion and
amortization 161 216 184 116 60 89 826
Income taxes 159 214 131 88 32 71 695
After-tax operating income 307 535 281 180 68 118 1,489
- ----------------------------------------------------------------------------------------------------------------------------
Assets:
Capital expenditures $ 183 $ 207 $ 166 $ 144 $ 96 $ 62 $ 858
Equity investments 54 153 66 -- 1 138 412
Total assets 3,046 4,532 3,385 2,320 646 1,647 15,576
- ----------------------------------------------------------------------------------------------------------------------------
54
Alumina And Chemicals. This segment consists of Alcoa's worldwide alumina and
chemicals system, that includes the mining of bauxite, which is then refined
into alumina. Alumina is sold directly to internal and external smelter
customers worldwide or is processed into industrial chemical products. Alcoa's
alumina operations in Australia are a significant component of this segment.
Approximately two-thirds of the third-party sales from this segment are derived
from alumina.
Primary Metals. This segment consists of Alcoa's worldwide smelter system.
Primary Metals receives alumina primarily from the Alumina and Chemicals segment
and produces aluminum ingot to be used by Alcoa's fabricating businesses, as
well as sold to external customers, aluminum traders and commodity markets.
Results from the sale of aluminum powder, scrap and excess power are also
included in this segment, as well as the results from aluminum derivative
contracts. The sale of ingot represents approximately 80% of this segment's
third-party sales.
Flat-Rolled Products. This segment's principal business is the production and
sale of aluminum plate, sheet and foil. This segment includes rigid container
sheet (RCS), which is used to produce aluminum beverage cans, and sheet and
plate used in the transportation and distributor markets. Approximately 60% of
the third-party sales in this segment are derived from sheet and plate, and foil
used in industrial markets, while the remaining 40% of third-party sales
consists of RCS.
Engineered Products. This segment includes hard- and soft- alloy extrusions,
including architectural extrusions, super-alloy castings, steel and aluminum
fasteners, aluminum forgings and wheels. These products serve the
transportation, building and construction and distributor markets.
Packaging and Consumer. This segment includes foodservice, flexible packaging,
consumer products and packaging graphics design, as well as closures, PET
bottles and packaging machinery. The principal products in this segment include
aluminum foil; plastic wraps and bags; metal and plastic beverage and food
closures; pre-press services and plastic shrink film and wraps. Consumer
products are marketed under brands including Reynolds Wrap, Diamond, Baco and
Cut-Rite wax paper.
Other. This group includes other Alcoa businesses that are not included in the
segments previously mentioned. This group includes Alcoa Fujikura Ltd., which
produces electrical components for the automotive industry along with
fiber-optic cable and provides services to the telecommunications industry;
residential building products operations, Alcoa Building Products (ABP);
automotive parts businesses; Thiokol, a producer of solid rocket propulsion
systems (Thiokol was sold in April 2001); and Reynolds' metal distribution
business, RASCO (in November 2001, the net assets of RASCO were contributed to a
joint venture, in which Alcoa retains a 50% equity interest).
The following reconciles segment information to consolidated totals.
2001 2000 1999
- -------------------------------------------------------------------------------
Sales:
Total sales $ 27,279 $ 27,703 $ 20,112
Elimination of intersegment sales (4,420) (4,767) (3,795)
Other revenues -- -- 6
- -------------------------------------------------------------------------------
Consolidated sales $ 22,859 $ 22,936 $ 16,323
- -------------------------------------------------------------------------------
Net income:
Total after-tax operating income $ 2,043 $ 2,389 $ 1,489
Impact of intersegment profit
eliminations (20) 24 (24)
Unallocated amounts (net of tax):
Interest income 40 40 26
Interest expense (242) (278) (126)
Minority interests (208) (381) (242)
Special items (397) -- --
Corporate expense (261) (227) (171)
Other (47) (83) 102
- -------------------------------------------------------------------------------
Consolidated net income $ 908 $ 1,484 $ 1,054
- -------------------------------------------------------------------------------
Assets:
Total assets $ 23,984 $ 26,569 $ 15,576
Elimination of intersegment
receivables (309) (530) (362)
Unallocated amounts:
Cash, cash equivalents and
short-term investments 527 371 314
Deferred tax assets 855 745 657
Corporate goodwill 1,710 1,570 558
Corporate fixed assets 513 414 278
LIFO reserve (605) (658) (645)
Operations to be divested -- 1,473 --
Other 1,680 1,737 690
- -------------------------------------------------------------------------------
Consolidated assets $ 28,355 $ 31,691 $ 17,066
- -------------------------------------------------------------------------------
Geographic information for revenues, based on country of origin, and long-lived
assets follows.
