FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1997 Commission File Number 1-3610
ALUMINUM COMPANY OF AMERICA
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0317820
(State of incorporation) (I.R.S. Employer Identification No.)
425 Sixth Avenue - Alcoa Building, Pittsburgh, Pennsylvania
15219-1850
(Address of principal executive offices) (Zip Code)
Office of Investor Relations 412-553-3042
Office of the Secretary 412-553-4707
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
As of July 29, 1997, 173,926,539 shares of common stock, par
value $1.00, of the Registrant were outstanding.
-1-
PART I - FINANCIAL INFORMATION
Alcoa and subsidiaries
Condensed Consolidated Balance Sheet
(in millions)
<TABLE>
<CAPTION>
(unaudited)
June 30 December 31
ASSETS 1997 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents (includes cash of
$100.2 in 1997 and $93.4 in 1996) $ 882.3 $ 598.1
Short-term investments 74.5 18.5
Accounts receivable from customers, less
allowances:
1997-$44.6; 1996-$48.4 1,823.3 1,674.7
Other receivables 112.0 154.2
Inventories (b) 1,345.3 1,461.4
Deferred income taxes 165.6 159.9
Prepaid expenses and other current assets 210.7 214.4
-------- --------
Total current assets 4,613.7 4,281.2
-------- --------
Properties, plants and equipment, at cost 15,576.1 15,729.9
Less, accumulated depreciation, depletion and
amortization 8,699.1 8,652.4
-------- --------
Net properties, plants and equipment 6,877.0 7,077.5
-------- --------
Other assets 2,041.5 2,091.2
-------- --------
Total assets $13,532.2 $13,449.9
======== ========
LIABILITIES
Current liabilities:
Short-term borrowings $ 223.4 $ 206.5
Accounts payable, trade 818.3 799.2
Accrued compensation and retirement costs 397.9 404.3
Taxes, including taxes on income 433.6 407.9
Other current liabilities 299.8 377.0
Long-term debt due within one year 183.9 178.5
-------- --------
Total current liabilities 2,356.9 2,373.4
-------- --------
Long-term debt, less amount due within one year 1,608.7 1,689.8
Accrued postretirement benefits 1,777.2 1,791.2
Other noncurrent liabilities and deferred credits 1,413.8 1,205.5
Deferred income taxes 300.3 317.1
-------- --------
Total liabilities 7,456.9 7,377.0
-------- --------
MINORITY INTERESTS 1,465.4 1,610.5
-------- --------
SHAREHOLDERS' EQUITY
Preferred stock 55.8 55.8
Common stock 178.9 178.9
Additional capital 582.5 591.9
Translation adjustment (223.3) (93.1)
Retained earnings 4,366.0 4,082.6
Net unrealized gains - securities available for sale 17.4 23.4
Unfunded pension obligation (6.5) (5.8)
Treasury stock, at cost (360.9) (371.3)
------- -------
Total shareholders' equity 4,609.9 4,462.4
-------- -------
Total liabilities and shareholders' equity $13,532.2 $13,449.9
======== ========
The accompanying notes are an integral part of the financial
statements.
</TABLE>
-2-
Alcoa and subsidiaries
Condensed Statement of Consolidated Income (unaudited)
(in millions, except per share amounts)
<TABLE>
<CAPTION>
Second quarter Six months
ended ended
June 30 June 30
------- -------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Sales and operating revenues $3,432.0 $3,413.1 $6,663.1 $6,562.7
Other income (expense) 37.7 (9.6) 79.0 18.6
------- ------- ------- -------
3,469.7 3,403.5 6,742.1 6,581.3
------- ------- ------- -------
COSTS AND EXPENSES
Cost of goods sold and operating expenses 2,602.1 2,576.3 5,091.1 4,922.8
Selling, general administrative and other
expenses 160.5 182.1 319.5 351.4
Research and development expenses 34.7 38.0 70.3 77.9
Provision for depreciation, depletion and
amortization 181.1 190.5 363.7 373.8
Interest expense 33.4 33.4 70.7 65.7
Taxes other than payroll and severance
taxes 33.9 33.1 67.7 66.6
Special items (c) - 65.4 (4.6) 65.4
------- ------- ------- -------
3,045.7 3,118.8 5,978.4 5,923.6
------- ------- ------- -------
EARNINGS
Income before taxes on income 424.0 284.7 763.7 657.7
Provision for taxes on income (d) 148.0 97.0 266.9 223.8
------- ------- ------- -------
Income from operations 276.0 187.7 496.8 433.9
Less: Minority interests' share (68.4) (55.5) (130.1) (123.5)
------- ------- ------- -------
NET INCOME $ 207.6 $ 132.2 $ 366.7 $ 310.4
======= ======= ======= =======
Earnings per common share (e) $ 1.19 $ .76 $ 2.11 $ 1.77
======= ======= ======= =======
Dividends paid per common share $ .25 $ .3325 $ .475 $ .665
======= ======= ======= =======
The accompanying notes are an integral part of the financial
statements.
