<PAGE>
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 September 30, 2000 Commission File Number 1-3610
ALCOA INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0317820
(State of incorporation) (I.R.S. Employer Identification No.)
201 Isabella Street, Pittsburgh, Pennsylvania 15212-5858
(Address of principal executive offices) (Zip Code)
Office of Investor Relations 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 October 19, 2000, 864,961,099 shares of common stock, par value $1.00
per share, of the Registrant were outstanding.
A07-15440
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Alcoa and subsidiaries
Condensed Consolidated Balance Sheet
(in millions)
<TABLE>
<CAPTION>
(unaudited)
September 30 December 31
ASSETS 2000 1999
------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 284 $ 237
Short-term investments 90 77
Receivables from customers, less allowances of
$71 in 2000 and $58 in 1999 3,224 2,199
Other receivables 143 165
Inventories (B) 2,785 1,618
Deferred income taxes 280 233
Prepaid expenses and other current assets 501 271
----------- ---------
Total current assets 7,307 4,800
----------- ---------
Properties, plants and equipment, at cost 22,304 18,436
Less, accumulated depreciation, depletion and
Amortization 9,424 9,303
----------- ---------
Net properties, plants and equipment 12,880 9,133
----------- ---------
Goodwill, net of accumulated amortization of $296 in
2000 and $221 in 1999 5,411 1,328
Other assets, including assets held for sale (G) 5,137 1,805
----------- ---------
Total assets $ 30,735 $ 17,066
=========== =========
LIABILITIES
Current liabilities:
Short-term borrowings $ 2,452 $ 343
Accounts payable, trade 1,797 1,219
Accrued compensation and retirement costs 895 582
Taxes, including taxes on income 632 368
Other current liabilities 923 424
Long-term debt due within one year 433 67
----------- ---------
Total current liabilities 7,132 3,003
----------- ---------
Long-term debt, less amount due within one year 5,297 2,657
Accrued postretirement benefits 2,545 1,720
Other noncurrent liabilities and deferred credits 2,278 1,473
Deferred income taxes 1,050 437
----------- ---------
Total liabilities 18,302 9,290
----------- ---------
MINORITY INTERESTS 1,439 1,458
----------- ---------
CONTINGENT LIABILITIES (C) - -
SHAREHOLDERS' EQUITY
Preferred stock 56 56
Common stock 925 395
Additional capital 5,923 1,704
Retained earnings 6,742 6,061
Treasury stock, at cost (1,713) (1,260)
Accumulated other comprehensive income (D) (939) (638)
----------- ---------
Total shareholders' equity 10,994 6,318
----------- ---------
Total liabilities and shareholders' equity $ 30,735 $ 17,066
=========== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
Alcoa and subsidiaries
Condensed Statement of Consolidated Income (unaudited)
(in millions, except per share amounts)
<TABLE>
<CAPTION>
Third quarter ended Nine months ended
September 30 September 30
------------------------ ------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Sales $ 6,298 $ 4,052 $ 16,398 $ 12,070
Other income 46 38 139 77
----------- ----------- ----------- -----------
6,344 4,090 16,537 12,147
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Cost of goods sold 4,798 3,120 12,346 9,388
Selling, general administrative
and other expenses 314 202 813 597
Research and development expenses 47 33 134 91
Provision for depreciation,
depletion and amortization 350 224 865 663
Interest expense 141 51 287 153
----------- ----------- ----------- -----------
5,650 3,630 14,445 10,892
----------- ----------- ----------- -----------
EARNINGS
Income before taxes on income 694 460 2,092 1,255
Provision for taxes on income (E) 235 147 711 402
----------- ----------- ----------- -----------
Income from operations 459 313 1,381 853
Less: Minority interests' share 91 54 281 133
----------- ----------- ----------- -----------
NET INCOME $ 368 $ 259 $ 1,100 $ 720
=========== =========== =========== ===========
EARNINGS PER SHARE (F)
Basic $ .42 $ .36 $ 1.37 $ .98
=========== =========== =========== ===========
Diluted $ .42 $ .35 $ 1.36 $ .96
=========== =========== =========== ===========
Dividends paid per common share $ .125 $ .101 $ .375 $ .302
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
Alcoa and subsidiaries
Condensed Statement of Consolidated Cash Flows (unaudited)
(in millions)
<TABLE>
<CAPTION>
Nine months ended
September 30
------------------------------
2000 1999
------------- -------------
<S> <C> <C>
CASH FROM OPERATIONS
Net income $ 1,100 $ 720
Adjustments to reconcile net income to cash from operations:
Depreciation, depletion and amortization 874 674
Change in deferred income taxes 42 89
Equity income before additional taxes, net of dividends (57) (4)
Gain on sale or disposal of assets (7) (1)
Minority interests 281 134
Other 11 9
Changes in assets and liabilities, excluding the effects of
acquisitions and divestitures:
Increase in receivables (118) (154)
(Increase) reduction in inventories (17) 287
Increase in prepaid expenses and other
current assets (166) (51)
Reduction in accounts payable and accrued expenses (267) (124)
Increase (reduction) in taxes, including taxes on income 289 (66)
Increase (reduction) in deferred hedging gains 2 (63)
Net change in noncurrent assets and liabilities (59) (40)
--------- ---------
CASH PROVIDED FROM OPERATIONS 1,908 1,410
--------- ---------
FINANCING ACTIVITIES
Net changes in short-term borrowings 1,856 181
Common stock issued and treasury stock sold, excluding
stock issued in acquisitions 182 577
Repurchase of common stock (730) (838)
Dividends paid to shareholders (310) (223)
Dividends paid to minority interests (192) (64)
Net change in commercial paper 849 -
Additions to long-term debt 1,703 318
Payments on long-term debt (1,689) (726)
--------- ---------
CASH PROVIDED FROM (USED FOR) FINANCING ACTIVITIES 1,669 (775)
--------- ---------
INVESTING ACTIVITIES
Capital expenditures (740) (609)
Acquisitions, net of cash acquired (H) (2,745) (52)
Proceeds from the sale of assets 4 14
Net change in short-term investments (14) (46)
Additions to investments (37) (90)
Sale of investments 18 31
Changes in minority interests 1 -
Other (10) (10)
--------- ---------
CASH USED FOR INVESTING ACTIVITIES (3,523) (762)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (7) (3)
--------- ---------
Net change in cash and cash equivalents 47 (130)
Cash and cash equivalents at beginning of year 237 342
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 284 $ 212
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
Notes to Condensed Consolidated Financial Statements
(in millions, except per share amounts)
A. Common Stock Split - On January 10, 2000, the board of directors declared a
two-for-one common stock split. Alcoa shareholders approved an amendment to
Alcoa's Articles of Incorporation to increase the authorized shares of Alcoa
common stock from 600 million to 1.8 billion at the company's annual meeting on
May 12, 2000. As a result of the stock split, shareholders of record on May 26,
2000 received an additional common share for each share held. The additional
shares were distributed on June 9, 2000. In this report, all per-share amounts
and number of shares have been restated to reflect the stock split.