2001 2000 1999
- -------------------------------------------------------------------------------
Revenues:
U.S. $ 15,000 $ 15,487 $ 10,392
Australia 1,350 1,690 1,398
Spain 1,011 1,146 1,059
United Kingdom 899 379 253
Brazil 736 885 730
Germany 720 713 521
Other 3,143 2,636 1,970
- -------------------------------------------------------------------------------
$ 22,859 $ 22,936 $ 16,323
- -------------------------------------------------------------------------------
Long-lived assets:
U.S. $ 12,495 $ 14,276 $ 6,650
Canada 2,787 2,844 948
Australia 1,345 1,458 1,585
United Kingdom 682 378 72
Brazil 600 698 712
Germany 194 213 165
Other 1,164 1,322 1,050
- -------------------------------------------------------------------------------
$ 19,267 $ 21,189 $ 11,182
- -------------------------------------------------------------------------------
55
M. Preferred And Common Stock
- -----------------------------
Preferred Stock. Alcoa has two classes of preferred stock. Serial preferred
stock has 557,740 shares authorized and outstanding, with a par value of $100
per share and an annual $3.75 cumulative dividend preference per share. Class B
serial preferred stock has 10 million shares authorized (none issued) and a par
value of $1 per share.
Common Stock. There are 1.8 billion shares authorized at a par value of $1 per
share. As of December 31, 2001, 94.5 million shares of common stock were
reserved for issuance under the long-term stock incentive plans.
In July 2001, the Alcoa Board of Directors authorized the repurchase of 50
million shares of Alcoa common stock. As of December 31, 2001, there were 37.5
million shares remaining on the stock repurchase authorization.
Stock options under the company's stock incentive plans have been and may be
granted, generally at not less than market prices on the dates of grant. The
stock option program includes a reload or stock continuation ownership feature.
Stock options granted have a maximum term of 10 years. Vesting periods are one
year from the date of grant and six months for options granted under the reload
feature.
Alcoa's net income and earnings per share would have been reduced to the
pro forma amounts shown below if compensation cost had been determined based on
the fair value at the grant dates.
2001 2000 1999
- -------------------------------------------------------------------------------
Net income:
As reported $ 908 $ 1,484 $ 1,054
Pro forma 730 1,277 912
- -------------------------------------------------------------------------------
Basic earnings per share:
As reported 1.06 1.82 1.43
Pro forma 0.85 1.57 1.24
- -------------------------------------------------------------------------------
Diluted earnings per share:
As reported 1.05 1.80 1.41
Pro forma 0.84 1.55 1.22
- -------------------------------------------------------------------------------
The weighted average granted was $9.54 fair value per option in 2001, $10.13 in
2000 and $5.35 in 1999.
The fair each value of option is estimated on the date of grant or
subsequent reload Black-Scholes using the pricing model with the following
assumptions:
2001 2000 1999
- -------------------------------------------------------------------------------
Average risk-free interest rate 3.8% 6.1% 5.0%
Expected dividend yield 1.6 1.6 1.4
Expected volatility 43.0 40.0 37.0
Expected life (years):
New option grants 2.5 2.5 2.5
Reload option grants 2.0 2.0 1.5
- -------------------------------------------------------------------------------
The transactions for shares under options were: (shares in millions)
2001 2000 1999
- ------------------------------------------------------------------------------
Outstanding, beginning of year:
Number of options 74.8 53.0 53.2
Weighted average exercise price $ 29.29 $ 22.15 $ 16.50
Options assumed from acquisitions:
Number of options -- 15.2 --
Weighted average exercise price -- $ 25.09 --
Granted:
Number of options 28.9 31.3 43.6
Weighted average exercise price $ 36.19 $ 37.87 $ 24.47
Exercised:
Number of options (29.0) (24.3) (43.2)
Weighted average exercise price $ 29.03 $ 22.03 $ 17.22
Expired or forfeited:
Number of options (1.2) (.4) (.6)
Weighted average exercise price $ 32.50 $ 34.90 $ 18.59
- -------------------------------------------------------------------------------
Outstanding, end of year:
Number of options 73.5 74.8 53.0
Weighted average exercise price $ 32.02 $ 29.29 $ 22.15
- -------------------------------------------------------------------------------
Exercisable, end of year:
Number of options 58.6 44.6 26.4
Weighted average exercise price $ 31.88 $ 23.42 $ 19.21
- -------------------------------------------------------------------------------
Shares reserved for future options 21.0 15.8 28.6