</TABLE>
-3-
Alcoa and subsidiaries
Condensed Statement of Consolidated Cash Flows (unaudited)
(in millions)
<TABLE>
<CAPTION>
Six months ended
June 30
-------
1997 1996
---- ----
<S> <C> <C>
CASH FROM OPERATIONS
Net income $ 366.7 $ 310.4
Adjustments to reconcile net income to cash from
operations:
Depreciation, depletion and amortization 371.4 381.7
Reduction of assets to net realizable value - 46.2
Increase in deferred income taxes 4.4 56.9
Equity income before additional taxes, net of dividends (13.6) (3.8)
Provision for special items (4.6) 19.2
Book value of asset disposals 14.5 29.6
Minority interests 130.1 123.5
Other (11.1) (1.3)
Increase in receivables (146.6) (96.4)
Reduction (increase) in inventories 59.9 (89.1)
Increase in prepaid expenses and other current assets (1.9) (19.7)
Reduction in accounts payable and accrued expenses (55.6) (116.9)
Increase in taxes, including taxes on income 49.2 35.7
Cash received on long-term alumina supply contract 240.0 -
Reduction in deferred hedging gains (60.1) (87.3)
Net change in noncurrent assets and liabilities (9.3) (69.4)
------- -------
CASH FROM OPERATIONS 933.4 519.3
------- -------
FINANCING ACTIVITIES
Net changes in short-term borrowings 17.7 113.8
Common stock issued and treasury stock sold 151.1 36.5
Repurchase of common stock (150.1) (202.0)
Dividends paid to shareholders (83.3) (119.9)
Dividends paid and return of capital to minority interests (257.5) (102.6)
Additions to long-term debt 362.2 202.0
Payments on long-term debt (430.3) (377.6)
------- -------
CASH USED FOR FINANCING ACTIVITIES (390.2) (449.8)
------- -------
INVESTING ACTIVITIES
Capital expenditures (408.6) (395.0)
Acquisitions, net of cash acquired - (171.5)
Proceeds from the sale of assets 193.2 82.8
Additions to investments (.7) (50.1)
Net change in short-term investments (56.1) (32.5)
Changes in minority interests 24.4 (10.0)
Loan to WMC - 121.8
Other - receipts .3 -
- payments (7.1) (8.3)
------- -------
CASH USED FOR INVESTING ACTIVITIES (254.6) (462.8)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (4.4) 4.5
------- -------
CHANGES IN CASH
Net change in cash and cash equivalents 284.2 (388.8)
Cash and cash equivalents at beginning of year 598.1 1,055.6
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 882.3 $ 666.8
======= =======
The accompanying notes are an integral part of the financial
statements.
</TABLE>
-4-
Notes to Condensed Consolidated Financial Statements
(in millions, except share amounts)
Notes:
(a) Summarized consolidated financial data for Alcoa
Aluminio S.A. (Aluminio) and Alcoa of Australia
Limited (AofA) begin on page 17.
(b) Inventories consisted of:
June 30 December 31
1997 1996
------- -----------
Finished goods $ 374.3 $ 403.1
Work in process 400.8 421.1
Bauxite and alumina 244.9 283.1
Purchased raw materials 214.0 235.5
Operating supplies 111.3 118.6
------- -------
$1,345.3 $1,461.4
======= =======
Approximately 55% of total inventories at June 30, 1997
was valued on a LIFO basis. If valued on an average
cost basis, total inventories would have been $781.5
and $753.7 higher at June 30, 1997 and December 31,
1996, respectively.
(c) Special items in the 1997 six-month period were the
result of asset sales, increases to environmental
reserves and an impairment at a U.S. manufacturing
facility. The special charge of $65.4 ($40.0 after tax)
in the 1996 second quarter was for the closing of Alcoa
Electronic Packaging (AEP), Alcoa's ceramic packaging
operations in San Diego, California. Most of the charge
was related to asset write-offs.
(d) The income tax provision for the period is based on the
effective tax rate expected to be applicable for the
full year. Lower taxes on foreign income were offset by
higher taxes on asset sales, resulting in a 35%
effective tax rate for 1997.
(e) The following formula is used to compute primary
earnings per common share (EPS):
EPS = Net income - preferred dividend requirements
--------------------------------------------
Weighted average number of common shares
outstanding for the period
The average number of shares used to compute EPS was
173,139,325 in 1997 and 175,254,973 in 1996. Fully
diluted earnings per share are not stated since the
dilution is not material.
-5-
(f) On July 29, 1997, Alcoa and SEPI, the Spanish State
Entity for Industrial Participation, jointly announced
that they had signed an agreement under which Alcoa
will acquire the main sectors of the aluminum business
of Inespal, S.A. of Madrid. Alcoa will pay
approximately $410 for substantially all of Inespal's
businesses. Inespal is an integrated aluminum
producer with 1996 revenues of $1.1 billion. The
acquisition includes an alumina refinery, three
aluminum smelters, three aluminum rolling facilities,
two extrusion plants, an administrative center and
related sales offices in Europe. The acquisition is
subject to government approval.
