- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
Commission file number 1-3677
ALCAN INC.
(Exact name of registrant as specified in its charter)
CANADA Inapplicable
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1188 SHERBROOKE STREET WEST, MONTREAL, QUEBEC, CANADA H3A 3G2
(Address of Principal Executive Offices and Postal Code)
(514) 848-8000
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
At June 30, 2002, the registrant had 321,256,890 shares of common stock (without
nominal or par value) outstanding.
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PART I - FINANCIAL INFORMATION
In this report, all dollar amounts are stated in U.S. dollars and all quantities
in metric tons, or tonnes, unless indicated otherwise. A tonne is 1,000
kilograms, or 2,204.6 pounds. The word "Company" refers to Alcan Inc. and, where
applicable, one or more consolidated subsidiaries.
ITEM 1. FINANCIAL STATEMENTS
ALCAN INC.
INTERIM CONSOLIDATED STATEMENT OF INCOME
(unaudited)
PERIODS ENDED JUNE 30 Second Quarter Six Months
(in millions of US$, except per share amounts) -------------------------- -----------------------
2002 2001 2002 2001
------ ------ ------ ------
(restated - note 2) (restated - note 2)
SALES AND OPERATING REVENUES 3,199 3,162 6,136 6,432
COSTS AND EXPENSES
Costs of sales and operating expenses 2,520 2,474 4,851 5,051
Depreciation and amortization 217 204 422 400
Selling, administrative and general expenses 142 138 281 271
Research and development expenses 27 34 55 67
Interest (note 12) 50 65 100 120
Restructuring, impairment and other special
charges (note 5) 7 - 21 -
Other expenses - net (notes 2 and 10) 43 54 50 122
------ ------ ------ ------
3,006 2,969 5,780 6,031
------ ------ ------ ------
Income before income taxes and other items 193 193 356 401
Income taxes (note 8) 122 101 200 159
------ ------ ------ ------
Income before other items 71 92 156 242
Equity income 2 1 3 3
Minority interests (2) (1) (2) -
------ ------ ------ ------
NET INCOME BEFORE AMORTIZATION OF GOODWILL 71 92 157 245
Amortization of goodwill (notes 2 and 7) - 18 - 36
------ ------ ------ ------
NET INCOME 71 74 157 209
Dividends on preference shares 1 2 2 4
NET INCOME ATTRIBUTABLE TO
COMMON SHAREHOLDERS 70 72 155 205
------ ------ ------ ------
NET INCOME PER COMMON SHARE BEFORE
AMORTIZATION OF GOODWILL - BASIC 0.22 0.28 0.48 0.75
Amortization of goodwill per common share - 0.05 - 0.11
------ ------ ------ ------
NET INCOME PER COMMON SHARE - BASIC (NOTE 3) 0.22 0.23 0.48 0.64
------ ------ ------ ------
NET INCOME PER COMMON SHARE - DILUTED (NOTE 3) 0.22 0.22 0.48 0.64
------ ------ ------ ------
DIVIDENDS PER COMMON SHARE 0.15 0.15 0.30 0.30
------ ------ ------ ------
The accompanying notes are an integral part of the interim financial statements.
</Table>
2
ALCAN INC.
INTERIM CONSOLIDATED STATEMENT OF RETAINED EARNINGS
(unaudited)
SIX MONTHS ENDED JUNE 30 (in millions of US$) 2002 2001
------ ------
RETAINED EARNINGS - BEGINNING OF PERIOD
As previously reported 4,095 4,290
Accounting changes (note 2)
- - Unamortized exchange loss (21) (18)
- - Impairment of goodwill as at January 1, 2002 (748) -
------ ------
As restated 3,326 4,272
Net income 157 209
Dividends
- - Common (96) (95)
- - Preference (2) (4)
------ ------
RETAINED EARNINGS - END OF PERIOD 3,385 4,382
====== =======
The accompanying notes are an integral part of the interim financial statements.
</Table>
3
ALCAN INC.
INTERIM CONSOLIDATED BALANCE SHEET
(unaudited for 2002)
(in millions of US$) June 30, 2002 December 31, 2001
- -------------------- ------------- -----------------
(restated - note 2)
ASSETS
- ------
CURRENT ASSETS
Cash and time deposits 121 119
Trade receivables
(net of allowances of $58 in 2002 and $52 in 2001) 1,415 1,216
Other receivables 424 532
Inventories
- Aluminum operating segments
- Aluminum 919 875
- Raw materials 401 413
- Other supplies 289 269
------- -------
1,609 1,557
- Packaging operating segment 428 393
------- -------
2,037 1,950
------- -------
TOTAL CURRENT ASSETS 3,997 3,817
------- -------
Deferred charges and other assets 764 716
Property, plant and equipment
- Cost (excluding Construction work in progress) 16,892 16,225
- Construction work in progress 666 613
- Accumulated depreciation (7,599) (7,136)
------- -------
9,959 9,702
------- -------
Intangible assets, net of accumulated amortization
of $41 in 2002 and $27 in 2001 (note 7) 311 298
Goodwill (note 7) 2,285 2,925
------- -------
TOTAL ASSETS 17,316 17,458
======= =======
The accompanying notes are an integral part of the interim financial statements.
</Table>
4
ALCAN INC.
INTERIM CONSOLIDATED BALANCE SHEET (CONT'D)
(unaudited for 2002)
(in millions of US$) June 30, 2002 December 31, 2001
- -------------------- -------------- -----------------
(restated - note 2)
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Payables and accrued liabilities 2,336 2,328
Short-term borrowings 397 555
Debt maturing within one year (note 10) 678 652
------- -------
3,411 3,535
------- -------
Debt not maturing within one year (note 10) 3,038 2,884
Deferred credits and other liabilities 1,253 1,131
Deferred income taxes 1,081 1,006
Minority interests 148 132
SHAREHOLDERS' EQUITY
Redeemable non-retractable preference shares 160 160
Common shareholders' equity
- Common shares 4,698 4,687
- Retained earnings 3,385 4,074
- Deferred translation adjustments 142 (151)
------- -------
8,225 8,610
------- -------
Commitments and contingencies (note 11) 8,385 8,770
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 17,316 17,458
======= =======
The accompanying notes are an integral part of the interim financial statements.
</Table>
5
ALCAN INC.
INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Second Quarter Six Months
-------------------------- -----------------------
PERIODS ENDED JUNE 30 (in millions of US$) 2002 2001 2002 2001
------ ------ ------ ------
(restated - note 2) (restated - note 2)
OPERATING ACTIVITIES
Net income 71 74 157 209
Adjustments to determine cash from operating activities:
Depreciation and amortization 217 204 422 400
Amortization of goodwill - 18 - 36
Deferred income taxes 36 17 39 (10)
Asset impairment provisions 9 - 9 -
Loss on sale of businesses - 32 - 122
Change in operating working capital
- Change in receivables 34 (28) 40 (81)
- Change in inventories (9) (14) 23 (104)
- Change in payables 5 (115) (87) (110)
---- ---- ---- -----
- Total change in operating
working capital 30 (157) (24) (295)
Change in deferred charges,
other assets, deferred credits
and other liabilities - net 40 36 64 (75)
Other-net (3) 15 (9) 8
---- ---- ---- -----
CASH FROM OPERATING ACTIVITIES 400 239 658 395
==== ==== ==== =====
The accompanying notes are an integral part of the interim financial statements.