B. Inventories
<TABLE>
<CAPTION>
September 30 December 31
2000 1999
--------------- --------------
<S> <C> <C>
Finished goods $ 859 $ 363
Work in process 864 550
Bauxite and alumina 333 286
Purchased raw materials 517 267
Operating supplies 212 152
---------- ---------
$2,785 $1,618
========== =========
</TABLE>
Approximately 56% of total inventories at September 30, 2000 were valued on
a LIFO basis. If valued on an average cost basis, total inventories would have
been $667 and $645 higher at September 30, 2000 and December 31, 1999,
respectively. During the third quarter 2000, LIFO inventory quantities were
reduced which resulted in a partial liquidation of the LIFO bases. The impact of
the liquidation increased net income by $13 for the quarter and year-to-date.
C. Commitments and Contingencies - Various lawsuits, claims and proceedings have
been or may be instituted or asserted against Alcoa, including those pertaining
to environmental, product liability and safety and health matters. While the
amounts claimed might be substantial, the ultimate liability cannot now be
determined because of the considerable uncertainties that exist. Therefore, it
is possible that results of operations or liquidity in a particular period could
be materially affected by certain contingencies. However, based on facts
currently available, management believes that the disposition of matters that
are pending or asserted will not have a materially adverse impact on the
financial position of the company.
Alcoa Aluminio, S.A. (Aluminio) is currently party to a hydroelectric
construction project in Brazil. Total estimated construction costs are $500, of
which the company's share is 24%. In the event that other participants in this
project fail to fulfill their financial responsibilities, Aluminio may be liable
for its pro rata share of the deficiency.
Alcoa of Australia, Ltd. (AofA) is party to a number of natural gas and
electricity contracts that expire between 2001 and 2022. Under these take-or-pay
contracts, AofA is obligated to pay for a minimum amount of natural gas or
electricity even if these commodities are not required for operations.
Commitments related to these contracts range from $176 to $182 annually through
2005 and approximately a total of $2,200 for all periods thereafter.
D. Comprehensive Income
<TABLE>
<CAPTION>
Third quarter ended Nine Months ended
September 30 September 30
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net income $ 368 $ 259 $ 1,100 $ 720
Other comprehensive loss, primarily
translation (181) (179) (301) (278)
-------- -------- -------- --------
Comprehensive income $ 187 $ 80 $ 799 $ 442
======== ======== ======== ========
</TABLE>
5
<PAGE>
E. Income Taxes - The income tax provision for the period is based on the
effective tax rate expected to be applicable for the full year. The 2000 third
quarter rate of 34% differs from the statutory rate primarily because of taxes
on foreign income. The 2000 third quarter rate differs from the 1999 third
quarter rate of 32% primarily because of higher US income before tax in 2000
that dilutes the impact of net permanent differences.
F. EARNINGS PER SHARE - Basic earnings per share (EPS) amounts are computed by
dividing earnings applicable to common stockholders by the average number of
common shares outstanding. Diluted EPS amounts assume the issuance of common
stock for all potentially dilutive equivalents outstanding. Anti-dilutive
outstanding stock options have been excluded from the diluted EPS calculation.
The detail of basic and diluted EPS follows:
<TABLE>
<CAPTION>
Third quarter ended Nine months ended
September 30 September 30
---------------------- ------------------------
2000 1999 2000 1999
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net income $ 368 $ 259 $ 1,100 $ 720
Less: Preferred stock dividends 1 1 2 2
------ ------ ------- ------
Income available to common
Stockholders $ 367 $ 258 $ 1,098 $ 718
Average shares outstanding-basic 866 733 799 734
Effect of dilutive securities:
Shares issuable upon exercise of
dilutive outstanding stock options
and settlement of forward share
repurchases 8 17 9 17
------ ------ ------- ------
Average diluted shares outstanding 874 750 808 751
Basic EPS $ .42 $ .36 $ 1.37 $ .98
====== ====== ======= ======
Diluted EPS $ .42 $ .35 $ 1.36 $ .96
====== ====== ======= ======
</TABLE>
Options to purchase 44 million shares of common stock at an average exercise
price of $36.00 were outstanding as of September 30, 2000 but were not included
in the computation of diluted EPS because the option exercise price was greater
than the average market price of the common shares.
In April 2000, Alcoa entered into a forward share repurchase agreement to
partially hedge the equity exposure related to its stock option program. The
contract, which matures in 2002, allows the company to repurchase up to 10
million shares from the financial institution. The company may elect to settle
the contract on a net share basis in lieu of physical settlement. The contract
permits early settlement. As of September 30, 2000, 10 million shares had been
committed to the contract at an average price of $31.90 per share. The effect of
this repurchase agreement has been included in determining diluted EPS.
G. ACQUISITIONS - In August 1999, Alcoa and Reynolds Metals Company (Reynolds)
announced they had reached a definitive agreement to merge. On May 3, 2000,
after approval by the US Department of Justice (DOJ) and other regulatory
agencies, Alcoa and Reynolds completed their merger. Under the agreement, Alcoa
issued 2.12 shares post-split of Alcoa common stock for each share of Reynolds.
The exchange resulted in Alcoa issuing approximately 135 million shares at a
value of $33.30 (post-split) to Reynolds stockholders. The transaction was
valued at approximately $5,900, including debt assumed, and has been accounted
for using the purchase method. The total purchase costs of the acquisition have
been allocated to the tangible and intangible assets and liabilities acquired
based on their fair values. The purchase price includes the conversion of
outstanding Reynolds options to Alcoa options as well as other direct costs of
the acquisition. The purchase price allocation is preliminary; the final
allocation of the purchase price will be based upon valuation and other studies,
including environmental and other contingent liabilities, that have not been
completed. The preliminary allocation resulted in total goodwill of
approximately $1,600, which will be amortized over a forty-year period.
6
<PAGE>
As part of the merger agreement, Alcoa agreed to divest the following Reynolds
operations:
- Reynolds' 56% stake in its alumina refinery at Worsley, Australia,
- Reynolds' 50% stake in its alumina refinery at Stade, Germany,
- 100% of Reynolds' alumina refinery at Sherwin, Texas and
- 25% of Reynolds' interest in its aluminum smelter at Longview, Washington.