(g) On April 21, 1997, Alcoa announced that it had signed
a Letter of Intent with Reynolds Metals Company to
acquire Reynolds' rolling mill in Muscle Shoals,
Alabama, two nearby can reclamation plants and a coil
coating facility in Sheffield, Alabama. The
transaction is subject to regulatory approval and
other closing conditions and should be completed in
the second half of the year. Upon closing, the
companies expect to enter a long-term agreement under
which Alcoa would become a major supplier of can sheet
to Reynolds or its successor if Reynold's Can Division
is sold, leased or transferred.
-6-
In the opinion of the Company, the financial statements
and summarized financial data in this Form 10-Q include
all adjustments, including those of a normal recurring
nature, necessary to fairly state the results for the
periods. This Form 10-Q should be read in conjunction
with the Company's annual report on Form 10-K for the
year ended December 31, 1996.
The financial information required in this Form 10-Q by
Rule 10-01 of Regulation S-X has been subject to review
by Coopers & Lybrand L.L.P., the Company's independent
certified public accountants, as described in their
report on page 8.
-7-
Independent Auditor's Review Report
To the Shareholders and Board of Directors
Aluminum Company of America (Alcoa)
We have reviewed the unaudited condensed consolidated
balance sheet of Alcoa and subsidiaries as of June 30,
1997, the unaudited condensed statements of consolidated
income for the three-month and six-month periods ended
June 30, 1997 and 1996, and condensed consolidated cash
flows for the six-month periods ended June 30, 1997 and
1996, which are included in Alcoa's Form 10-Q for the
period ended June 30, 1997. These financial statements
are the responsibility of Alcoa's management.
We conducted our review in accordance with standards
established by the American Institute of Certified Public
Accountants. A review of interim financial information
consists principally of applying analytical procedures to
financial data and making inquiries of persons
responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards,
the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the condensed
consolidated financial statements referred to above for
them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with
generally accepted auditing standards, the consolidated
balance sheet of Alcoa and subsidiaries as of December
31, 1996, and the related statements of consolidated
income, shareholders' equity, and cash flows for the year
then ended (not presented herein). In our report dated
January 8, 1997, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1996 is
fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been
derived.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Pittsburgh, Pennsylvania
July 7, 1997
-8-
Management's Discussion and Analysis of the
Results of Operations and Financial Condition
(dollars in millions, except share amounts)
<TABLE>
<CAPTION>
Results of Operations
Principal income and operating data follow.
Second quarter ended Six months ended
June 30 June 30
------- -------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales and operating revenues $3,432.0 $3,413.1 $6,663.1 $6,562.7
Net income 207.6 132.2 366.7 310.4
Earnings per common share 1.19 .76 2.11 1.77
Shipments of aluminum products (1) 760 721 1,480 1,377
Shipments of alumina (1) 1,780 1,656 3,549 3,161
<FN>
(1) in thousands of metric tons (mt)
</TABLE>
Overview
Alcoa earned $207.6 or $1.19 per common share for the second
quarter of 1997, compared with $132.2 or 76 cents per share, in
the 1996 second quarter. Second quarter 1996 earnings included
an after-tax charge of $40.0, or 23 cents per share, related to
the shutdown of Alcoa's ceramic packaging operations in San
Diego, California. Before the charge, the Company had earnings
of $172.2, or 99 cents per share. For the first half of 1997
earnings were $366.7, or $2.11 per share, and included special
charges of $1.1 related to asset sales, increases to
environmental reserves and an impairment at a U.S. manufacturing
facility. This compares with $310.4, or $1.77 per share, in the
1996 six-month period which included the $40.0 charge related to
the shutdown of ceramic packaging operations noted above.
AofA's pretax income from operations for the 1997 second quarter
and year-to-date periods was up $1.7 and $5.5, respectively, from
the comparable 1996 periods. Increased alumina and ingot
volumes, partially offset by lower prices for both products,
generated the increases.
In Brazil, Aluminio's second quarter and year-to-date 1997 pretax
income from operations increased $14.0 and $6.5, respectively,
from the comparable 1996 periods. Revenues grew 6% from the 1996
second quarter but increased only 2% over the 1996 six-month
period. Aluminio's results reflect improved volumes and prices
for ingot, lower costs related to packaging operations and higher
volumes for fabricated products, partially offset by lower
fabricated product prices.
-9-
Consolidated revenues and shipment information by segment
follows.
<TABLE>
<CAPTION>
Alumina and Chemicals Segment
Second quarter ended Six months ended
June 30 June 30
------- -------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Alumina and chemicals revenues $ 499 $ 504 $ 994 $ 966
Alumina shipments (000 mt) 1,780 1,656 3,549 3,161
</TABLE>
Total revenues for the Alumina and Chemicals segment in the 1997
second quarter fell slightly when compared with the 1996 second
quarter. Year-to-date, revenues increased 3% from the 1996
period.
Alumina revenues for the 1997 second quarter were down slightly
as shipments increased 7% and prices fell 8%. Year-to-date,
revenues increased 4% as shipments increased 12% over the 1996
six-month period. Alumina prices have shown improvement over
1997 first quarter levels but remain below prices realized in
the 1996 first half.