</Table>
6
ALCAN INC.
INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS (CONT'D)
(unaudited)
Second Quarter Six Months
-------------------------- -----------------------
PERIODS ENDED JUNE 30 (in millions of US$) 2002 2001 2002 2001
------ ------ ------ ------
(restated - note 2) (restated - note 2)
FINANCING ACTIVITIES
New debt 51 584 182 1,819
Debt repayments (21) (316) (192) (1,306)
---- ---- ---- ------
30 268 (10) 513
Short-term borrowings - net (49) (525) (176) (274)
Common shares issued 4 44 10 57
Dividends
- Alcan shareholders
(including preference) (49) (49) (98) (99)
- Minority interests (2) (1) (3) (1)
---- ---- ---- ------
CASH FROM (USED FOR) FINANCING ACTIVITIES (66) (263) (277) 196
---- ---- ---- ------
INVESTMENT ACTIVITIES
Property, plant and equipment (155) (253) (262) (497)
Business acquisitions (172) (22) (172) (401)
Net proceeds from disposal of businesses,
investments and other assets 11 194 47 194
---- ---- ---- ------
CASH USED FOR INVESTMENT ACTIVITIES (316) (81) (387) (704)
Effect of exchange rate changes on cash
and time deposits 7 (2) 8 (10)
---- ---- ---- ------
INCREASE (DECREASE) IN CASH
AND TIME DEPOSITS 25 (107) 2 (123)
Cash and time deposits - beginning of period 96 245 119 261
---- ---- ---- ------
Cash and time deposits - end of period 121 138 121 138
==== ==== ==== ====
The accompanying notes are an integral part of the interim financial statements.
</Table>
7
ALCAN INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
(in millions of US$, except per share amounts)
1. ACCOUNTING POLICIES
The unaudited interim consolidated financial statements are based upon
accounting policies and methods of their application consistent with those
used and described in the Company's annual financial statements, except for
the accounting changes described in note 2. The interim financial statements
do not include all of the financial statement disclosures included in its
annual financial statements prepared in accordance with Canadian generally
accepted accounting principles (GAAP) and therefore should be read in
conjunction with the most recent annual financial statements.
2. ACCOUNTING CHANGES
Goodwill and Other Intangible Assets
On January 1, 2002, the Company adopted the new standard of the Canadian
Institute of Chartered Accountants (CICA) concerning goodwill and other
intangible assets. Under this standard, goodwill and other intangible assets
with an indefinite life are no longer amortized but are carried at the lower
of carrying value and fair value. Goodwill and other intangible assets with
an indefinite life are tested for impairment on an annual basis.
An impairment of $748 was identified in the goodwill balance as at January
1, 2002 and was charged to opening retained earnings in 2002. Any further
impairment arising subsequent to January 1, 2002 will be taken as a charge
against income. As a result of the new standard, the Company no longer
amortizes goodwill. In 2001, the amount of goodwill amortization for the
second quarter and six months was $18 and $36, respectively.
Business Combinations
As of January 1, 2002, the Company has adopted the new standard of the CICA
for business combinations. All business combinations are now required to be
accounted for under the purchase method.
Deferred Foreign Exchange Translation Gains and Losses
As of January 1, 2002, the Company no longer amortizes the exchange gains
and losses arising on the translation of long-term foreign currency
denominated monetary assets and liabilities that have a fixed or
ascertainable life extending beyond the end of the following fiscal year.
These exchange gains and losses are now absorbed in income immediately.
This standard has been applied retroactively and consequently, prior years'
financial statements have been restated. At December 31, 2001, Retained
earnings have been decreased by $21 (2000: $18) and Deferred charges and
other assets were reduced by $21 (2000: $18). In the second quarter and six
months of 2002, an exchange loss of $2 and $4 (2001: nil and $2),
respectively, on the translation of long-term foreign currency denominated
assets and liabilities, has been included in Other expenses - net. The
transfer of an unamortized exchange loss of $21 (2000: $18) to Retained
earnings from Deferred charges and other assets pertains to the long-term
foreign currency denominated monetary assets and liabilities that existed at
each year-end.
8
2. ACCOUNTING CHANGES (CONT'D)
Stock-based Compensation
The CICA issued a new standard relating to the measurement of stock options
and other stock-based compensation effective January 1, 2002. This standard
applies to awards granted after January 1, 2002 and is applied
prospectively. Also, this standard encourages but does not require that the
fair value method be used for transactions with employees. The method used
by the Company is consistent with these new requirements; therefore, the
Company is continuing to account for stock options granted to employees in
the same manner as previously done. The Company will continue to provide the
required disclosures in connection with the fair value method in its annual
financial statements. Stock compensation arrangements that can be settled in
cash result in the recognition of compensation expense. If the Company had
elected to recognize compensation expense for the options using the fair
value method prescribed by this accounting standard, net income would have
been reduced by $1 for both the second quarter and six months ended June 30,
2002. There would have been no impact on net income per common share (basic
and diluted) for both these periods.
The fair values of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for the option grant in the first quarter: dividend yield
of 1.74%; expected volatility of 34.49%, risk-free interest rate of 4.74%;
and an expected life of 6 years. The weighted average fair value of options
granted in the first quarter was $13.04 per share and is being amortized
over the vesting period.
Hedging Relationships
Beginning in 2003, the Company will adopt the new CICA accounting guideline,
which establishes certain conditions for when hedge accounting may be
applied. The Company is studying the new guideline but has not yet
determined its impact.
3. NET INCOME PER COMMON SHARE
The following table outlines the calculation of basic and diluted net income
per common share.
<Table>
<Caption>
Second Quarter Six Months
---------------- ---------------
2002 2001 2002 2001
----- ----- ----- -----
Numerator for basic and diluted net income per common share:
Net income attributable to common
shareholders (restated for 2001) 70 72 155 205
===== ===== ===== =====
Denominator (number of common shares in millions):
Denominator for basic net income per
common share - weighted average of
outstanding shares 321 320 321 319
Effect of dilutive stock options 2 1 2 1
----- ------ ----- -----
Denominator for diluted net income per
common share - adjusted weighted average
of outstanding shares 323 321 323 320
===== ====== ===== =====
Net income per common share - basic 0.22 0.23 0.48 0.64
----- ------ ----- -----
Net income per common share - diluted 0.22 0.22 0.48 0.64
----- ------ ----- -----
</Table>
As at June 30, 2002, there were 321,256,890 (2001 : 320,791,232) common
shares outstanding.