- -------------------------------------------------------------------------------
The following tables summarize certain stock option information
at December 31, 2001: (shares in millions)
Options Outstanding
Range of Weighted average Weighted average
exercise price Number remaining life exercise price
- -------------------------------------------------------------------------------
$ 0.125 0.2 employment career $ 0.125
$ 4.38-$12.15 2.0 3.24 10.11
$12.16-$19.93 5.8 3.85 17.08
$19.94-$27.71 12.0 5.39 23.16
$27.72-$35.49 27.0 7.14 32.56
$35.50-$43.25 26.5 6.67 40.63
- -------------------------------------------------------------------------------
Total 73.5 6.31 $ 32.02
- -------------------------------------------------------------------------------
Options Exercisable
Range of Weighted average
exercise price Number exercisable price
- -------------------------------------------------------------------------------
$ 0.125 0.2 $ 0.125
$ 4.38-$12.15 2.0 10.11
$12.16-$19.93 5.8 17.08
$19.94-$27.71 12.1 23.16
$27.72-$35.49 14.0 33.52
$35.50-$43.25 24.5 40.74
- -------------------------------------------------------------------------------
Total 58.6 $ 31.88
- -------------------------------------------------------------------------------
N. Earnings Per Share
- ---------------------
Basic earnings per common share (EPS) amounts are computed by dividing earnings
after the deduction of preferred stock dividends by the average number of common
shares outstanding. Diluted EPS amounts assume the issuance of common stock for
all potentially dilutive equivalents outstanding.
The details of basic and diluted EPS follow. (shares in millions)
2001 2000 1999
- -----------------------------------------------------------------------
Income before cumulative effect $ 908 $ 1,489 $ 1,054
Less: preferred stock dividends 2 2 2
- -----------------------------------------------------------------------
Income available to common stock-
holders before cumulative effect $ 906 $ 1,487 $ 1,052
Cumulative effect of accounting
change -- (5) --
- -----------------------------------------------------------------------
Income available to common stock-
holders after cumulative effect $ 906 $ 1,482 $ 1,052
- -----------------------------------------------------------------------
Average shares outstanding--basic 858.0 814.2 733.8
Effect of dilutive securities:
Shares issuable upon exercise
of dilutive stock options 8.6 9.0 13.4
- -----------------------------------------------------------------------
Average shares outstanding--diluted 866.6 823.2 747.2
Basic EPS (before cumulative effect) $ 1.06 $ 1.83 $ 1.43
Basic EPS (after cumulative effect) 1.06 1.82 1.43
Diluted EPS (before cumulative effect) 1.05 1.81 1.41
Diluted EPS (after cumulative effect) 1.05 1.80 1.41
- -----------------------------------------------------------------------
Options to purchase 32 million shares of common stock at an average exercise
price of $40 per share were outstanding as of December 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. As of
June 30, 2001, Alcoa had repurchased all 10 million shares under the agreement.
O. Income Taxes
- ---------------
The components of income before taxes on income were:
2001 2000 1999
- -----------------------------------------------------------------------
U.S. $ (84) $ 756 $ 631
Foreign 1,725 2,056 1,218
- -----------------------------------------------------------------------
$ 1,641 $ 2,812 $ 1,849
- -----------------------------------------------------------------------
The provision for taxes on income consisted of:
2001 2000 1999
- -----------------------------------------------------------------------
Current:
U.S. federal* $ (17) $ 217 $ 175
Foreign 521 568 306
State and local 45 22 18
- -----------------------------------------------------------------------
549 807 499
- -----------------------------------------------------------------------
Deferred:
U.S. federal* (32) 90 74
Foreign 3 42 (25)
State and local 5 3 5
- -----------------------------------------------------------------------
(24) 135 54
- -----------------------------------------------------------------------
Total $ 525 $ 942 $ 553
- -----------------------------------------------------------------------
*Includes U.S. taxes related to foreign income
In the 1999 fourth quarter, Australia reduced its corporate income tax rate from
36% to 34% for 2000 and 30% for 2001.
The exercise of employee stock options generated a tax benefit of $90 in
2001, $108 in 2000 and $145 in 1999. This amount was credited to additional
capital and reduced current taxes payable.
Reconciliation of the U.S. federal statutory rate to Alcoa's effective tax rate
follows.