The entities jointly owned by Alcoa and WMC Limited of Australia
(WMC), known as Alcoa World Alumina and Chemicals (AWAC),
produced 2,583 mt of alumina during the 1997 second quarter,
compared with 2,527 mt in the comparable 1996 period. Of the
1997 second quarter amount, 1,780 mt was shipped to third-party
customers.
During the 1997 second quarter, AWAC received an advance payment
of $240.0 related to a long-term alumina supply contract with
Sino Mining Alumina Ltd. (SMAL). The contract entitles SMAL to
400,000 mt of alumina per year for 30 years. SMAL has the option
to increase its alumina purchases as its needs grow. Per-ton
payments will also be made under the terms of the agreement.
<TABLE>
<CAPTION>
Aluminum Processing Segment
Second quarter ended Six months ended
June 30 June 30
Product classes 1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Shipments (000 mt)
Flat-rolled products 369 348 698 685
Aluminum ingot 227 223 457 424
Engineered products 144 132 287 234
Other aluminum products 20 18 38 34
----- ----- ----- -----
Total 760 721 1,480 1,377
Revenues
Flat-rolled products $1,051 $1,011 $1,948 $2,017
Aluminum ingot 379 380 759 704
Engineered products 639 619 1,244 1,138
Other aluminum products 74 84 149 162
----- ----- ----- -----
Total $2,143 $2,094 $4,100 $4,021
</TABLE>
-10-
Flat-rolled products - The majority of revenues and shipments for
flat-rolled products are derived from rigid container sheet
(RCS), which is used to produce aluminum beverage can bodies and
can ends. Despite lower prices, 1997 second quarter RCS revenues
were 7% higher than the comparable 1996 period as shipments
increased 12%. However, year-to-date RCS revenues fell 11% as
prices were 7% below 1996 levels and volume was down 5%.
Overall, flat-rolled products revenues were up 4% for the second
quarter and down 3% for the six-month period, reflecting customer
inventory adjustments in the 1997 first quarter.
Sheet and plate shipments in the 1997 second quarter were up 9%
compared with the 1996 quarter and 12% on a year-to-date basis.
Prices were stable in both periods, resulting in revenue
increases of 11% for both the 1997 second quarter and six-month
periods.
Aluminum ingot - Revenues for this product were flat when
compared with the 1996 second quarter as a 2% increase in
shipments was offset by a slight decline in prices. Year-to-
date, revenues rose 8% on a similar increase in shipments. Ingot
pricing has been relatively flat in 1997 as the London Metal
Exchange (LME) 3-month price is comparable to its level at the
beginning of the year. In contrast, LME inventories have fallen
29% over the same period.
Engineered products - These products include extrusions used in
the transportation and construction markets, aluminum forgings
and wire, rod and bar. Revenues from the sale of engineered
products increased 3% in the 1997 second quarter while shipments
rose 9%. Average prices fell by 6% from the 1996 quarter. Year-
to-date, revenues and shipments were up 9% and 22%, respectively.
The Alumix acquisition by Alcoa Italia in 1996 contributed
approximately half of the increase in revenues on a year-to-date
basis.
Revenues for extruded products were higher by 4% and 16% from the
1996 second quarter and six-month periods. Prices fell 5% and 8%
over the same periods, while shipments were up 9% and 26%,
respectively. The primary reasons for the shipment and revenue
increases are the Alumix acquisition noted above and increased
shipments of hard alloy extrusions to the aerospace industry.
Revenues from forged aluminum wheels increased 13% and 8% from
the 1996 quarter and six-month periods. The increases were
driven by higher shipments of 17% and 11% for the quarter and
six-month periods, as prices fell when compared with those in
the 1996 period.
Other aluminum products - Revenues from sales of other aluminum
products for the 1997 quarter and year-to-date periods were 12%
and 8% lower than those in the respective 1996 periods. The
declines were primarily due to the sale of Alcoa's Richmond,
Indiana closure facility in the 1997 second quarter.
-11-
Nonaluminum Segment
Revenues for the Nonaluminum Segment were $790 in the 1997 second
quarter, down 3% from the 1996 quarter. The decrease is due to
the dispositions of Alcoa Composites, Norcold, Dayton
Technologies and Caradco in the 1997 first and second quarters,
partially offset by a 21% increase in revenue at Alcoa Fujikura
Ltd. (AFL). The revenue increase at AFL is due to higher
shipments of automotive electrical components. Year-to-date,
revenues for this segment were $1,569, down 1% from the 1996
period as the above-mentioned dispositions and lower revenues
from magnesium production were again nearly offset by improved
revenues at AFL.
Cost of Goods Sold
Cost of goods sold increased $25.8, or 1%, from the 1996 second
quarter. Year-to-date, the increase was $168.3, or 3%. The
increases reflect higher volumes in aluminum, alumina and at AFL.
These increases were nearly offset by improved cost performance.
Cost of goods sold as a percentage of revenues was 76.4%, or 1.4
points higher than in the 1996 year-to-date period. The higher
ratio is primarily due to lower aluminum selling prices.