9
4. RECONCILIATION OF CANADIAN AND U.S. GAAP
Differences relate to accounting for foreign currency translation,
derivatives, post-retirement benefits, "available for sale" securities and
goodwill impairment identified as at January 1, 2002.
In 2001, the Company adopted the Financial Accounting Standards Board (FASB)
Statements 133 and 138. These standards require that all derivatives be
recorded in the financial statements and valued at market. However, the
Company has elected not to adopt the FASB's optional hedge accounting
provisions. Accordingly, for U.S. GAAP reporting purposes only, unrealized
gains and losses resulting from the valuation of derivatives at market value
are recognized in net income as the gains and losses arise and not
concurrently with the recognition of the transactions being hedged. In its
primary Canadian GAAP financial statements, the Company continues to
recognize the gains and losses on derivative contracts in income
concurrently with the recognition of the transactions being hedged. Upon
initial adoption of the FASB standards in the first quarter of 2001, the
cumulative effect of the accounting change resulted in a decrease in net
income of $12.
On January 1, 2002, the Company adopted FASB Statement 141, "Business
Combinations", and FASB Statement 142, "Goodwill and Other Intangible
Assets". Both statements are the same as recently issued Canadian accounting
standards except that goodwill impairment identified as at January 1, 2002
was charged to income as a cumulative effect of accounting change. Under
Canadian GAAP, an impairment loss of $748 was recognized as a charge to
opening retained earnings in 2002. See note 2, Accounting Changes, for a
description of the impact on the Company and see note 7, Goodwill and
Acquired Intangible Assets.
Beginning in 2002, the Company adopted FASB Statement 144, "Accounting for
Impairment or Disposal of Long-lived Assets". This statement amends previous
accounting and disclosure requirements for impairments and disposals of
long-lived assets. The provisions of this new standard are generally to be
applied prospectively.
FASB has recently issued Statement 143, "Accounting for Asset Retirement
Obligations", which will be effective for the Company's fiscal year
beginning on January 1, 2003. The Company is studying this new standard but
has not yet determined its impact.
10
4. RECONCILIATION OF CANADIAN AND U.S. GAAP (CONT'D)
RECONCILIATION OF CANADIAN AND U.S. GAAP
<Table>
<Caption>
Second Quarter Six Months
------------------ ------------------
2002 2001 2002 2001
----- ----- ----- -----
Net income - as reported 71 74 157 209
Differences due to:
- Valuation of derivatives (13) 15 54 (34)
- Other - 5 - 5
----- ----- ----- -----
Net income from continuing operations before
cumulative effect of accounting changes - U.S. GAAP 58 94 211 180
Cumulative effect on prior years of accounting changes
- Valuation of derivatives - - - (12)
- Impairment of goodwill - - (748) -
----- ----- ----- -----
Net income (loss) - U.S. GAAP 58 94 (537) 168
----- ----- ----- -----
Net income attributable to common shareholders
- as reported 70 72 155 205
----- ----- ----- -----
Net income per common share - basic 0.22 0.23 0.48 0.64
Net income per common share - diluted 0.22 0.22 0.48 0.64
Net income attributable to common shareholders
from continuing operations before cumulative
effect of accounting changes - U.S. GAAP 57 92 209 176
----- ----- ----- -----
Net income per common share - basic 0.18 0.29 0.65 0.55
Net income per common share - diluted 0.17 0.29 0.65 0.55
Net income (loss) attributable to common shareholders
- U.S. GAAP 57 92 (539) 164
----- ----- ------ -----
Net income (loss) per common share - basic
0.18 0.29 (1.68) 0.51
Net income (loss) per common share - diluted
0.17 0.29 (1.68) 0.51
</Table>
The financial statements for the first quarter of 2002 were restated to
reflect the charge of $748 for the impairment of goodwill. The restatement
resulted in a net loss of $595 under U.S. GAAP for the first quarter (net
loss per common share - basic and diluted - of $1.86).
<Table>
<Caption>
AS AT JUNE 30 2002 2001
------------- ------------------------- ------------------------
As As reported
reported U.S. GAAP (restated) U.S. GAAP
-------- --------- ------------ ---------
Deferred charges and other assets 764 777 696 721
Intangible assets, net of accumulated
amortization 311 329 303 303
Payables and accrued liabilities 2,336 2,337 2,226 2,288
Deferred credits and other liabilities 1,253 1,599 825 825
Deferred income taxes 1,081 973 1,148 1,123
Retained earnings 3,385 3,435 4,382 4,393
Deferred translation adjustments 142 86 (220) (277)
</Table>
11
4. RECONCILIATION OF CANADIAN AND U.S. GAAP (CONT'D)
<Table>
<Caption>
Second Quarter Six Months
-------------------- ------------------
COMPREHENSIVE INCOME (LOSS) 2002 2001 2002 2001
----- ---- ----- ----
Net income (loss) 58 94 (537) 168
Net change in unrealized deferred
translation adjustments 278 (60) 286 (201)
Net change in excess of market value over
book value of available-for-sale securities 6 12 10 11
Net change in minimum liability for
post-retirement benefits (77) - (77) -
---- ---- ----- ----
Comprehensive income (loss) 265 46 (318) (22)
==== ==== ===== ====
</Table>
<Table>
<Caption>
Six Months
-----------------
ACCUMULATED OTHER COMPREHENSIVE LOSS 2002 2001
---- ----
Accumulated other comprehensive loss - beginning of year (347) (61)
Net change in unrealized deferred translation adjustments 286 (201)
Deferred translation adjustments realized in net income 7 -
Net change in excess of market value over book value of available-for-sale securities 10 11
Net change in minimum liability for post-retirement benefits (77) -
----- -----
Accumulated other comprehensive loss - June 30 (121) (251)
===== =====
</Table>
As at June 30, 2002, Accumulated other comprehensive loss is comprised of
deferred translation adjustments of $86, minimum pension liability of
$(225) and unrealized gain on "available for sale" securities of $18.
12
5. RESTRUCTURING, IMPAIRMENT AND OTHER SPECIAL CHARGES
Restructuring, impairment and other special charges of $657 pre-tax, which
were recorded in the fourth quarter of 2001, included restructuring and
asset impairment charges of $411 and other special charges of $246.
Restructuring and asset impairment charges
In the fourth quarter of 2001, the Company recorded charges of $411 pre-tax
in Restructuring, impairment and other special charges as a result of a
restructuring program aimed at safeguarding its competitiveness. The aim of
the restructuring program was twofold: to make the businesses more
competitive in the face of the current economic difficulties; and to put
them in the best position to meet future industry needs. These aims will be
achieved through cost reduction measures, exiting from non-core products and
the consolidation of certain operations and will result in a series of plant
sales, closures and divestments throughout the organization. The charges
associated with this program consist of severance costs of $112 related to
workforce reductions of approximately 2,200 employees, impairment of
long-lived assets of $269 and other exit costs related to the shutdown of
facilities of $30.