2001 2000 1999
- -----------------------------------------------------------------------
U.S. federal statutory rate 35.0% 35.0% 35.0%
Taxes on foreign income (8.4) (3.5) (2.4)
State taxes net of federal benefit 1.1 .5 .5
Tax rate changes -- -- (2.4)
Minority interests 1.8 .1 .3
Permanent differences on sold and
disposed assets (1.4) -- --
Goodwill amortization 2.4 1.2 0.5
Other 1.5 .2 (1.6)
- -----------------------------------------------------------------------
Effective tax rate 32.0% 33.5% 29.9%
- -----------------------------------------------------------------------
The components of net deferred tax assets and liabilities follow.
2001 2000
---------------------- ----------------------
Deferred Deferred Deferred Deferred
tax tax tax tax
December 31 asset liabilities assets liabilities
- ----------------------------------------------------------------------------
Depreciation $ -- $ 1,744 $ -- $ 2,263
Employee benefits 1,071 -- 1,127 --
Loss provisions 406 -- 588 --
Deferred income/expense 279 132 237 166
Tax loss carryforwards 329 -- 272 --
Tax credit carryforwards 219 -- 144 --
Other 293 252 262 304
- ----------------------------------------------------------------------------
2,597 2,128 2,630 2,733
Valuation allowance (201) -- (165) --
- ----------------------------------------------------------------------------
$ 2,396 $ 2,128 $ 2,465 $ 2,733
- ----------------------------------------------------------------------------
Of the total deferred tax assets associated with the tax loss carryforwards, $65
expires over the next 10 years, $104 over the next 20 years and $160 is
unlimited. Of the tax credit carryforwards, $142 is unlimited with the balance
expiring over the next 10 years. A substantial portion of the valuation
allowance relates to the loss carryforwards because the ability to generate
sufficient foreign taxable income in future years is uncertain. Approximately
$52 of the valuation allowance relates to acquired companies for which
subsequently recognized benefits will reduce goodwill.
The cumulative amount of Alcoa's share of undistributed earnings for which
no deferred taxes have been provided was $4,399 at December 31, 2001. Management
has no plans to distribute such earnings in the foreseeable future. It is not
practical to determine the deferred tax liability on these earnings.
P. Pension Plans and Other Postretirement Benefits
- --------------------------------------------------
Alcoa maintains pension plans covering most U.S. employees and certain other
employees. Pension benefits generally depend on length of service, job grade and
remuneration. Substantially all benefits are paid through pension trusts that
are sufficiently funded to ensure that all plans can pay benefits to retirees as
they become due.
Alcoa maintains health care and life insurance benefit plans covering most
eligible U.S. retired employees and certain other retirees. Generally, the
medical plans pay a stated percentage of medical expenses, reduced by
deductibles and other coverages. These plans are generally unfunded, except for
certain benefits funded through a trust. Life benefits are generally provided by
insurance contracts. Alcoa retains the right, subject to existing agreements, to
change or eliminate these benefits. All U.S. salaried and certain hourly
employees hired after January 1, 2002 will not have postretirement health care
benefits.
57
The table below reflects the status of Alcoa's pension and postretirement
benefit plans.
Pension benefits Postretirement benefits
--------------------------- -------------------------------
December 31 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $ 8,270 $ 5,366 $ 2,924 $ 1,687
Service cost 162 162 25 25
Interest cost 578 502 220 177
Amendments 136 9 76 (17)
Actuarial losses (gains) 634 (309) 369 85
Acquisitions (principally Reynolds and Cordant) -- 3,124 -- 1,182
Divestitures (principally Thiokol) (664) -- (159) --
Benefits paid (585) (514) (278) (215)
Exchange rate (43) (70) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 8,488 $ 8,270 $ 3,177 $ 2,924
- ------------------------------------------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year $ 9,790 $ 6,103 $ 155 $ 112
Actual return on plan assets 65 586 1 12
Acquisitions (principally Reynolds and Cordant) -- 3,597 -- 31
Employer contributions 37 61 -- 5
Participants' contributions 11 13 -- --
Divestitures (principally Thiokol) (783) -- (33) --
Transfer to defined contribution pension plan (49) -- -- --
Benefits paid (574) (487) -- (5)
Administrative expenses (17) (12) -- --
Exchange rate (46) (71) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 8,434 $ 9,790 $ 123 $ 155
- ------------------------------------------------------------------------------------------------------------------------------------
Funded status $ (54) $ 1,520 $ (3,054) $ (2,769)
Unrecognized net actuarial (gain) loss (8) (1,385) 221 (137)
Unrecognized net prior service cost (credit) 138 40 11 (97)
- ------------------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 76 $ 175 $ (2,822) $ (3,003)
- ------------------------------------------------------------------------------------------------------------------------------------
Amount recognized in the balance sheet consists of:
Prepaid benefit $ 502 $ 661 $ -- $ --
Accrued benefit liability (568) (509) (2,822) (3,003)
Intangible asset 50 9 -- --
Accumulated other comprehensive loss 92 14 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 76 $ 175 $ (2,822) $ (3,003)
- ------------------------------------------------------------------------------------------------------------------------------------
The components of net periodic benefit costs are reflected below.