Other Income & Expenses
Other income totaled $37.7 for the 1997 second quarter, an
increase of $47.3 from the 1996 period. Losses from mark-to-
market metal trading activities declined $47.0 from the 1996
quarter resulting in the increase. For the 1997 six-month
period, other income increased $60.4 again due to reduced
losses from mark-to-market activities partially offset by
lower interest income.
Selling, general and administrative expenses decreased $21.6 and
$31.9 from the year-ago quarter and six-month periods. The
primary factors that resulted in the declines were lower spending
as Alcoa's efforts to reduce administrative expenses take hold
and the dispositions mentioned above.
Interest expense was up $5.0 from the 1996 six-month period due
to higher borrowings at Aluminio and at Alcoa Italia related to
the Alumix acquisition.
The income tax provision for the period is based on the effective
tax rate expected to be applicable for the full year. Lower
taxes on foreign income were offset by higher taxes on asset
sales, resulting in a 35% effective tax rate for 1997.
Minority interests' share of income from operations increased 23%
from the 1996 second quarter and 5% year-to-date, primarily
reflecting higher earnings by Aluminio, AFL and AofA.
Commodity Risks
Alcoa is a leading global producer of aluminum ingot and aluminum
fabricated products. Aluminum ingot is an internationally
priced, sourced and traded commodity. The principal trading
market for ingot is the London Metal Exchange (LME). Alcoa
participates in this market by buying and selling forward
portions of its aluminum requirements and output.
In the U.S., and for export, Alcoa enters into long-term
contracts with a number of its customers. At December 31, 1996,
such contracts totaled approximately 2,369,000 mt. Alcoa may
enter into similar arrangements in the future.
-12-
As a hedge against the risk of higher prices for anticipated
metal purchases to fulfill long-term customer contracts, Alcoa
entered into long positions, principally using futures and
options. At June 30, 1997 and December 31, 1996, these contracts
totaled approximately 833,000 mt and 872,000 mt, respectively.
Alcoa follows a fairly stable pattern of purchasing metal;
therefore it is highly likely that the anticipated metal
requirements will be met.
The futures and options contracts limit the unfavorable effect of
price increases on metal purchases and likewise limit the
favorable effect from price declines. The contracts are with
creditworthy counterparties and are further supported by cash,
treasury bills, or irrevocable letters of credit issued by
carefully chosen banks.
For financial accounting purposes, the gains and losses on the
hedging contracts are reflected in earnings concurrent with the
hedged costs. The cash flows from these contracts are classified
in a manner consistent with the underlying nature of the
transactions.
Alcoa intends to close out the hedging positions at the time it
purchases the metal from third parties, thus creating the right
economic match both in time and price. The deferred gains on the
hedging contracts of $164 at June 30, 1997 are expected to offset
the increase in the price of the purchased metal.
The expiration dates of the call options and the delivery dates
of the futures contracts do not always coincide exactly with the
dates on which Alcoa is required to purchase metal to meet its
contractual commitments with customers. Accordingly, some of
the futures and option positions will be rolled forward. This
may result in significant cash inflows if the hedging contracts
are "in-the-money" at the time they are rolled forward.
Conversely, there could be significant cash outflows, as was
the case in 1996, if metal prices fall below the price of
contracts being rolled forward.
In addition, Alcoa had 206,000 mt and 205,000 mt of LME contracts
outstanding at June 30, 1997 and December 31, 1996, respectively,
that cover long-term fixed-price commitments to supply customers
with metal from internal sources. Accounting convention requires
that these contracts be marked-to-market, which resulted in
after-tax losses of $7.1 and $33.8 for the quarters ended
June 30, 1997 and 1996, respectively.
Alcoa also purchases certain other commodities, such as gas and
copper, for its operations and enters into futures contracts to
eliminate volatility in the prices of such products. None of
these contracts are material.
Financial Risk
Alcoa is subject to significant exposure from fluctuations in
foreign currencies. As a matter of company policy, foreign
currency exchange contracts, including forwards and options, are
used to manage transactional exposure to changes in currency
exchange rates. The forward contracts principally cover firm
commitments. Options are generally used to hedge anticipated
transactions.
-13-
Alcoa also attempts to maintain a reasonable balance between
fixed and floating rate debt and uses interest rate swaps and
caps to keep financing costs as low as possible.
Risk Management
All of the aluminum and other commodity contracts, as well as
the various types of financial instruments, are straightforward.
They are used primarily to mitigate uncertainty and volatility,
and principally cover underlying exposures.
Alcoa's commodity and derivative activities are subject to the
management, direction and control of the Strategic Risk
Management Committee (SRMC). It is composed of the chief
executive officer, the president, the chief financial officer
and other officers and employees as the chief executive officer
may select from time to time. The SRMC reports to the Board of
Directors at each of its scheduled meetings on the scope of its
derivatives activities.
Environmental Matters
Alcoa continues to participate in environmental assessments
and cleanups at a number of locations, including operating
facilities and their adjoining property; at previously owned
or operated facilities; and at Superfund and other waste
sites. A liability is recorded for environmental remediation
costs or damages when a cleanup program becomes probable and
the costs or damages can be reasonably estimated.