The workforce reductions, which consist principally of manufacturing
employees from all segments of the Company's worldwide operations, are
comprised of:
- 500 employees - Primary Metal (principally Canada)
- 200 employees - Rolled Products, Americas and Asia
- 400 employees - Rolled Products, Europe (U.K. and Switzerland)
- 800 employees - Packaging (U.K., Canada, U.S. and other areas)
- 300 employees - Other operating segments
In the second quarter of 2002, the Company recorded additional severance
charges of $14 pre-tax in Restructuring, impairment and other special
charges principally relating to the closure of its Bracebridge plant in
Ontario, Canada (part of Engineered Products). Included in the charge of $14
is a non-cash expense of $5 relating to pension costs. Corresponding
workforce reductions of approximately 300 employees were comprised of 200
employees in Engineered Products (including 162 employees relating to the
closure of the Bracebridge plant) and 100 employees in Packaging. Also
recorded in Restructuring, impairment and other special charges in the
second quarter of 2002 was a gain of $3 pre-tax on the sale of an
investment.
13
5. RESTRUCTURING, IMPAIRMENT AND OTHER SPECIAL CHARGES (CONT'D)
As at June 30, 2002, approximately 1,400 of a total of 2,500 employees had
been terminated, consisting of approximately 400 employees in the fourth
quarter of 2001 and 1,000 employees in the first six months of 2002.
In the first quarter of 2002, the Company recorded charges of $14 pre-tax in
Restructuring, impairment and other special charges related to the
restructuring program. The charges consisted of impairment for long-lived
assets of $9 related to the exit from non-core products at its Borgofranco
plant in Italy (part of Rolled Products, Europe) and a loss of $5 on the
sale of the Company's extrusion operations in Thailand arising principally
from the realization of deferred translation losses.
Total impairment charges of $278 consisted of a charge of $269 in 2001 and a
charge of $9 in the first quarter of 2002 and related principally to
buildings, machinery and equipment and some previously capitalized project
costs. The charge consisted of $187 related to assets to be held and used
and $91 for assets held for disposal.
The impairment charge for assets to be held and used consisted of $5 for
Bauxite, Alumina and Specialty Chemicals; $22 for Primary Metal; $14 for
Rolled Products, Americas and Asia; $79 for Rolled Products, Europe; $3 for
Engineered Products; $43 for Packaging; and $21 for Other. In the context of
the Company's objective of value maximization, a detailed business portfolio
review was undertaken to identify high cost operations, excess capacity and
non-core products. The impairment charge for assets held and used arose as a
result of negative projected cash flows and recurring losses. The charges
principally related to the cold mill at the Rogerstone plant in the U.K.
(Rolled Products, Europe); the foil facilities at Glasgow, U.K. (Packaging);
and the engineered cast products plant in Quebec (Primary Metal). An
impairment provision was recorded to the extent that the net recoverable
amount, which approximates fair value based on discounted cash flows, was
below the net book value.
The impairment charge for assets held for disposal consisted of $40 for
Bauxite, Alumina and Specialty Chemicals; $8 for Rolled Products, Americas
and Asia; $31 for Rolled Products, Europe; and $12 for Packaging. In the
context of the Company's objective of value maximization, a detailed
business portfolio review was undertaken to identify high cost operations,
excess capacity and non-core products. The charges principally related to
the specialty chemicals plant at Burntisland, U.K. (Bauxite, Alumina and
Specialty Chemicals); the extrusion operations in Malaysia and Thailand
(Rolled Products, Americas and Asia); certain rolled products and recycling
operations at the Pieve and Borgofranco plants in Italy (Rolled Products,
Europe); and the Pharmatech rubber stopper and aluminum seals operations in
the U.S. (Packaging). An impairment provision was recorded to bring the net
book value to net realizable value. These assets are expected to be disposed
of by the end of 2002. The assets held for disposal had:
- sales and operating revenues of $290 in 2001 (Bauxite, Alumina and
Specialty Chemicals - $40; Rolled Products, Americas and Asia - $30;
Rolled Products, Europe - $90; Packaging - $130) and $64 and $140 in the
second quarter and six months of 2002, respectively (Bauxite, Alumina and
Specialty Chemicals - $9 and $19; Rolled Products, Americas and Asia - $3
and $13; Rolled Products, Europe - $24 and $50; and Packaging - $28 and
$58).
- net operating losses of $(20) in 2001 (Bauxite, Alumina and Specialty
Chemicals - $(10); Packaging - $(10)) and $(4) and $(7) in the second
quarter and six months of 2002, respectively (Bauxite, Alumina and
Specialty Chemicals - $(3) and $(5); and Packaging $(1) and $(2)).
- assets of $220 at December 2001 (Bauxite, Alumina and Specialty Chemicals
- $20; Rolled Products, Americas and Asia - $20; Rolled Products, Europe -
$100; Packaging - $80) and $190 at June 2002 (Bauxite, Alumina and
Specialty Chemicals - $20; Rolled Products, Americas and Asia - $10;
Rolled Products, Europe - $90; and Packaging - $70).
14
5. RESTRUCTURING, IMPAIRMENT AND OTHER SPECIAL CHARGES (CONT'D)
- liabilities of $130 at December 2001 (Bauxite, Alumina and Specialty
Chemicals - $20; Rolled Products, Americas and Asia - $10; Rolled
Products, Europe - $30; Packaging - $70) and $130 at June 2002 (Bauxite,
Alumina and Specialty Chemicals - $15; Rolled Products, Americas and
Asia - $5; Rolled Products, Europe - $40; and Packaging - $70).
The restructuring program is expected to be completed in 2002, with the
exception of the shutdown of the cold mill at the Rogerstone plant in the
U.K. in early 2003 and the closure of facilities at Glasgow, U.K. in
mid-2003 as scheduled per the Company's plans. The closure plans include the
orderly shutdown of facilities after existing customer requirements have
been satisfied and in some situations, the transfer of production operations
to other facilities. Of the reserve balance at June 30, 2002 of $105,
approximately $13 will be paid out in 2003.
The reserve balance and related cash payments for the restructuring and
asset impairment charges consisted of :
IMPAIRMENT
OF
SEVERANCE LONG-LIVED
COSTS ASSETS OTHER TOTAL
--------- ---------- ------- -----
2001:
Charges 112 269 30 411
Cash payments (7) - (7) (14)
Non-cash charges - (269) - (269)
---- ---- ---- ----
Reserve balance as at December 31 105 - 23 128
2002:
Charges 14 9 2 25
Cash payments (28) - (4) (32)
Non-cash charges (5) (9) (2) (16)
---- ---- ---- ----
Reserve balance as at June 30 86 - 19 105
==== ==== ==== ====
Other Special Charges
In 2001, the Company increased its environmental reserves by $246 pre-tax to
cover treatment costs of $150 for stored spent potlining (SPL) in Quebec and
British Columbia, Canada, as well as to cover remediation costs of $96
relating to red mud disposal and other sites in Canada and the United
Kingdom. The charges were recorded on the income statement in Restructuring,
impairment and other special charges and on the balance sheet, in Deferred
credits and other liabilities ($235) and in Payables and accrued liabilities
($11).