Under the agreement, these divestitures must be completed within six months of
the merger date of May 3, 2000 (nine months for Worsley). Alcoa has formally
asked the European Union (EU) for an extension for the Stade, Germany and
Longview, Washington divestitures. At this time Alcoa has not received a formal
reply.
The Unaudited Condensed Consolidated Financial Statements have been prepared
in accordance with EITF 87-11 Allocation of Purchase Price to Assets to be Sold.
Under EITF 87-11, the fair value of net assets to be divested have been reported
as assets held for sale in the Condensed Consolidated Balance Sheet, and the
results of operations from these assets of $14 after tax have not been included
in the Condensed Statement of Consolidated Income.
On August 29, 2000 Alcoa and Billiton plc (Billiton) announced they had
reached an agreement under which Billiton will acquire Reynolds Australia
Alumina, Ltd. LLC, which holds a 56% interest in the Worsley alumina refinery in
Western Australia. The price is $1,490, and the sale is expected to close in
January 2001. The sale is subject to regulatory, including appropriate
antitrust, approvals. Alcoa received approval from the EU for the sale. Alcoa
also requested and is awaiting approval for this sale from the US DOJ.
On October 19, 2000 Alcoa reached a definitive agreement subject to certain
closing conditions, including approval by the US Government, to sell the
Sherwin, Texas alumina refinery in the fourth quarter of 2000.
On March 14, 2000, Alcoa and Cordant Technologies Inc. (Cordant) announced a
definitive agreement under which Alcoa would acquire all outstanding shares of
Cordant, a company serving global aerospace and industrial markets. In addition,
on April 13, 2000, Alcoa announced plans to commence a cash tender offer for all
outstanding shares of Howmet International Inc. (Howmet). The offer for Howmet
shares was part of Alcoa's acquisition of Cordant, which owned approximately 85%
of Howmet. On May 25, 2000 and June 20, 2000, after approval by the DOJ and
other regulatory agencies, Alcoa completed the acquisition of Cordant and
Howmet, respectively. Under the agreement and tender offer, Alcoa paid $57 for
each outstanding share of Cordant common stock and $21 for each outstanding
share of Howmet common stock. The total value of the transaction was
approximately $3,300, including the assumption of debt. This transaction has
been accounted for using the purchase method. The purchase price includes the
conversion of outstanding Cordant and Howmet options to Alcoa options as well as
other direct costs of the acquisition. The purchase price allocation is
preliminary; the final allocation is subject to valuation and other studies,
including environmental and other contingent liabilities, that have not been
completed. The preliminary allocation resulted in total goodwill of
approximately $2,500, which will be amortized over periods not to exceed forty
years.
The following presents pro forma information assuming that the acquisition
of 100% of Reynolds and Cordant had occurred at the beginning of each respective
year. Adjustments that have been included to arrive at the pro forma totals
primarily include those related to acquisition financing, the amortization of
goodwill, the elimination of transactions between Alcoa, Reynolds, and Cordant,
and additional depreciation related to the increase in basis that resulted from
the transaction. Tax effects from the pro forma adjustments noted above also
have been included at the 35% statutory rate.
7
<PAGE>
Nine months ended
September 30
------------
2000 1999
-------- --------
Sales $19,180 $17,280
Net Income 1,145 726
Basic EPS $ 1.32 $ 0.84
======= =======
Diluted EPS $ 1.31 $ 0.82
======= =======
The pro forma results are not necessarily indicative of what actually would
have occurred if the transaction had been in effect for the entire periods
presented, are not intended to be a projection of future results, and do not
reflect any cost savings that might be achieved from the combined operations.
Debt increased $4,552 as a result of the Reynolds and Cordant acquisitions.
Debt of $1,297 was assumed in the acquisition of Reynolds, while $826 of debt
was assumed in the acquisition of Cordant. The Cordant acquisition price of
$2,429, including the acquisition of the remaining shares of Howmet, was
financed with debt. On July 20, 2000, Alcoa issued $1,500 of callable notes. Of
these notes, $1,000 mature in 10 years and carry a coupon rate of 7.375%, and
$500 mature in 5 years and carry a coupon rate of 7.25%. A portion of these
notes was used to refinance debt.
On August 24, 2000, Alcoa and Luxfer Holdings plc announced that they had
reached an agreement under which Alcoa will acquire the aluminum plate, sheet
and soft-alloy extrusion manufacturing operations and distribution businesses of
British Aluminium Limited, a wholly owned subsidiary of Luxfer. These businesses
generated approximately $360 in revenues in 1999 and have about 1,550 employees.
The transaction is subject to clearance by antitrust authorities in Europe. The
transaction does not require US regulatory approval and is expected to be
completed in the fourth quarter of 2000.
Alcoa completed a number of other acquisitions in 2000, as described in
Management's Discussion and Analysis that amounted to $403. None of these
transactions had a material impact on Alcoa's financial statements.
H. CASH FLOW INFORMATION - The details of cash payments related to acquisitions
follow.
Nine months ended
September 30,2000
----------------------
Fair value of assets acquired $14,519
Liabilities assumed (7,021)
Stock issued (4,649)
-------
Cash paid 2,849
Less: cash acquired (104)
-------
Net cash paid for acquisitions $ 2,745
=======
I. RECENTLY ISSUED ACCOUNTING STANDARDS - In September 2000, the FASB issued
SFAS 140, a replacement of Statement 125, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities. SFAS 140 is effective
for transfers after March 31, 2000 and is effective for disclosures about
securitizations and collateral and for recognition and reclassification of
collateral for fiscal years ending after December 15, 2000. The company is
currently reviewing this guidance in order to determine the impact of its
provisions, if any, on the consolidated financial statements.
In December 1999, the staff of the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin (SAB) 101, Revenue Recognition in Financial
Statements. SAB 101 outlines the basic criteria that must be met to recognize
revenue, and provides guidelines for disclosure related to revenue recognition
policies. This guidance is required to be implemented in the fourth quarter of
2000. On October 13, 2000 the SEC issued Frequently Asked Questions and Answers
(FAQs) relating to SAB 101. The company is currently reviewing this guidance in
order to determine the impact of its provisions, if any, on the consolidated
financial statements.