As assessments and cleanups proceed, the liability is
adjusted based on progress in determining the extent of
remedial actions and related costs and damages. The
liability can change substantially due to factors such as the
nature or extent of contamination, changes in remedial
requirements and technological changes.
For example, there are certain matters, including several
related to alleged natural resource damage or alleged off-
site contaminated sediments, where investigations are
ongoing. It is not possible to determine the outcomes or to
estimate with any degree of certainty the ranges of potential
costs for these matters.
Alcoa's remediation reserve balance at the end of the 1997
second quarter was $257 and reflects the most probable costs
to remediate identified environmental conditions for which
costs can be reasonably estimated. Approximately 27% of the
reserve relates to Alcoa's Massena, NY plant site and 18%
relates to Alcoa's Pt. Comfort, TX plant site. Remediation
expenditures charged to the reserve during the 1997 second
quarter were $17. They include expenditures currently
mandated as well as those not required by any regulatory
authority or third party.
Included in ongoing 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.
-14-
Liquidity and Capital Resources
Cash from Operations
Cash from operations during the 1997 six-month period was $933.4,
a $414.1 increase from the comparable 1996 period. A $240.0 cash
payment on a long-term alumina supply contract, lower working
capital requirements and higher earnings in the 1997 period
generated the increase.
Financing Activities
Financing activities used $390.2 of cash during the first six
months of 1997. This included $150.1 to repurchase 2,142,835
shares of the Company's common stock. Stock purchases were
offset by $151.1 of common stock issued primarily for employee
benefit plans. Dividends paid to shareholders were $83.3 in the
1997 six-month period, a decrease of $36.6 over the 1996 period.
The decrease was due to Alcoa's bonus dividend program, which
paid out 10.75 cents in addition to the base dividend in each
quarter of 1996. In March 1997 Alcoa raised its quarterly base
dividend from 22.5 to 25 cents per share, an 11% increase.
Dividends paid and return of capital to minority interests
totaled $257.5 as AWAC and AofA returned funds to their investors
during the 1997 second quarter. Payments on long-term debt
during the first six months of 1997 exceeded additions by $68.1.
Debt as a percentage of invested capital was 20.9% at the end of
the 1997 second quarter, a slight decrease over the 21.8%
recorded at year-end 1996.
Investing Activities
Investing activities used $254.6 during the 1997 six-month
period, compared with $462.8 in the 1996 period. Capital
expenditures totaled $408.6, while $193.2 was received from the
sale of Alcoa's Caradco, Arctek, Alcoa Composites, Norcold,
Dayton Technologies and Richmond, Indiana facilities. In the
1996 period, Alcoa used $171.5 to purchase the operating assets
of Alumix in Italy and also received $121.8 from WMC which was
originally loaned in January, 1995.
-15-
Accounting Rule Change
Two new accounting rules, FAS 130 - Reporting Comprehensive
Income and FAS 131 - Disclosures about Segments of an Enterprise
and Related Information were issued in June 1997. The
implementation of FAS 130 will require that the components of
comprehensive income be reported in the financial statements.
The implementation of FAS 131 will require the disclosure of
segment information utilizing the approach that the company uses
to manage its internal organization. The company is currently
assessing the impact that the new standards will have on its
financial statements. Implementation of both of these new
standards is required for calendar year 1998.
A new accounting rule, FAS 128 - Earnings per Share (EPS), was
issued in February 1997. The implementation will require the
disclosure of basic (currently referred to as primary) and
diluted (currently referred to as fully diluted) EPS. The
calculation of basic EPS under the new rule will not change from
the current calculation of primary EPS. The calculation of
diluted EPS under the new rule will not be materially different
from the current calculation of fully diluted EPS, which is
available in Exhibit-11 of this document. Implementation of this
new standard will begin as of December 31, 1997.
Other
The company, with the assistance of outside consulting resources,
is in the process of conducting a review of its computer systems
to identify areas that could be affected by the "Year 2000"
issue. An implementation plan will then be developed to resolve
the issues identified. The Year 2000 issue is the result of
computer programs being written using two digits (rather than
four) to define the applicable year. This could result in
computational errors as dates are compared across the century
boundary. The total cost of altering the applicable program code
is being determined as part of the company's detailed
implementation plan.
-16-
Alcoa and subsidiaries
Summarized unaudited consolidated financial data for Aluminio, a
Brazilian subsidiary effectively owned 59% by Alcoa, follow.
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
---- ----
<S> <C> <C>
Cash and short-term investments $ 284.8 $ 269.1
Other current assets 437.6 441.2
Properties, plants and equipment, net 886.8 897.5
Other assets 218.6 235.0
------- -------
Total assets 1,827.8 1,842.8
------- -------
Current liabilities 415.3 404.0
Long-term debt 426.8 492.5
Other liabilities 64.6 62.1
-------- --------
Total liabilities 906.7 958.6
-------- --------
Net assets $ 921.1 $ 884.2
======== ========
</TABLE>
<TABLE>
<CAPTION>
Second quarter ended Six months ended
June 30 June 30
--------------- ---------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues (1) $ 316.3 $ 299.8 $ 604.5 $ 591.0
Costs and expenses (293.5) (291.1) (559.3) (553.1)
Translation and exchange adjustments - .1 (.1) .7
Income tax (expense) benefit (4.5) 3.0 (9.0) (1.2)
------- ------- ------- -------
Net income $ 18.3 $ 11.8 $ 36.1 $ 37.4
======= ======= ======= =======
Alcoa's share of net income $ 10.8 $ 7.0 $ 21.3 $ 22.1
======= ======= ======= =======
<FN>
(1) Revenues from Alcoa and its subsidiaries, the terms of which
were established by negotiations between the parties, follow.