In the second quarter of 2002, a write-back of $4 pre-tax for a portion of
the environmental reserve relating to spent potlining that is recoverable
was recorded on the income statement in Restructuring, impairment and other
special charges and on the balance sheet, in Other receivables.
SPL, which is a waste material generated by the smelting process, needs to
be treated in a safe and environmentally sound manner. The Company's
objectives have been to find the best alternative to stockpiling SPL and
various technical studies were carried out to identify treatment
alternatives that are economically viable. Following these studies, which
were completed in 2001, and in accordance with local laws and regulations,
the Company intends to initiate a treatment program of all stored SPL. The
liability of $150 reflected the Company's best estimate of the cost to treat
the stored SPL in Quebec and to have the SPL in British Columbia treated by
a third party. The amounts will be paid over the next twenty years.
The liability of $96 relating to red mud and other disposal sites reflected
the Company's best estimate of the cost of rehabilitation. Red mud is the
normal residue associated with extracting alumina from bauxite. The charge
represents the cost to fill and seal the sites.
15
6. INTERIM INFORMATION BY OPERATING SEGMENT
The following presents selected information by operating segment, viewed on
a stand-alone basis. Effective January 1, 2002, a new operating management
structure was put in place comprised of six operating segments. The six
operating segments are Bauxite, Alumina and Specialty Chemicals; Primary
Metal; Rolled Products, Americas and Asia; Rolled Products, Europe;
Engineered Products; and Packaging. Prior to 2002, there were four operating
segments: Primary Metal; Aluminum Fabrication, Americas and Asia; Aluminum
Fabrication, Europe; and Packaging. Comparative information has been
restated to conform to the 2002 organizational structure. Transactions
between operating segments are conducted on an arm's-length basis and
reflect market prices. Thus, earnings from the Primary Metal group represent
mainly profit on metal produced by the Company, whether sold to third
parties or used in the Company's Rolled Products, Engineered Products and
Packaging groups. Earnings from the Rolled Products, Engineered Products and
Packaging groups represent only the fabricating profit on rolled, engineered
and packaging products. The accounting principles used to prepare the
information by operating segment are the same as those used to prepare the
consolidated financial statements of the Company except that the pension
costs for the operating segments are based on the normal current service
cost with all actuarial gains, losses and other adjustments being included
in Intersegment and other. Some corporate office and certain other costs
have been allocated to the respective operating segments. The operating
segments are described below.
Bauxite, Alumina and Specialty Chemicals
This segment consists of a network of bauxite mines/deposits in five
countries and alumina refineries in four countries, which supplies the
primary metal operations and third-party sales of alumina and specialty
chemicals.
Primary Metal
This segment produces primary aluminum in seven countries. The alumina is
sourced primarily from the Bauxite, Alumina and Specialty Chemicals segment
and the ingot produced is used by the Company's fabricating businesses as
well as sold to third-parties. The segment produces value-added products in
the form of sheet ingot, extrusion billet, wire bar and foundry ingot for
end-use markets in consumer goods, transportation, building and construction
and other industrial applications.
Rolled Products, Americas and Asia
This segment, which has an extensive network of 17 rolled products
facilities in North and South America and Asia, manufactures sheet and
light-gauge products, including can stock, automotive sheet and industrial
products. In addition the segment has a well-established used beverage can
recycling capability in North and South America.
Rolled Products, Europe
This segment has nine rolled products plants and serves a number of European
markets with advanced value-added sheet products, including automotive
sheet, lithographic sheet, industrial sheet, can sheet and foil stock.
Engineered Products
This segment develops, manufactures and sells value-added engineered
products for a variety of applications, including extrusions, composites,
systems and components for mass transportation and automotive applications
and electrical cables.
Packaging
This segment has 84 plants in 15 countries and is focused on serving
specific end-use markets: food, pharmaceutical, tobacco, cosmetics and some
technical applications.
Intersegment and other
This classification includes the deferral or realization of profits on
intersegment sales of aluminum as well as other non-operating items.
16
6. INTERIM INFORMATION BY OPERATING SEGMENT (CONT'D)
PERIODS ENDED JUNE 30
<Table>
<Caption>
SALES AND OPERATING REVENUES - INTERSEGMENT Second Quarter Six Months
------------------ ----------------------
2002 2001 2002 2001
----- ----- ------- -----
Bauxite, Alumina and Specialty Chemicals 187 207 374 389
Primary Metal 575 576 1,115 1,196
Rolled Products, Americas and Asia 42 47 90 96
Rolled Products, Europe 83 80 153 192
Engineered Products 3 (5) 9 10
Packaging 6 17 11 34
Intersegment and other (896) (922) (1,752) (1,917)
----- ----- ------ ------
- - - -
===== ===== ====== ======
</Table>
<Table>
<Caption>
SALES AND OPERATING REVENUES - THIRD PARTIES Second Quarter Six Months
------------------ ----------------------
2002 2001 2002 2001
----- ----- ------- -----
Bauxite, Alumina and Specialty Chemicals 111 113 212 253
Primary Metal 615 592 1,176 1,168
Rolled Products, Americas and Asia 857 855 1,639 1,728
Rolled Products, Europe 474 452 885 947
Engineered Products 430 424 828 863
Packaging 698 720 1,372 1,461
Other 14 6 24 12
----- ----- ------ ------
3,199 3,162 6,136 6,432
===== ===== ====== =====
</Table>
<Table>
<Caption>
EBITDA Second Quarter Six Months
------------------- ---------------------
2002 2001 2002 2001
----- ----- ------ -----
Bauxite, Alumina and Specialty Chemicals 63 79 127 179
Primary Metal 211 208 425 457
Rolled Products, Americas and Asia 94 76 186 162
Rolled Products, Europe 35 39 65 77
Engineering Products 27 24 54 58
Packaging 93 92 169 178
----- ----- ----- -----
EBITDA from operating segments 523 518 1,026 1,111
Depreciation and amortization (217) (204) (422) (400)
Restructuring, impairment
and other special charges (7) - (21) -
Intersegment and other (28) (37) (74) (155)
Corporate office (26) (18) (50) (32)
Interest (50) (65) (100) (120)
Income taxes (122) (101) (200) (159)
Minority interests (2) (1) (2) -
----- ----- ----- -----
NET INCOME BEFORE AMORTIZATION OF GOODWILL 71 92 157 245
----- ----- ----- -----
NET INCOME AFTER AMORTIZATION OF GOODWILL 71 74 157 209
----- ----- ----- -----
</Table>
17
7. GOODWILL AND ACQUIRED INTANGIBLE ASSETS
GOODWILL
The changes in the carrying amount of goodwill for the period ended June 30,
2002, are as follows:
Balance Balance
as at as at
January 1, Impairment June 30,
2002 losses Exchange 2002
----------- ---------- -------- --------
Bauxite, Alumina and
Specialty Chemicals 543 - - 543
Primary Metal 426 - 33 459
Rolled Products, Europe 163 163 - -
Engineered Products 466 321 12 157
Packaging 1,306 264 63 1,105
Other 21 - - 21
----------- ---------- -------- --------
Total 2,925 748 108 2,285
=========== ========== ======== ========
There were no additions to goodwill in the six month period ended June 30,
2002.