8
<PAGE>
In June 1998, the Financial Accounting Standards Board (FASB)issued
SFAS 133, Accounting for Derivative Instruments and Hedging Activities. The
standard requires that entities value all derivative instruments at fair
value and record the instruments on the balance sheet. The standard also
significantly changes the requirements for hedge accounting. In June 1999,
the FASB approved a delay in the effective date of this standard until
January 2001. In June 2000, the FASB in SFAS 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, amended SFAS 133 to
provide guidance on its implementation. Management is currently completing
a plan of implementation. The company believes that the adoption of the
amended standard will have a material impact on its balance sheet. Upon
adoption, Alcoa's commodity, foreign exchange and interest rate derivative
contracts as well as certain underlying exposures will be recorded on the
balance sheet at fair value.
J. RECLASSIFICATIONS - Certain amounts have been reclassified to conform to
current year presentation.
K. SEGMENT INFORMATION - Alcoa is primarily a producer of aluminum
products. Its segments are organized by product on a worldwide basis.
Alcoa's management reporting system evaluates performance based on a number
of factors; however, the primary measure of performance is the after-tax
operating income (ATOI) of each segment. Non-operating items such as
interest income, interest expense, foreign exchange gains/losses and the
effects of LIFO accounting and minority interest are excluded from segment
profit. In addition, certain expenses such as corporate general
administrative expenses, depreciation and amortization on corporate assets
and certain special items are not included in segment results.
Alcoa's products are used primarily by transportation (including
aerospace, automotive, rail and shipping), packaging, building and
construction, and industrial customers worldwide. Alcoa's businesses that
do not fall into these categories are listed as Other. In the 2000 second
quarter, as a result of recent acquisition activity, Alcoa changed its
internal management reporting structure to add a Packaging and Consumer
Products segment. Alcoa's closures, PET bottle and packaging machinery
businesses were moved from the Other group to this segment. Previously
reported data from the 1999 third quarter and nine-month periods have been
restated in the schedules below to reflect this change. Reynolds' packaging
and consumer businesses were also added to the new Packaging and Consumer
Products segment. Other Reynolds and Cordant businesses were added to the
appropriate existing segments. For more information on the segments, see
Management's Discussion and Analysis beginning on page 13
The following details sales and ATOI for each reportable segment for
the three-month and nine-month periods ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
Segment Information: Alumina Flat- Engi- Pack-
& Chem- Primary Rolled neered aging &
Third quarter ended icals Metals Products Products Consumer Other Total
September 30, 2000
Sales:
<S> <C> <C> <C> <C> <C> <C> <C>
Third-party sales $ 529 $ 1,049 $ 1,361 $ 1,586 $ 631 $ 1,142 $ 6,298
Intersegment sales 294 936 29 18 - - 1,277
------ ------- ------- ------- ------ ------- --------
Total sales $ 823 $ 1,985 $ 1,390 $1,604 $631 $ 1,142 $ 7,575
====== ======= ======= ======= ====== ======= =======
After-tax operating
Income $ 146 $ 254 $ 83 $ 49 $ 38 $ 39 $ 609
====== ======= ======= ======= ====== ======= ========
Third quarter ended
September 30, 1999
Sales:
Third-party sales $ 474 $ 560 $ 1,273 $ 917 $ 191 $ 637 $ 4,052
Intersegment sales 214 671 14 6 - - 905
------ ------- ------- ------- ------ ------- -------
Total sales $ 688 $ 1,231 $ 1,287 $ 923 $ 191 $ 637 $ 4,957
====== ======= ======= ======= ====== ======= =======
After-tax operating
Income $ 83 $ 159 $ 74 $ 42 $ 15 $ 35 $ 408
====== ======= ======= ======= ====== ======= =======
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Segment Information: Alumina Flat- Engi- Pack-
& Chem- Primary Rolled neered aging &
Nine months ended icals Metals Products Products Consumer Other Total
September 30, 2000
Sales:
<S> <C> <C> <C> <C> <C> <C> <C>
Third-party sales $1,584 $2,512 $4,159 $3,935 $1,358 $2,850 $16,398
Intersegment sales 818 2,618 71 46 - - 3,553
------ ------ ------ ------ ------ ------ -------
Total sales $2,402 $5,130 $4,230 $3,981 $1,358 $2,850 $19,951
====== ====== ====== ====== ====== ====== =======
After-tax operating
Income $ 441 $ 706 $ 230 $ 164 $ 90 $ 118 $ 1,749
====== ====== ====== ====== ====== ====== =======
Nine months ended
September 30, 1999
Sales:
Third-party sales $1,350 $1,613 $3,801 $2,798 $ 596 $1,906 $12,064
Intersegment sales 666 2,125 40 12 - - 2,843
------ ------ ------ ------ ------ ------ -------
Total sales $2,016 $3,738 $3,841 $2,810 $ 596 $1,906 $14,907
====== ====== ====== ====== ====== ====== =======
After-tax operating
Income $ 205 $ 362 $ 211 $ 148 $ 53 $ 95 $ 1,074
====== ====== ====== ====== ====== ====== =======
</TABLE>
The following table reconciles segment information to consolidated totals.
<TABLE>
<CAPTION>
Third quarter ended Nine months ended
September 30 September 30
------------ ------------
2000 1999 2000 1999
------ ------ ------- -------
<S> <C> <C> <C> <C>
Total after-tax operating income $ 609 $ 408 $1,749 $1,074
Elimination of intersegment (profit)
loss 9 (8) (16) (27)
Unallocated amounts (net of tax):
Interest income 4 7 30 20
Interest expense (85) (33) (187) (99)
Minority interest (91) (54) (281) (133)
Corporate expense (66) (34) (173) (110)
Other (12) (27) (22) (5)
------ ------ ------ ------
Consolidated net income $ 368 $ 259 $1,100 $ 720
====== ====== ====== ======
</TABLE>
Segment assets: September 30 December 31
2000 1999
------- -------
Alumina and chemicals $ 2,807 $ 3,250
Primary metals 6,862 5,098
Flat-rolled products 3,588 3,395
Engineered products 6,437 2,387
Packaging and consumer 1,755 745
Other 2,962 1,664
------- -------
Total Segment Assets $24,411 $16,539
======= =======
The total segment assets and ATOI above do not include unallocated purchase
accounting adjustments or assets to be divested.
10
<PAGE>
________________________________
In the opinion of the Company, the financial statements and summarized
financial data in this Form 10-Q report include all adjustments, including
those of a normal recurring nature, necessary to fairly state the results
for the periods. This Form 10-Q report should be read in conjunction with
the Company's annual report on Form 10-K for the year ended December 31,
1999.
The financial information required in this Form 10-Q by Rule 10-01 of
Regulation S-X has been subject to a review by PricewaterhouseCoopers LLP,
the Company's independent certified public accountants, as described in
their report on page 12.