Second quarter ended June 30: 1997 - $2.5, 1996 - $3.7
Six months ended June 30: 1997 - $4.9, 1996 - $6.3
</TABLE>
-17-
Alcoa and subsidiaries
Summarized unaudited consolidated financial data for AofA, an
Australian subsidiary, 60% owned by Alcoa, follow.
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
---- ----
<S> <C> <C>
Cash and short-term investments $ 44.0 $ 13.9
Other current assets 490.9 522.4
Properties, plants and equipment, net 1,575.9 1,695.4
Other assets 101.0 108.6
------- -------
Total assets 2,211.8 2,340.3
------- -------
Current liabilities 307.3 341.9
Long-term debt 356.1 131.0
Other liabilities 412.2 435.7
------- -------
Total liabilities 1,075.6 908.6
------- -------
Net assets $1,136.2 $1,431.7
======= =======
</TABLE>
<TABLE>
<CAPTION>
Second quarter ended Six months ended
June 30 June 30
------- -------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues (1) $ 504.5 $ 523.9 $ 996.2 $1,009.5
Costs and expenses (383.4) (404.5) (747.7) (766.5)
Income tax (expense) benefit (42.7) (43.4) (89.6) (87.1)
------ ------ ------ -------
Net income $ 78.4 $ 76.0 $ 158.9 $ 155.9
====== ====== ====== =======
Alcoa's share of net income $ 47.0 $ 45.6 $ 95.3 $ 93.5
====== ====== ====== =======
<FN>
(1) Revenues from Alcoa and its subsidiaries, the terms of which
were established by negotiations between the parties, follow.
Second quarter ended June 30: 1997 - $14.9, 1996 - $15.0
Six months ended June 30: 1997 - $27.6, 1996 - $31.5
</TABLE>
-18-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
As previously reported, on June 13, 1995, the Company was served
with a class action complaint in the matter of John P. Cooper, et
al. v. Aluminum Company of America, Case Number 3-95-CV-10074,
pending in the United States District Court for the Southern
District of Iowa. The named plaintiffs alleged violation of
Federal and state civil rights laws prohibiting discrimination on
the basis of race and gender. On June 16, 1997, the court
approved a settlement agreement which provides for complete
settlement of all classwide claims for injunctive relief in
consideration for $212,000 and implementation of certain
structural changes. The settlement also provides for mediation
of certain remaining individual claims for damages due to a
hostile work environment or wrongful termination. All other
claims were released under the terms of the agreement. The
mediation process is expected to be completed by year-end 1997.
As previously reported, in March 1997 Alcoa's Lebanon Works
received a draft Consent Order and Agreement from the
Pennsylvania Department of Environmental Protection (DEP) for
the alleged emissions of hexane in excess of permissible levels.
Alcoa had reported the potential problem with hexane emissions to
the DEP in late 1995. Alcoa and the DEP entered into a Consent
Order and Agreement on May 29, 1997, pursuant to which Alcoa
agreed to pay a civil penalty of $95,000 for emissions which
occurred during 1995 and 1996 and additional penalties for
emissions in excess of authorized levels in 1997. Alcoa also
committed to a pollution prevention project which will
eliminate the need to use hexane at the facility and
thereby eliminate all hexane emissions.
Item 4. Submission of Matters to a Vote of Security Holders.
At the annual meeting of Alcoa shareholders held on May 9, 1997,
Kenneth W. Dam, Judith M. Gueron and Paul O'Neill were reelected
to serve for three-year terms as directors of Alcoa. Votes cast
for Mr. Dam were 148,934,891 and votes withheld were 1,792,987;
votes cast for Dr. Gueron were 148,907,093 and votes withheld
were 1,820,785; and votes cast for Mr. O'Neill were 148,768,817
and votes withheld were 1,959,061.
Also at that annual meeting, a proposal to approve an amendment
to Alcoa's Long Term Stock Incentive Plan was adopted. Total
votes cast for the proposal were 127,913,363 and votes cast
against were 22,104,804. There were 709,711 abstentions.
Abstentions, however, are not counted for voting purposes under
Pennsylvania law, the jurisdiction of Alcoa's incorporation.
The company's definitive proxy statement, dated March 12, 1997,
and filed with the Securities and Exchange Commission contains,
on pages 16-18, a description of the proposal to amend Alcoa's
Long Term Stock Incentive Plan, which is incorporated herein by
reference.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
11. Computation of Earnings per Common Share
12. Computation of Ratio of Earnings to Fixed Charges
15. Independent Accountants' letter regarding unaudited
financial information
27. Financial Data Schedule
(b) No reports on Form 8-K were filed by Alcoa during the
quarter covered by this report.