Pension benefits Postretirement benefits
------------------------------------ ---------------------------------------------
December 31 2001 2000 1999 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Components of net periodic
benefit (income) costs
Service cost $ 162 $ 162 $ 141 $ 25 $ 25 $ 19
Interest cost 578 502 342 220 177 109
Expected return on plan assets (781) (666) (427) (11) (11) (9)
Amortization of prior service
cost (benefit) 34 35 39 (33) (34) (34)
Recognized actuarial gain (26) (18) (4) (2) (2) (4)
Amortization of transition obligation -- 2 2 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit (income) costs $ (33) $ 17 $ 93 $ 199 $ 155 $ 81
- ------------------------------------------------------------------------------------------------------------------------------------
The aggregate benefit obligation and fair value of plan assets for the pension
plans with benefit obligations in excess of plan assets were $1,921 and $1,362,
respectively, as of December 31, 2001, and $804 and $508, respectively, as of
December 31, 2000. The aggregate pension accumulated benefit obligation and fair
value of plan assets with accumulated benefit obligations in excess of plan
assets were $1,708 and $1,284, respectively, as of December 31, 2001, and $594
and $338, respectively, at December 31, 2000.
Weighted average assumptions used in the accounting for Alcoa's plans follow.
December 31 2001 2000 1999
- --------------------------------------------------------------------------------
Discount rate 7.25% 7.75% 7.00%
Expected long-term return on
plan assets 9.50 9.00 9.00
Rate of compensation increase 5.00 5.00 5.00
- --------------------------------------------------------------------------------
58
For measurement purposes, a 9.5% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 2002. The rate was assumed to
decrease gradually to 5% in 2006 and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage-point change in these
assumed rates would have the following effects:
1% 1%
increase decrease
- ------------------------------------------------------------------------------
Effect on total of service and interest cost
components $ 16 $ (14)
Effect on postretirement benefit obligations 196 (172)
- ------------------------------------------------------------------------------
Alcoa also sponsors a number of defined contribution pension plans. Expenses
were $103 in 2001, $80 in 2000 and $64 in 1999.
Q. Lease Expense
- ----------------
Certain equipment, warehousing and office space and oceangoing vessels are under
operating lease agreements. Total expense for all leases was $199 in 2001, $152
in 2000 and $145 in 1999. Under long-term operating leases, minimum annual
rentals are $128 in 2002, $98 in 2003, $77 in 2004, $64 in 2005, $60 in 2006 and
a total of $223 for 2007 and thereafter.
R. Interest Cost Components
- ---------------------------
2001 2000 1999
- -----------------------------------------------------------
Amount charged to expense $ 371 $ 427 $ 195
Amount capitalized 22 20 21
- -----------------------------------------------------------
$ 393 $ 447 $ 216
- -----------------------------------------------------------
S. Other Financial Instruments and Derivatives
- ----------------------------------------------
Other Financial Instruments. The carrying values and fair values of Alcoa's
financial instruments at December 31 follow.
2001 2000
------------------- --------------------
Carrying Fair Carrying Fair
value value value value
- ---------------------------------------------------------------------------
Cash and cash equivalents $ 512 $ 512 $ 315 $ 315
Short-term investments 15 15 56 56
Noncurrent receivables 44 44 118 118
Short-term debt 245 245 3,146 3,146
Long-term debt 6,388 6,535 4,987 5,053
- ---------------------------------------------------------------------------
The methods used to estimate the fair values of certain financial instruments
follow.
Cash and Cash Equivalents, Short-term Investments and Short-Term Debt. The
carrying amounts approximate fair value because of the short maturity of the
instruments.
Noncurrent Receivables. The fair value of noncurrent receivables is based on
anticipated cash flows and approximates carrying value.
Long-term Debt. The fair value is based on interest rates that are currently
available to Alcoa for issuance of debt with similar terms and remaining
maturities.