11
<PAGE>
INDEPENDENT ACCOUNTANT'S REVIEW REPORT
--------------------------------------
To the Shareholders and Board of Directors
Alcoa Inc. (Alcoa)
We have reviewed the unaudited condensed consolidated balance sheet of
Alcoa and subsidiaries as of September 30, 2000, the unaudited condensed
statements of consolidated income for the three-month and nine-month periods
ended September 30, 2000 and 1999, and the unaudited condensed statement of
consolidated cash flows for the nine-month periods ended September 30, 2000
and 1999, which are included in Alcoa's Form 10-Q for the period ended
September 30, 2000. These financial statements are the responsibility of
Alcoa's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with auditing standards generally accepted in the
United States of America, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we
do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred to
above for them to be in conformity with accounting principles generally
accepted in the United States of America.
We have previously audited, in accordance with audit standards generally
accepted in the United States of America, the consolidated balance sheet of
Alcoa and subsidiaries as of December 31, 1999, 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 10, 2000, except
for Note V, for which the date is February 11, 2000, 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, 1999, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has
been derived.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
October 5, 2000
12
<PAGE>
Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
(dollars in millions, except share amounts and ingot prices; shipments in
thousands of metric tons (mt))
Certain statements in this report under this caption and elsewhere relate to
future events and expectations and as such constitute forward-looking
statements. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements of Alcoa to be different from those expressed or implied in the
forward-looking statements. See Risk Factors below.
Results of Operations
---------------------
Principal income and operating data follow.
<TABLE>
<CAPTION>
Third quarter ended Nine months ended
September 30 September 30
------------ ------------
2000 1999 2000 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Sales $6,298 $4,052 $16,398 $12,070
Net income 368 259 1,100 720
Basic earnings per common share $ .42 $ .36 $ 1.37 $ .98
Diluted earnings per common share $ .42 $ .35 $ 1.36 $ .96
Shipments of aluminum products (mt) 1,419 1,100 3,913 3,349
Shipments of alumina (mt) 1,893 1,814 5,527 5,314
Alcoa'a average realized ingot price $ .77 $ .71 $ .77 $ .66
Average 3-month LME price $ .72 $ .67 $ .72 $ .61
</TABLE>
_________________________
Earnings Summary
Alcoa's 2000 third quarter revenues rose 55% from the 1999 third quarter to
$6,298, and revenues for the nine months of 2000 increased 36% from the 1999
nine-month period to $16,398. The increase in revenues for both periods was due
to higher overall aluminum and alumina prices, as well as higher shipment
volumes due to acquisitions. However, the 2000 third quarter results were
affected by the softening in the transportation, building, construction and
distribution markets. Acquisitions, increased prices and cost reductions
positively impacted the 2000 third quarter and year-to-date results as net
income increased to $368 for the quarter and $1,100 year-to-date, 42% above the
1999 third quarter and 53% over the 1999 nine month period. Partially
offsetting these positive factors were higher energy costs for natural gas and
fuel oil that approximated $70.
Annualized return on shareholders' equity was 17.0% as of September 30,
2000, compared with 15.7% for the 1999 period. The increase was due to increased
earnings in 2000, which outpaced the increase in shareholders' equity balances
resulting primarily from the recent acquisitions.
SEGMENT INFORMATION
I. Alumina and Chemicals
<TABLE>
<CAPTION>
Third quarter ended Nine months ended
September 30 September 30
------------ ------------
2000 1999 2000 1999
---------- --------- --------- --------
<S> <C> <C> <C> <C>
Alumina production 3,509 3,372 10,481 9,890
Third-party alumina shipments 1,893 1,814 5,527 5,314
Third-party sales $ 529 $ 474 $ 1,584 $ 1,350
Intersegment sales 294 214 818 666
-------- ------- ------- --------
Total sales $ 823 $ 688 $ 2,402 $ 2,016
======== ======= ======= ========
After-tax operating income $ 146 $ 83 $ 441 $ 205
======== ======= ======= ========
</TABLE>
This segment's activities include the mining of bauxite, which is then refined
into alumina. The alumina is then sold to internal and external customers
worldwide or processed into industrial chemical products. Alcoa's Australian
alumina operations are a significant component of this segment. This segment
does not include the Reynolds alumina assets to be divested. The majority of the
third-party sales from this segment are derived from alumina.
13
<PAGE>
Third-party sales for this segment increased 12% from the 1999 third
quarter. Shipments increased 4% while realized prices for alumina increased 9%.
For the nine-month period ending September 30, third-party sales increased 17%
over the same 1999 period. This was due to 4% higher shipments and higher
prices.
After-tax operating income (ATOI) for this segment increased 76% to $146
for the 2000 third quarter and 115% to $441 for the nine-month period. The
increases were primarily due to higher prices as well as improved overall cost
performance. Third quarter 2000 conversion costs decreased $14 after tax versus
the 1999 third quarter. These savings were primarily generated through
productivity improvements, offset by an increase in natural gas costs.
II. PRIMARY METALS
<TABLE>
<CAPTION>
Third quarter ended Nine months ended
September 30 September 30
------------ ------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Aluminum production 965 724 2,556 2,134
Third-party aluminum shipments 574 335 1,406 1,059
Third-party sales $ 1,049 $ 560 $ 2,512 $ 1,613
Intersegment sales 936 671 2,618 2,125
-------- -------- -------- --------
Total sales $ 1,985 $ 1,231 $ 5,130 $ 3,738
======== ======== ======== ========
After-tax operating income $ 254 $ 159 $ 706 $ 362
======== ======== ======== ========
</TABLE>
This group's primary focus is Alcoa's worldwide smelter system. Primary Metals
receives alumina from the alumina and chemicals segment and produces aluminum
ingot to be used by other Alcoa segments, as well as sold to outside customers.
Results from internal hedging contracts and from marking to market certain
aluminum commodity contracts are also included in this segment. The smelting
operations of Reynolds have been added to this segment. The sale of ingot
represents over 90% of this segment's third-party sales. Revenues from the sale
of powder and scrap are also included here.
In the 1999 fourth quarter, Alcoa changed its internal reporting system to
include the results of aluminum hedging in the Primary Metals segment.
Previously these results were reported as reconciling items between segment ATOI
and net income. Segment results for the 1999 third quarter and nine-month period
have been restated to reflect this change.