-19-
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
ALUMINUM COMPANY OF AMERICA
July 31, 1997 By /s/ RICHARD B. KELSON
Date Richard B. Kelson
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
July 31, 1997 By /s/ EARNEST J. EDWARDS
Date Earnest J. Edwards
Senior Vice President and
Controller
(Chief Accounting Officer)
-20-
EXHIBITS
Page
----
11. Computation of Earnings per Common Share 22
12. Computation of Ratio of Earnings to Fixed Charges 23
15. Independent Accountants' letter regarding unaudited 24
financial information
27. Financial Data Schedule
-21-
Alcoa and subsidiaries EXHIBIT 11
<TABLE>
<CAPTION>
Computation of Earnings (Loss) per Common Share
For the six months ended June 30
(in millions, except share amounts)
1997 1996
----------- -----------
<S> <C> <C>
1. Income applicable to common stock* $365.7 $309.4
2. Weighted average number of common
shares outstanding during the period 173,139,325 175,254,973
3. Primary earnings per common share
(1 divided by 2) $2.11 $1.77
4. Fully diluted earnings (1) $365.7 $309.4
5. Shares issuable under compensation plans 34,291 33,780
6. Shares issuable upon exercise of dilutive
outstanding stock options (treasury
stock method) 1,697,708 1,310,246
7. Fully diluted shares (2 + 5 + 6) 174,871,324 176,598,999
8. Fully diluted earnings per common share
(4 divided by 7) $2.09 $1.75
<FN>
* After preferred dividend requirement
</TABLE>
-22-
Alcoa and subsidiaries EXHIBIT 12
<TABLE>
<CAPTION>
Computation of Ratio of Earnings to Fixed Charges
For the six months ended June 30, 1997
(in millions, except ratio)
1997
----
<S> <C>
Earnings:
Income before taxes on income $ 763.7
Minority interests' share of earnings of majority-
owned subsidiaries without fixed charges 1.9
Equity income (18.5)
Fixed charges 90.1
Proportionate share of income (loss) of 50%-owned 16.0
persons 16.0
Distributed income of less than 50%-owned persons -
Amortization of capitalized interest 10.3
-------
Total earnings $ 863.5
Fixed Charges:
Interest expense:
Consolidated $ 70.7
Proportionate share of 50%-owned persons 1.8
-------
72.5
-------
Amount representative of the interest factor
in rents:
Consolidated $ 17.4
Proportionate share of 50%-owned persons .2
-------
17.6
-------
Fixed charges added to earnings 90.1
-------
Interest capitalized:
Consolidated 4.1
Proportionate share of 50%-owned persons -
-------
4.1
-------
Preferred stock dividend requirements of
majority-owned subsidiaries -
-------
Total fixed charges $ 94.2
=======
Ratio of earnings to fixed charges 9.2
=======
</TABLE>
-23-
EXHIBIT 15
July 7, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: Aluminum Company of America
1. Form S-8 (Registration No. 33-24846 and
333-00033)
Alcoa Savings Plan for Salaried Employees; Alcoa
Fujikura Ltd. Salaried 401(k) Savings Plan
2. Form S-8 (Registration No. 33-22346, 33-49109,
33-60305 and 333-27903)
Long Term Stock Incentive Plan
3. Form S-3 (Registration No. 33-49997) and
Form S-3 (Registration No. 33-60045) and
Form S-3 (Registration No. 33-64353)
Debt Securities and Warrants to Purchase Debt
Securities, Preferred Stock and Common Stock
Ladies and gentlemen:
We are aware that our report dated July 7, 1997,
accompanying interim financial information of Aluminum
Company of America (Alcoa) and subsidiaries for the three-
month and six-month periods ended June 30, 1997, is
incorporated by reference in the registration statements
referred to above. Pursuant to Rule 436(c) under the
Securities Act of 1933, this report should not be considered
as part of a registration statement prepared or certified by
us within the meaning of Sections 7 and 11 of that Act.
Very truly yours,
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
-24-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 882,300
<SECURITIES> 74,500
<RECEIVABLES> 1,823,300
<ALLOWANCES> 44,600
<INVENTORY> 1,345,300
<CURRENT-ASSETS> 4,613,700
<PP&E> 15,576,100
<DEPRECIATION> 8,699,100
<TOTAL-ASSETS> 13,532,200
<CURRENT-LIABILITIES> 2,356,900
<BONDS> 1,792,600
0
55,800
<COMMON> 178,900
<OTHER-SE> 4,375,200
<TOTAL-LIABILITY-AND-EQUITY> 13,532,200
<SALES> 6,663,100
<TOTAL-REVENUES> 6,742,100
<CGS> 5,091,100
<TOTAL-COSTS> 5,091,100
<OTHER-EXPENSES> 363,700
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70,700
<INCOME-PRETAX> 763,700
<INCOME-TAX> 266,900
<INCOME-CONTINUING> 366,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 366,700
<EPS-PRIMARY> 2.11
<EPS-DILUTED> 2.09
</TABLE>