Derivatives. Alcoa holds or purchases derivative financial instruments for
purposes other than trading. Details of the fair values of the significant
instruments follow.
2001 2000
- ------------------------------------------------
Aluminum $ (65) $ 29
Interest rates 34 (1)
Foreign currency (132) (166)
Other commodities (30) 74
- ------------------------------------------------
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 known 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 to help 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 $2,250 of debt,
through 2011.
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, cost of goods sold
or interest expense, consistent with the underlying hedged item. 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. Alcoa's foreign currency contracts were
principally used to purchase Australian dollars and Canadian dollars. The U.S.
dollar notional amount of all foreign currency contracts was $1,409 and $2,342
as of December 31, 2001 and 2000, respectively.
Commodities. Alcoa may elect to sell forward a portion of its anticipated
primary aluminum and alumina production. In addition, Alcoa 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. From time to time, Alcoa enters into pay floating, receive fixed
interest rate swaps to hedge the interest rate risk exposure of forecasted
interest payments on a portion of its outstanding variable rate debt. As of
December 31, 2001, there were no outstanding contracts of this nature.
For these cash flow hedge transactions, the fair values of the derivatives are
recorded on the balance sheet. The effective portions of the changes in the fair
values of these derivatives are recorded in other comprehensive income and are
reclassified to sales, cost of
59
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. There were no material transactions that ceased to qualify as a
cash flow hedge 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 December 31, 2001, $71 of the $104 loss
included in other comprehensive income is expected to be recognized in earnings
over the next 12 months.
Other
Alcoa also enters into foreign currency contracts that do not qualify as a fair
value, cash flow or net investment hedge. These contracts hedge the variability
in cash flows from the payment or receipt of currencies other than the
functional currency for certain foreign currency denominated assets and
liabilities or for certain forecasted transactions that do not qualify as hedged
items. These contracts were not material at December 31, 2001 or 2000.
Alcoa is exposed to credit loss in the event of nonperformance by counterparties
on the above instruments, as well as credit or performance risk with respect to
its hedged customers' commitments. Although nonperformance is possible, Alcoa
does not anticipate nonperformance by any of these parties. Futures and options
contracts are with creditworthy counterparties and are further supported by
cash, treasury bills or irrevocable letters of credit issued by carefully chosen
banks. In addition, various master netting arrangements are in place with
counterparties to facilitate settlement of gains and losses on these contracts.
For further information on Alcoa's hedging and derivatives activities, see
Note A.
T. Environmental Matters
- ------------------------
Alcoa participates in environmental assessments and cleanups at a number of
locations. These include approximately 31 owned or operating facilities and
adjoining properties, approximately 28 previously owned or operated 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. See Note A for additional information.
As assessments and cleanups proceed, the liability is adjusted based on
progress in determining the extent of remedial actions and related costs and
damages. The liability can change substantially due to factors such as the
nature and extent of contamination, changes in remedial requirements and
technological changes. Therefore, it is not possible to determine the outcomes
or to estimate with any degree of accuracy the potential costs for certain of
these matters. For example, there are issues related to the Massena, New York
and Point Comfort, Texas sites where investigations are ongoing and where
natural resource damage or off-site contaminated sediments have been alleged.
The following discussion provides additional details regarding the current
status of certain 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).
In the fourth quarter of 1999, Alcoa submitted an Analysis of Alternatives
Report to the EPA. This report identified potential courses of remedial action
related to the PCB contamination of the river. The EPA indicated to Alcoa that
it believed additional remedial alternatives needed to be included in the
Analysis of Alternatives Report. During 2000 and 2001, Alcoa completed certain
studies and investigations on the river, including pilot tests of sediment-
capping techniques and other remediation technologies. In February 2002, Alcoa
submitted a revised draft Analysis of Alternatives Report based on these
additional evaluations and included additional remedial alternatives required by
the EPA. The additional alternatives required by the EPA involve removal of more
sediment than was included in the 1999 Analysis of Alternatives Report. The
range of costs associated with the remedial alternatives evaluated in the 2002
report is between $2 and $525. Alcoa believes that several of those
alternatives, involving the largest amounts of sediment removal, should not be
selected for the Grasse River remedy. Alcoa believes the alternatives that
should be selected are those ranging from monitored natural recovery ($2) to a
combination of moderate dredging and capping ($90). A reserve of $2 has been
recorded for any probable losses, as no one of the alternatives is more likely
to be selected than any other.