In January 2000, Alcoa announced that it was restarting approximately
200,000 mt of primary aluminum capacity. The restarted capacity will be in
production by the end of 2000. In June 2000, Alcoa announced that it was
temporarily curtailing all production at its 121,000 metric ton per year (mtpy)
primary aluminum smelter in Troutdale, Oregon, a former Reynolds facility that
had been operating at an 80,000 mtpy level. The curtailment began immediately.
After the scheduled curtailment and restart of capacity, Alcoa will have
approximately 370,000 mtpy of idle capacity.
Third-party sales for the third quarter rose 87% from the 1999 third quarter
and 56% for the year on an increase in shipments, due to the addition of
Reynolds' smelters of 71% and 33%, respectively. Excluding the locations
recently acquired, third party sales increased 25% quarter-to-quarter and 19%
year-to-year as a result of higher prices combined with increases in shipments
of 13% quarter-to-quarter and 1% year-to-year. Alcoa's average realized third-
party price for ingot rose 8% to 77 cents per pound from the 1999 third quarter
to the 2000 third quarter and 17% to 77 cents from the 1999 nine-month to the
2000 nine-month period, reflecting the increase in market prices over last year.
Intersegment sales also rose 39% in the 2000 third quarter and 23% in the 2000
nine-month period as a result of higher prices and volume related to
acquisitions.
Primary metals third quarter and nine-month ATOI rose 60% from the 1999
third quarter and 95% from the 1999 nine-month period, respectively, due to
higher ingot prices and the impact of acquired Reynolds facilities beginning in
May. Partially offsetting these positive factors were higher energy costs for
these locations.
14
<PAGE>
III. Flat-Rolled Products
<TABLE>
<CAPTION>
Third quarter ended Nine months ended
September 30 September 30
------------ ------------
2000 1999 2000 1999
------- ------ ------ ------
<S> <C> <C> <C> <C>
Third-party aluminum shipments 492 496 1,503 1,479
Third-party sales $1,361 $1,273 $4,159 $3,801
Intersegment sales 29 14 71 40
------ ------ ------ ------
Total sales $1,390 $1,287 $4,230 $3,841
====== ====== ====== ======
After-tax operating income $ 83 $ 74 $ 230 $ 211
====== ====== ====== ======
</TABLE>
This segment's primary business is the production and sale of aluminum plate,
sheet and foil. This segment includes the aggregation of rigid container sheet
(RCS) used to produce aluminum beverage cans, and sheet and plate used in the
aerospace and distributor markets. Approximately one-half of the third-party
sales from this segment are derived from sheet and plate and one-third are from
RCS.
Third-party flat-rolled product sales for the 2000 third quarter rose 7%
over the prior year quarter, driven by higher prices. Year-to-date sales
increased 9% over the prior-year period due to increases in shipments and prices
of 2% and 7%, respectively. For RCS, third-party sales were up 14% for the
quarter and 12% year-to-date versus the comparable 1999 periods due to 8% higher
prices for both the 2000 third quarter and year-to-date period, and higher
shipments, 6% quarter-over-quarter and 3% year-over-year. For the 2000 nine-
month period, sheet and plate third-party sales were up 9% over the 1999 period
due to 2% higher shipment volumes and 7% higher prices. Sheet and plate sales
for the 2000 third quarter rose 2% from the year-ago quarter as shipment
declines of 11% in the US and 6% worldwide were offset by price increases of 9%.
Flat-rolled products ATOI grew 12% for the 2000 third quarter and 9% year-
to-date from the corresponding 1999 period levels. RCS ATOI fell 7% for the
quarter due in part to higher energy and other costs. Sheet and plate ATOI
increased 31% quarter-over-quarter as a more profitable product mix in the US
and improved costs in Europe boosted results, though the impact was partially
offset by higher energy costs. In the 2000 nine-month period, sheet and plate
ATOI increased 11% over the 1999 period. After-tax cost reductions within the
sheet and plate business of $45 year-to-date and the economic recovery in the
2000 year in Brazil drove this increase.
IV. Engineered Products
<TABLE>
<CAPTION>
Third quarter ended Nine months ended
September 30 September 30
------------ ------------
2000 1999 2000 1999
------ ----- ------ ------
<S> <C> <C> <C> <C>
Third-party aluminum shipments 258 249 806 756
Third-party sales $1,586 $ 917 $3,935 $2,798
Intersegment Sales 18 6 46 12
------ ----- ------ ------
Total sales $1,604 $ 923 $3,981 $2,810
====== ===== ====== ======
After-tax operating income $ 49 $ 42 $ 164 $ 148
====== ===== ====== ======
</TABLE>
Products produced by this segment include hard and soft alloy extrusions,
including Alcoa's architectural extrusion businesses, super-alloy castings,
steel and aluminum fasteners, forgings and wheels. Primarily transportation and
distribution customers use these products worldwide. This segment includes the
Reynolds wheels business acquired in May 2000, as well as the Huck (fasteners)
and Howmet (super-alloy castings) businesses added in June 2000 as part of the
Cordant acquisition, and Excel Extrusions acquired from Noranda Aluminum in
January 2000.
Including acquisitions, engineered products third-party revenues improved
73% and 41% respectively over the corresponding 1999 quarterly and year-to-year
results. Excluding these recent acquisitions, third-party sales increased 1% in
the third quarter and 7% in the nine-month period while volumes decreased 9% in
the third quarter and 2% in the nine-month period versus the
15
<PAGE>
corresponding 1999 periods, reflecting the softening in the transportation
market.
Third quarter and year-to-date third-party sales of soft alloy extrusions
were up 22% and 20%, respectively, from the corresponding 1999 periods. Volume
increases of 4% quarter-to-quarter and 6% year-to-year due to acquisitions and
higher average prices, 17% for the quarter and 13% for the year as compared to
the 1999 periods, drove this improvement. Hard alloy extrusion revenues for the
quarter increased 11% over the year-ago quarter as a 15% increase in shipments
was partially offset by a 3% decrease in average price. For the nine-month
period, third-party hard alloy sales were down 2% versus the 1999 period on 4%
lower shipments.
For the 2000 third quarter and nine-month period, revenue from the sales of
wheels increased 39% and 52% respectively over the 1999 periods due primarily to
the acquisition of the Reynolds wheels business. Excluding the Reynolds'
results, revenues decreased 15% from the 1999 third quarter on 17% lower
shipments. For the year, wheels sales excluding Reynolds increased 17% over the
1999 nine-month period on 12% higher shipments.