The Company completed a review to determine whether, at January 1, 2002,
there was impairment in the goodwill balance. As a result of this review, an
impairment loss of $748 was recognized as a charge to opening retained
earnings in 2002. The adjustment reflects the decline in end-market
conditions in the period from the algroup merger in October 2000 to January
1, 2002. The fair value of all reporting units was determined using
discounted future cash flows.
In 2001, changes in the carrying amount of goodwill for the year ended
December 31, 2001 were as follows:
Goodwill, net of accumulated amortization of $17 as at January 1, 2001 2,669
- Additions 394
- Exchange (62)
- Amortization (73)
- Amount related to disposal of business (3)
-----
Goodwill, net of accumulated amortization of $92 as at December 31, 2001 2,925
=====
</Table>
ACQUIRED AMORTIZED INTANGIBLE ASSETS
June 30, 2002 December 31, 2001
-------------------------------------- --------------------------------------
Gross Net Gross Net
Carrying Accumulated Book Carrying Accumulated Book
Amount Amortization Value Amount Amortization Value
-------- ------------ ----- -------- ------------ -----
Trademarks 138 16 122 127 11 116
Patented and
non-patented technology 214 25 189 198 16 182
-------- ------------ ----- -------- ------------ -----
Total 352 41 311 325 27 298
======== ============ ===== ======== ============ =====
</Table>
18
7. GOODWILL AND ACQUIRED INTANGIBLE ASSETS (CONT'D)
The aggregate amortization expenses for the second quarter and six months
ended June 30, 2002 were $6 and $11 (excluding deferred translation gains of
nil and $3), respectively. The estimated amortization expense for the five
succeeding fiscal years is approximately $22 per year.
There were no acquisitions of intangible assets in the six month period
ended June 30, 2002.
GOODWILL AND OTHER INTANGIBLE ASSETS
For periods ended June 30 Second Quarter Six Months
-------------------------- ----------------------
2002 2001 2002 2001
------ ----- ---- ----
Reported net income 71 74 157 209
Add : Goodwill amortization - 18 - 36
------ ----- ---- ----
Adjusted net income 71 92 157 245
====== ===== ==== ====
Basic earnings per share:
Reported net income 0.22 0.23 0.48 0.64
Goodwill amortization - 0.05 - 0.11
------ ----- ---- ----
Adjusted net income 0.22 0.28 0.48 0.75
====== ===== ==== ====
Diluted earnings per share:
Reported net income 0.22 0.22 0.48 0.64
Goodwill amortization - 0.05 - 0.11
------ ----- ---- ----
Adjusted net income 0.22 0.27 0.48 0.75
====== ====== ===== ====
8. INCOME TAXES
Second Quarter Six Months
-------------------------- ----------------------
2002 2001 2002 2001
---- ---- ---- ----
Current 86 84 161 169
Deferred 36 17 39 (10)
---- ---- ---- ----
122 101 200 159
==== ==== ==== ====
The composite of the applicable statutory corporate income tax rates in
Canada is 39.4% (40.1% for 2001). The difference between income taxes
calculated at the Canadian composite rate and the amounts shown as reported
is primarily attributable to exchange. In 2001, the difference is primarily
attributable to lower tax rates in foreign jurisdictions and reduced rate or
tax-exempt items, partially offset by the impact of potential future tax
benefits that were not recognized since their realization is not likely.
9. SUPPLEMENTARY INFORMATION
STATEMENT OF CASH FLOWS Second Quarter Six Months
----------------------- -------------------------- ----------------------
2002 2001 2002 2001
---- ---- ---- ----
Interest paid 61 98 118 161
Income taxes paid 112 126 65 159
19
10. LONG TERM DEBT
On January 15, 2002, the Company redeemed all of its outstanding 8.875%
$150 debentures originally due on January 15, 2022. The redemption was at
a price of 104.15%. A loss of $6 was recorded in Other expenses - net in
the first quarter of 2002.
The new debt of $51 and $182 in the second quarter and six months of 2002,
respectively, principally relates to an increase in commercial paper
borrowings.
11. COMMITMENTS AND CONTINGENCIES
In 1997, as part of the claim settlement arrangements related to the
British Columbia Government's cancellation of the Kemano Completion
Project, the Company obtained the right to transfer a portion of a power
supply contract with BC Hydro to a third party. The Company sold the right
to supply this portion to Enron Power Marketing Inc. (EPMI), a subsidiary
of Enron Corporation (Enron) for cash consideration. In order to obtain
the consent of BC Hydro to this sale, the Company was required to retain a
residual obligation for EPMI's performance of the power supply contract in
the event that EPMI became unable to perform. This contingent obligation
is subject to a maximum aggregate amount of $100, with mitigation and
subrogation rights. On December 2, 2001, EPMI and Enron filed for
protection under Chapter 11 of the U.S. Bankruptcy Code. Powerex Corp.,
the BC Hydro affiliate which now holds the rights to the portion of the
power supply contract transferred to EPMI, maintains that it has
terminated the power supply contract and as result has filed a claim for
$100 against Enron on March 15, 2002 as a necessary step prior to making
the same claim against the Company. Neither Enron nor EPMI responded to
that claim and the Company received, on March 22, 2002, a demand for
payment in the amount of $100 from Powerex Corp. The Company disputes its
obligation to pay on the demand by Powerex Corp. and is currently
defending itself in an arbitration initiated by Powerex Corp. with a
hearing date scheduled for December 2002. The Company is unable to
estimate reasonably the amount of the contingent loss which might arise in
respect of this matter and is contesting the claim on substantive and
procedural grounds as well as by reason of inadequate mitigation efforts.
In any event, the Company is of the view that any residual obligations,
which it may have as a result of its assignment of the power supply
agreement to EPMI in 1997 would relate to the supply of power and not be
in the form of a financial obligation.
Alcan, in the course of its operations, is subject to environmental and
other claims, lawsuits and contingencies. The Company has environmental
contingencies relating to approximately 30 existing and former Alcan sites
and third-party sites. Accruals have been made in specific instances where
it is probable that liabilities will be incurred and where such
liabilities can be reasonably estimated.
Although it is possible that liabilities may arise in other instances for
which no accruals have been made, the Company does not believe that such
an outcome will significantly impair its operations or have a material
adverse effect on its financial position.