Portions of the St. Lawrence River system adjacent to the former Reynolds
plant were also contaminated with PCB, and during 2001, Alcoa substantially
completed a dredging remedy for the St. Lawrence River. Further analysis of the
condition of the sediments is being performed. Any required additional dredging
or capping of residual contamination is likely to be completed during the 2003
construction season. The most probable cost of any such additional remediation
is fully reserved.
Alcoa is aware of natural resource damage claims that may be asserted by
certain federal, state and tribal natural resource trustees at these locations.
Point Comfort/Lavaca Bay. Since 1990, Alcoa has undertaken investigations
and evaluations concerning alleged releases of mercury from its Point 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. In December 2001, the EPA issued its
Record of Decision (ROD) for the site. That ROD selected the final remedial
approach for the site, which is fully reserved. The company is negotiating a
Consent Order with the EPA under which it will undertake to implement the
remedy. The company and certain federal and state natural resource trustees, who
previously served Alcoa with notice of their intent to file suit to recover
damages for alleged loss or injury of natural resources in Lavaca Bay, have
cooperatively identified restoration alternatives and approaches for Lavaca Bay.
The cost of such restoration is reserved and Alcoa anticipates negotiating a
Consent Decree with the trustees under which it will implement the restoration.
60
Troutdale. 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 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 cleanup.
This amount has been fully reserved. The company anticipates a final ROD to be
issued by the EPA in 2002.
Sherwin. In connection with the sale of the Sherwin alumina refinery in
Texas, which was required to be divested as part of the Reynolds merger in 2000
(see Note C), Alcoa has agreed to retain responsibility for the remediation of
certain properties, including former waste disposal areas, and a share of the
ultimate closure costs of other active waste disposal areas. The most probable
cost of such remediation has been evaluated and is 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
adequate reserves have been provided and that the disposition of these matters
will not have a materially adverse effect on the financial position or liquidity
of the company.
Alcoa's remediation reserve balance at the end of 2001 and 2000 was $431
and $447 (of which $74 and $78 were classified as a current liability),
respectively, and reflects the most probable costs to remediate identified
environmental conditions for which costs can be reasonably estimated. Of the
2001 reserve balance, approximately 8% relates to the Massena, New York plant
sites, 6% relates to the Troutdale, Oregon plant site, and 23% relates to the
Sherwin, Texas site. Remediation costs charged to the reserve were $72 in 2001,
$77 in 2000 and $47 in 1999. 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 $56 primarily as a result of acquisitions
and the shutdown of the company's magnesium plant in Addy, Washington. In 2000,
the reserve balance was increased by $350 as a result of acquisitions.
Included in annual operating expenses are the recurring costs of managing
hazardous substances and environmental programs. These costs are estimated to be
about 2% of cost of goods sold.
Supplemental Financial Information
Quarterly Data (unaudited)
(dollars in millions, except per-share amounts)
2001 First Second Third Fourth Year
- -----------------------------------------------------------------------
Sales $ 6,176 $5,991 $5,511 $5,181 $22,859
Income (loss) from
operations 500 339 391 (114) 1,116
Net income (loss)* 404 307 339 (142)+ 908
Earnings per share:
Basic 0.47 0.36 0.40 (0.17) 1.06
Diluted 0.46 0.35 0.39 (0.17) 1.05
- -----------------------------------------------------------------------
* After special charges of $114, or 13 cents per share, in the second quarter
and $241, or 28 cents per share, in the fourth quarter (See Note B) +The 2001
fourth quarter includes an after-tax credit of $22, or three cents per share,
related to changes in the LIFO index.
2000 First Second Third Fourth Year
- -----------------------------------------------------------------------
Sales $ 4,509 $5,569 $6,298 $6,560 $22,936
Income from
operations 457 462 459 492 1,870
Net income 347 377 368 392* 1,484
Earnings per share:
Basic .47 .47 .42 .45 1.82
Diluted .47 .47 .42 .45 1.80
- -----------------------------------------------------------------------
* The 2000 fourth quarter includes an after-tax credit of $18, or two cents per
share, related to changes in the LIFO index and LIFO liquidations.
Number of Employees (unaudited)
2001 2000 1999
- -----------------------------------------------------------------------
Other Americas 38,700 46,500 45,100
U.S. 56,500 61,600 38,400
Europe 27,700 27,400 18,800
Pacific 6,100 6,500 5,400
- -----------------------------------------------------------------------
129,000 142,000 107,700
- -----------------------------------------------------------------------
61
Shareholder Information
Annual Meeting
The annual meeting of shareholders will be at 9:30 a.m. Friday, April 19, 2002
at the Westin Convention Center Pittsburgh.