ATOI for the segment increased 17% for the 2000 third quarter and 11% for
the 2000 nine-month period versus the corresponding 1999 periods. The recent
acquisitions as well as after-tax cost savings of $11 quarter-over quarter and
$33 year-over-year in existing businesses caused these increases. Excluding the
results from the acquisitions, ATOI fell 19% quarter-over-quarter while
increasing 1% year-over-year. The cost savings were offset by a decline in
volumes and profits due to lower demand for wheels and soft alloy extrusions in
the most recent quarter, as well as higher energy and fuel costs.
V. Packaging and Consumer
<TABLE>
<CAPTION>
Third quarter ended Nine months ended
September 30 September 30
------------------------ ------------------------
2000 1999 2000 1999
----- ----- ------ -----
<S> <C> <C> <C> <C>
Third-party aluminum shipments 37 2 71 7
Third-party sales $ 631 $ 191 $1,358 $ 596
After-tax operating income $ 38 $ 15 $ 90 $ 53
</TABLE>
This segment includes closures, packaging machinery, Aluminio's PET bottle
businesses in Latin America, as well as the packaging and consumer businesses of
Reynolds acquired in the 2000 second quarter. Alcoa's closures, packaging and
PET bottle businesses were previously included in the Other category.
Third quarter third-party sales for this segment rose 230% and year to date
sales rose 128%, due primarily to the acquisition of the Reynolds packaging and
consumer businesses in May 2000, as well as the acquisition of MCG Closures
Limited (MCG) in April 2000. The Reynolds Packaging and Consumer businesses
accounted for 64% of the 2000 third quarter sales and 51% for the 2000 year.
Excluding these recent acquisitions, third-party sales rose 7% versus the 1999
third quarter and 7% versus the 1999 nine-month period. Sales by Aluminio's
packaging operations in Brazil, which were negatively impacted by the 1999
currency devaluation and recession, grew by 5% quarter-over-quarter and 12%
year-over-year. Closures sales were up 15% and 5% for the third quarter and the
nine-month period, respectively, versus 1999 periods, excluding the MCG
acquisition.
Segment ATOI was $38 in the 2000 third quarter and $90 in the 2000 nine-
month period, up 153% and 70% over the respective 1999 periods. This increase
was primarily due to the acquisitions noted earlier and the increase in closure
sales, offset by higher raw materials costs for the closures and PET bottle
businesses.
16
<PAGE>
VI. Other
<TABLE>
<CAPTION>
Third quarter ended Nine months ended
September 30 September 30
------------------------ ------------------------
2000 1999 2000 1999
------ ----- ------ ------
<S> <C> <C> <C> <C>
Third-party aluminum shipments 58 18 127 48
Third-party sales $1,142 $ 637 $2,850 $1,906
After-tax operating income $ 39 $ 35 $ 118 $ 95
</TABLE>
This group includes Alcoa businesses that do not fit into the categories noted
above. Among others, this includes Alcoa Fujikura Ltd. (AFL), which produces
fiber optic cable and services for the telecommunications industry and
electrical components for the automotive industry, Thiokol Propulsion (Thiokol),
a producer of solid rocket propulsion systems, Reynolds' metal distribution
business (RASCO), and Alcoa's residential building products operations, Alcoa
Building Products, Inc. (ABP). Thiokol and RASCO were added in the 2000 second
quarter as part of the Cordant and Reynolds acquisitions, respectively.
Packaging, closures and packaging machinery businesses that were previously
reported in this group are now included in the Packaging and Consumer segment.
Third-party revenues for this group were $1,142 in the 2000 third quarter
and $2,850 in the 2000 nine-month period, up 79% and 50% from the respective
1999 periods. After excluding Thiokol and RASCO, these growth rates adjust to
15% quarter-over-quarter and 16% year-over-year.
AFL revenues increased 18% in the 2000 third quarter and 17% in the first
nine-months of 2000 over the corresponding 1999 periods. These increases were
due in large part to growth in telecommunications sales of 97% quarter-to-
quarter and 84% year-to-year. For the quarter-to-quarter and the year-to-year,
11% and 8% of the increases respectively, were from acquisitions made since the
1999 third quarter. Revenues from the sale of residential building products
decreased 13% from the 1999 third quarter on 14% lower shipment volume, leaving
revenue growth for the nine-month period down 5% on 8% lower shipments. Sales by
Alcoa's automotive operations benefited from the acquisition, late in the 1999
third quarter, of the remaining 50% of the A-CMI joint venture with Hayes
Lemmerz International. A-CMI was accounted for as an equity holding through
August 1999 and contributed 9% of the overall revenue growth in this category.
ATOI for this category in the 2000 third quarter was $39, up 11% from the
1999 third quarter, and was $118 for the 2000 nine-month period, up 24% from the
1999 nine-month period. Increases in ATOI for the 2000 quarter versus the 1999
third quarter were due to improved results at AFL, offset by decreases at ABP.
ABP's results have been adversely influenced by higher resin prices as well as
the decrease in demand noted above. For the 2000 year-to-date period,
productivity improvements of $17 after tax along with strong growth at AFL drove
ATOI results higher.
Reconciliation Of ATOI to Consolidated Net Income
Items required to reconcile ATOI to consolidated net income include:
corporate adjustments to eliminate any remaining profit or loss between
segments; the after-tax impact of interest income and expense at the statutory
rate; minority interest; corporate expense, comprised of the general
administrative and selling expenses of operating the corporate headquarters and
other global administrative facilities along with depreciation on corporate-
owned assets; and other, which includes the impact of LIFO, differences between
estimated tax rates used in each segment and the corporate effective tax rate,
and other non-operating items such as foreign exchange.
Interest expense increased because of higher debt related to recent
acquisitions. Minority interest increased quarter-over-quarter and year over
year due to higher income at AofA, AFL and Aluminio. Corporate expense increased
from the 1999 third quarter and nine-month period primarily due to acquisitions.
Other increased in the 2000 nine-month period compared to the 1999 period due to
larger foreign exchange losses and the amortization of unallocated purchase
accounting adjustments on the Reynolds acquisition, partially offset by higher
equity and miscellaneous income.
17
<PAGE>
Costs and Other
Cost of Goods Sold - Cost of goods sold increased $1,678 and $2,958 from the
prior year third quarter and nine-month period, respectively. The increase
reflects higher volumes primarily due to acquisitions, as well as higher energy
costs. Cost of goods sold as a percentage of sales in the 2000 third quarter was
76.2% versus 77.0% in the 1999 third quarter, and in the 2000 nine-month period
was 75.3% versus 77.8% in the 1999 period. The lower ratios in 2000 were due to
higher revenues resulting from higher prices for alumina and aluminum, higher
aluminum volumes and improved productivity, offset by higher energy costs.