12. CAPITALIZATION OF INTEREST COSTS
Total interest costs in the second quarter and six months of 2002 were $50
and $100 respectively (2001: $73 and $148) of which none were capitalized
in 2002 (2001: $8 and $28).
13. ACQUISITION OF A 20% INTEREST IN THE ALUMINERIE ALOUETTE CONSORTIUM
On April 24, 2002, the Company announced that it had completed the
acquisition of the Societe generale de financement (SGF) 20% interest in
the Aluminerie Alouette consortium at a cost of approximately $172,
subject to post-closing adjustments. The Company is in the process of
determining the allocation of the purchase price in the accounts to the
fair values of the assets acquired and liabilities assumed.
20
14. PRIOR PERIOD AMOUNTS
Certain prior period amounts have been reclassified to conform with the
2002 presentation.
In the opinion of management, all adjustments necessary for a fair presentation
of interim period results have been included in the financial statements. These
interim results are not necessarily indicative of results for the full year.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Company reported second quarter earnings per share, excluding non-recurring
items and foreign currency balance sheet translation effects, of US$0.46 per
share compared to US$0.41 per share in the second quarter of 2001 and US$0.33
per share in the first quarter of 2002.
Including non-recurring items and foreign currency balance sheet translation
effects, net income under Canadian generally accepted accounting principles
(GAAP) for the quarter was US$0.22 per share compared to US$0.23 per share in
the second quarter of 2001 and US$0.26 per share in the previous quarter.
With aluminum prices unchanged from the first quarter, the Company's higher
operating earnings were a direct result of its continued focus on cost control
and improving volumes, while cash flows also reflected continued financial
discipline.
The results for the second quarter of 2002 included a net non-recurring
after-tax charge of US$8 million (US$0.03 per share) which related mainly to the
restructuring program announced on October 17, 2001. The current quarter also
included an after-tax US$70 million loss (US$0.21 per share) for foreign
currency balance sheet translation effects resulting principally from the
strengthening of the Canadian and Australian currencies against the U.S. dollar.
Non-recurring after-tax charges and foreign currency balance sheet translation
effects were US$54 million (US$0.18 per share) in the year-ago quarter and US$21
million (US$0.07 per share) in the first quarter of 2002.
For the first six months of 2002, net income per share under GAAP was US$0.48
compared to US$0.64 for the comparable period of 2001. Excluding non-recurring
items and foreign currency balance sheet translation effects, earnings per share
were US$0.79 compared to US$0.91 during the first six months of 2001.
22
CONSOLIDATED REVIEW
SECOND QUARTER SIX MONTHS FIRST QUARTER
------------------ ---------------- -------------
(US$ millions, unless otherwise noted) 2002 2001 2002 2001 2002
----- ----- ---- ----- -----
Sales & operating revenues 3,199 3,162 6,136 6,432 2,937
Shipments (thousands of tonnes)
Ingot products1 359 342 674 653 315
Rolled products 528 493 1,025 1,012 497
Conversion of customer-owned metal 95 87 170 178 75
Aluminum used in engineered products & packaging 152 129 278 300 126
Total aluminum volume 1,134 1,051 2,147 2,143 1,013
Ingot product realizations (US$ per tonne) 1,536 1,628 1,518 1,651 1,497
Rolled product realizations (US$ per tonne)2 2,311 2,409 2,278 2,427 2,250
Average London Metal Exchange 3-month price (US$ per tonne) 1,377 1,511 1,386 1,536 1,395
Net income excluding non-recurring items and foreign currency
balance sheet translation 149 128 256 291 107
Non-recurring items (8) (17) (15) (87) (7)
Foreign currency balance sheet translation (70) (37) (84) 5 (14)
Net income including non-recurring items and foreign currency
balance sheet translation 71 74 157 209 86
Economic Value Added (EVA(R)) (167) (110) (365) (158) (198)
1 Includes primary and secondary ingot and scrap, as well as shipments resulting
from metal trading activities
2 Excluding conversion of customer owned metal
(R)EVA is a registered trademark of Stern, Stewart & Company
Largely as a result of higher volumes in most business segments, sales and
operating revenues for the quarter increased by 1% compared to the year-ago
quarter, despite significantly lower LME aluminum prices. As compared to the
previous quarter, both higher shipments in all areas and slightly higher ingot
and rolled product prices contributed to the increase in sales and operating
revenues.
Total aluminum volume was 1,134 thousand tonnes (kt) in the quarter, compared to
1,051 kt a year earlier and to 1,013 kt in the preceding quarter. Year over
year, the additional volume was from the new smelter in Alma, Quebec and the
Company's newly acquired 20% interest in the Alouette smelter, also in Quebec.
As compared to the previous quarter, the increase in volume was mainly due to
additional metal purchased for resale and production from the Alouette smelter.
Ingot product realizations of US$1,536 per tonne fell by 6% from the year-ago
quarter in line with a 9% decrease in the London Metal Exchange (LME) price.
Compared to the previous quarter, ingot product realizations increased by 3%
versus a 1% decrease in the LME price.
Rolled product realizations of US$2,311 per tonne were 4% lower than the
year-ago quarter and 3% above the previous quarter.
23
For the quarter, the net income under GAAP of US$71 million compares to a net
income of US$74 million in the year-ago quarter and to US$86 million in the
previous quarter. The comparable results to the year-ago quarter were primarily
due to improvements from the Company's restructuring and merger-related
synergies programs, higher volumes, lower interest expense and the absence of
goodwill amortization, offset by lower LME related ingot product realizations
and the unfavourable effects of foreign currency balance sheet translation. As
compared to the previous quarter, the US$15 million decrease was a result of
higher volumes that were more than offset by the unfavourable effects of foreign
currency balance sheet translation.
In 2002, the Company adopted the new accounting standard dealing with goodwill.
As a result of this change in accounting, goodwill is no longer being amortized.
This had a positive impact of US$0.05 per share in the second quarter and
US$0.06 per share in the previous quarter. Also under this standard, the Company
completed a review of goodwill and recorded an impairment charge of US$748
million as a reduction in opening retained earnings as of January 1, 2002. The
adjustment reflects the decline in end-market conditions in the period from the
algroup merger in October 2000 to January 1, 2002. This adjustment will have no
impact on the future growth of the Company, nor will it affect its cash flow.