Company News
Visit www.alcoa.com for current stock quotes, Securities and Exchange Commission
(SEC) filings, quarterly earnings reports and other company news. This
information is also available toll-free 24 hours a day by calling 1 800 522 6757
(in the U.S. and Canada) or 1 402 572 4993 (all other calls). Reports may be
requested by voice, fax or mail.
Copies of the annual report, Forms 10-K and 10-Q may be requested through
the Internet, by calling the toll-free numbers, or by writing to Corporate
Communications at the corporate center address.
Investor Information
Security analysts and investors may write to Director - Investor Relations at
390 Park Avenue, New York, NY 10022-4608, call 1 212 836 2674, or E-mail
investor.relations@alcoa.com.
Other Publications
For a report of contributions and programs supported by Alcoa Foundation, write
Alcoa Foundation at the corporate center address, visit www.alcoa.com or call 1
412 553 2348.
For a report on Alcoa's environmental, health and safety performance, write
Alcoa EHS Department at the corporate center address or visit www.alcoa.com.
Dividends
Alcoa's objective is to pay common stock dividends at rates competitive with
other investments of equal risk and consistent with the need to reinvest
earnings for long-term growth. In January 2002, the Board of Directors approved
a 20% increase in the quarterly common stock dividend from 12.5 cents per share
to 15 cents per share. The Board also approved eliminating the variable dividend
that was equal to 30% of Alcoa's annual earnings over $1.50 per basic share.
Basic earnings per share for 2001 did not meet the $1.50 threshold. Quarterly
dividends are paid to shareholders of record at each quarterly distribution
date.
Dividend Reinvestment
The company offers a Dividend Reinvestment and Stock Purchase Plan for
shareholders of Alcoa common and preferred stock. The plan allows shareholders
to reinvest all or part of their quarterly dividends in shares of Alcoa common
stock. Shareholders also may purchase additional shares under the plan with cash
contributions. The company pays brokerage commissions and fees on these stock
purchases.
Direct Deposit of Dividends
Shareholders may have their quarterly dividends deposited directly to their
checking, savings or money market accounts at any financial institution that
participates in the Automated Clearing House (ACH) system.
Shareholder Services
Shareholders with questions on account balances; dividend checks, reinvestment
or direct deposit; address changes; lost or misplaced stock certificates; or
other shareholder account matters may contact Alcoa's stock transfer agent,
registrar and dividend disbursing agent:
Equiserve Trust Company, N.A. Telephone Response Center:
P.O. Box 2500 1 800 317 4445
Jersey City, NJ 07303-2500 Outside U.S. and Canada:
1 201 324 0313
Internet address: www.equiserve.com
Telecommunications Device for the Deaf (TDD): 1 201 222 4955
For shareholder questions on other matters related to Alcoa, write to Donna
Dabney, Office of the Secretary, at the corporate center headquarters address or
call 1 412 553 4707.
Stock Listing
Common: New York Stock Exchange, The Electronical Stock Exchange in Switzerland,
the Australian Stock Exchange and exchanges in Brussels, Frankfurt and London
Preferred: American Stock Exchange
Ticker symbol: AA
Quarterly Common Stock Information
2001 2000
--------------------------- ----------------------------
Quarter High Low Dividend High Low Dividend
- -----------------------------------------------------------------------
First $ 39.58 $ 30.63 $ .150 $ 43.63 $ 30.41 $ .125
Second 45.71 33.75 .150 37.06 27.88 .125
Third 42.00 27.36 .150 34.94 23.25 .125
Fourth 40.50 29.82 .150 35.00 23.13 .125
- -----------------------------------------------------------------------
Year $ 45.71 $ 27.36 $ .600 $ 43.63 $ 23.13 $ .500
- -----------------------------------------------------------------------
Common Share Data
Estimated number Average shares
of shareholders* outstanding (000)
- -------------------------------------------------------------------
2001 266,800 857,990
2000 265,300 814,229
1999 185,000 733,888
1998 119,000 698,228
1997 95,800 688,904
- -------------------------------------------------------------------
* These estimates include shareholders who own stock
registered in their own names and those who own stock
through banks and brokers.
Corporate Center
Alcoa Alcoa Inc. is incorporated
201 Isabella St. at 7th St. Bridge in the Commonwealth
Pittsburgh, PA 15212-5858 of Pennsylvania.
Telephone: 1 412 553 4545
Fax: 1 412 553 4498
Internet: www.alcoa.com
66