SEGMENT REVIEW
SECOND QUARTER SIX MONTHS FIRST QUARTER
---------------- ----------------- -------------
(US$ millions) 2002 2001 2002 2001 2002
---- ---- ---- ---- ----
EBITDA
Bauxite, Alumina and Specialty Chemicals 63 79 127 179 64
Primary Metal 211 208 425 457 214
Rolled Products, Americas and Asia 94 76 186 162 92
Rolled Products, Europe 35 39 65 77 30
Engineered Products 27 24 54 58 27
Packaging 93 92 169 178 76
EBITDA from operating segments 523 518 1,026 1,111 503
Depreciation & amortization (217) (204) (422) (400) (205)
Restructuring, impairment and other special charges (7) - (21) - (14)
Intersegment and other (28) (37) (74) (155) (46)
Corporate offices (26) (18) (50) (32) (24)
Interest (50) (65) (100) (120) (50)
Income taxes (122) (101) (200) (159) (78)
Minority interests (2) (1) (2) - -
Net income before goodwill amortization 71 92 157 245 86
Net income after goodwill amortization 71 74 157 209 86
Second quarter earnings before interest, taxes, depreciation and amortization
(EBITDA) for Bauxite, Alumina and Specialty Chemicals were lower than in the
previous year, reflecting lower selling prices for alumina and bauxite and the
divestiture of Jamaican operations, partially offset by lower production costs.
EBITDA of US$63 million was unchanged from the preceding quarter.
For Primary Metal, EBITDA of US$211 million increased slightly compared to the
year-ago quarter due mainly to lower costs, better performance at the Alma
smelter, as well as the addition of Alouette. These were largely offset by lower
LME related ingot prices and the unfavourable effects of foreign currency
balance sheet translation. Compared to the preceding quarter, EBITDA was
24
essentially unchanged as higher volumes and prices were offset by the
unfavourable effects of foreign currency balance sheet translation.
EBITDA for Rolled Products, Americas and Asia, at US$94 million, was 24% higher
than in the previous year largely as a result of higher volumes in North America
and Asia along with the effective implementation of ongoing cost reduction
initiatives. Compared to the preceding quarter, EBITDA increased by 2% driven by
volume increases in North America and Asia which more than offset the time lag
in passing the change in metal prices to certain customers.
For Rolled Products, Europe, EBITDA at US$35 million was US$4 million lower than
in the previous year. Beneficial effects of higher shipments and a stronger Euro
were offset by metal valuation losses and higher wage settlements. Compared to
the first quarter of 2002, EBITDA increased by US$5 million, due mainly to
higher shipments and the strengthening Euro.
EBITDA for Engineered Products of US$27 million was US$3 million higher than in
the previous year, with no change compared to the first quarter of 2002.
Packaging Group EBITDA of US$93 million was slightly improved over the same
quarter in 2001 when market conditions were more robust, but represented a
significant improvement over the US$76 million reported in the previous quarter.
The improvement was driven both by recovering business volumes following the
downturn of the last 3 quarters, the ramp-up of benefits from restructuring,
other cost reduction programs and merger synergies, as well as a stronger Euro.
Depreciation and amortization of US$217 million was 6% higher than the year-ago
quarter largely due to the Alma smelter which reached full capacity during the
fourth quarter of 2001, as well as the acquisition of a 20% interest in the
Alouette smelter. As compared to the previous quarter, depreciation and
amortization was also 6% higher, partly due to the addition of Alouette.
The "Restructuring, impairment and other special charges" consisted mainly of
provisions for a portion of the restructuring program announced in the fourth
quarter of 2001, relating specifically to the closure of the Bracebridge cable
plant in Ontario, Canada.
"Intersegment and other" includes the deferral or realization of profits on
intersegment sales of aluminum as well as other non-operating items.
The Company's effective tax rate was 36% in the second quarter and 38% for the
first half of 2002, excluding the effects of non-recurring items and foreign
currency balance sheet translation.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
Cash generated from operating activities during the first six months of 2002 was
US$658 million compared to US$395 million in the comparable period of 2001. The
improvement was due largely to tighter controls on working capital.
FINANCING ACTIVITIES
Cash from (used for) financing activities in the first six months of 2002 was
US$(277) million compared to US$196 million in the same period in 2001. A net
amount of US$186 million of debt was repaid during the period, including the
redemption, in the first quarter, of the 8.875% US$150 million debentures that
were originally due on January 15, 2022. Debt as a percent of invested capital
at June 30, 2002 was 33%, compared to 32% at the end of the first quarter
(restated to reflect the impact of the impairment of goodwill) and 34% at the
end of the second quarter of 2001.
25
Interest expense, at US$50 million, decreased by US$15 million compared to the
previous year reflecting lower interest rates and debt levels, partially offset
by the fact that no interest was capitalized during the current quarter.
Interest expense was the same as in the previous quarter.
INVESTMENT ACTIVITIES
Capital expenditures during the first six months of 2002 were US$262 million
compared to US$497 million a year earlier. Capital expenditures were lower
principally due to the completion of the Alma smelter, which reached full
operation on September 30, 2001. Capital expenditures were considerably lower
than depreciation expense for the second quarter and first six months of 2002.
While the spending rate is expected to accelerate somewhat in the second half of
the year, capital expenditures for the full year are expected to be below
depreciation expense.
During the first six months of 2002, the Company received US$47 million (US$36
million in the first quarter) as net proceeds from the disposal of businesses,
investments and other assets, including the sale of three company-owned ships
and the sale of businesses which were announced in the fourth quarter of 2001
following a detailed portfolio review.
On April 24, 2002, the Company completed the acquisition of the Societe generale
de financement (SGF) 20% interest in the Aluminerie Alouette Consortium at a
cost of approximately US$172 million, subject to post-closing adjustments. The
Company is in the process of determining the allocation of the purchase price in
the accounts to the fair values of the assets acquired and liabilities assumed.
Alouette is a first-class aluminum smelter located in Sept-Iles, Quebec with an
annual capacity of 243,000 tonnes with a significant low-cost expansion
potential.
CURRENCY HEDGING OF AUSTRALIAN DOLLAR
At June 30, 2002, the Company has hedged AUD $717 million of its future
Australian dollar commitments in respect of its Australian dollar exposure,
through forward exchange contracts and options maturing over the next two years.
CAUTIONARY STATEMENT
Readers are cautioned that forward looking statements contained in this
Management's Discussion and Analysis should be read in conjunction with
"Cautionary Statements for Purposes of the Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995" at Exhibit No. 99.
26
PART II. OTHER INFORMATION
ITEMS 1. THROUGH 5.
The registrant has nothing to report under these items.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(3.1) Amendments to the Articles
(3.2) Amendments to By-Law No. 1A
(4) Re-Confirmation of the Shareholder Rights Plan
(99) Cautionary statement for purposes of the
"Safe Harbor" provisions of the Private
Securities Litigation Reform Act of 1995.
(Filed herewith)
(b) Reports on Form 8-K
No reports were filed during the quarter ended 30 June 2002.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALCAN INC.
Dated: August 14, 2002 By: /s/ Glenn R. Lucas
------------------------
Glenn R. Lucas
Vice President and Treasurer
(A Duly Authorized Officer)
27
EXHIBIT INDEX
Exhibit
Number Description
(3.1) Amendments to the Articles
(3.2) Amendments to By-Law No. 1A
(4) Re-Confirmation of the Shareholder Rights Plan
(99) Cautionary statement for purposes of the "Safe Harbor" provisions of the Private Securities Litigation Reform
Act of 1995. (Filed herewith.)
28