Selling, General Administrative, and Other Expenses - Selling, general
administrative, and other (SG&A) expenses were up $112 from the 1999 third
quarter and $216 from the 1999 nine-month period, predominantly due to
acquisitions. SG&A as a percentage of sales was 5.0% for the 2000 third quarter
and 2000 year-to-date periods, unchanged from the 1999 third quarter and up
slightly from 4.9% for the 1999 year-to-date period.
Interest Expense - Interest expense was up $90, or 176%, from the 1999 third
quarter, and $134, or 88%, from the 1999 nine-month period, due to higher
interest rates and the higher debt levels resulting from the recent
acquisitions. Approximately 85% of these increases are due to higher debt levels
and the remaining due to higher interest rate.
On July 20, 2000, Alcoa issued $1,500 of callable notes. Of these notes,
$1,000 mature in 10 years and carry a coupon rate of 7.375%, and $500 mature in
5 years and carry a coupon rate of 7.25%.
Income Taxes - The income tax provision for the period is based on the
effective tax rate expected to be applicable for the entire year. The 2000 third
quarter rate of 34% differs from the statutory rate primarily because of lower
taxes on foreign income. This 2000 third quarter rate differs from the 1999
third quarter rate of 32% primarily because of higher US income before tax in
2000 that dilutes the impact of net permanent differences.
Other Income/Foreign Currency - Other income increased to $46 in the 2000 third
quarter and $139 in the 2000 nine-month period, up 21% and 81%, respectively,
over the comparable 1999 periods. Quarterly results benefited from $5 higher
equity income, $6 higher interest income and $6 in insurance proceeds. These
positive items were offset by $6 larger negative translation and exchange
adjustments and $4 lower mark-to-market gains on commodity contracts. Year-to-
date results benefited from $43 higher equity income, $13 higher interest
income, and $7 due to the demutualization of Met Life, as well as from a $6
increase in the gains on sales of assets. These positive year-over-year items
were partially offset by $16 higher translation and exchange losses and $3 lower
mark-to-market gains on commodity contracts. These mark-to-market gains totaled
$13 in the 2000 nine-month period versus $16 in the prior year period.
Minority Interests - Minority interests' share of income from operations
increased 69% from the 1999 third quarter and 111% from the 1999 nine-month
period to $91 and $281, respectively. The increase was due primarily to earnings
growth at AofA and AFL, and income in 2000 versus a net loss in 1999 at
Aluminio.
Risk Factors
In addition to the risks inherent in its operations, Alcoa is exposed to
financial, market, political and economic risks. The following discussion, which
provides additional detail regarding Alcoa's exposure to the risks of changing
commodity prices, foreign exchange rates and interest rates, includes forward-
looking statements that involve risk and uncertainties. Actual results could
differ materially from those projected in these forward-looking statements.
18
<PAGE>
COMMODITY PRICE RISKS - Alcoa is a leading global producer of aluminum ingot and
aluminum fabricated products. As a condition of sale, customers often require
Alcoa to commit to fixed-price contracts that sometimes extend a number of years
into the future. Customers will likely require Alcoa to enter into similar
arrangements in the future. These contracts expose Alcoa to the risk of
fluctuating aluminum prices between the time the order is accepted and the time
that the order ships.
In order to fulfill some of the orders noted above, Alcoa might be required
to purchase aluminum to supplement its internal production. These purchases
expose the company to the risk of higher aluminum prices. To hedge this risk,
Alcoa enters into long positions, principally using futures and options. Alcoa
follows a stable pattern of purchasing metal; therefore, it is highly likely
that anticipated metal requirements will be met. At September 30, 2000 and 1999,
these contracts totaled approximately 371,000 and 500,000 mt, respectively.
These contracts act to fix the purchase price for these metal purchase
requirements, thereby reducing Alcoa's risk to rising metal prices.
The futures and options contracts noted above are with creditworthy
counterparties and are further supported by cash, treasury bills or irrevocable
letters of credit issued by carefully chosen banks.
The expiration dates of options and the delivery dates of futures contracts
may 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 options positions may 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 if metal prices fall below the price of contracts being rolled forward.
In addition to the above-noted aluminum positions, Alcoa had 71,000 mt and
35,000 mt of futures and options contracts outstanding at September 30, 2000 and
1999, 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 quarter-to-date after-tax
credit to earnings of $2 at September 30, 2000 and $5 at September 30, 1999.
Alcoa also sells products to various third parties at prices that are
influenced by changes in London Metal Exchange (LME) aluminum prices. From time
to time, the company may elect to hedge a portion of these exposures to reduce
the risk of fluctuating market prices on these sales. Toward this end, Alcoa may
enter into short positions using futures and options contracts. At September 30,
2000 and September 30, 1999, these contracts totaled 116,000 mt and 173,000 mt.
respectively. These contracts act to fix a portion of the sales price related to
these sales contracts.
Alcoa also purchases certain other commodities, such as fuel oil, natural
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 sometimes used to limit the risk
of fluctuating exchange rates. In addition, 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 and held for
purposes other than trading. They are used primarily to mitigate uncertainty and
volatility, and principally cover underlying exposures.
Alcoa's commodity and derivative activities are subject to the management,
direction and control of the Strategic Risk Management Committee (SRMC). SRMC is
composed of the chief executive officer, the chief financial
19
<PAGE>
officer and other officers and employees that the chief executive officer may
select from time to time. SRMC reports to the board of directors at each of its
scheduled meetings on the scope of its derivative activities.
ENVIRONMENTAL MATTERS
Alcoa continues to participate in environmental assessments and cleanups at a
number of locations. These include approximately 24 owned or operating
facilities and adjoining properties, approximately 29 previously owned or
operated facilities and adjoining properties and approximately 90 Superfund and
other waste sites. A liability is recorded for environmental remediation costs
or damages when a cleanup program becomes probable and the costs or damages can
be reasonably estimated.
As assessments and cleanups proceed, the liability is adjusted based on
progress in determining the extent of remedial actions and related costs and
damages. The liability can change substantially due to factors such as the
nature and extent of contamination, changes in remedial requirements and
technological changes. Therefore, it is not possible to determine the outcomes
or to estimate with any degree of accuracy the potential costs for certain of
these matters. For example, there are issues related to the Massena, New York,
Pt. Comfort, Texas and Troutdale, Oregon sites where investigations are ongoing
and where natural resource damage or off-site migrations of contaminants to
sediments has been alleged. The following discussion provides additional details
regarding the current status of these sites.
MASSENA/GRASSE RIVER. Sediments and fish in the Grasse River adjacent to
Alcoa's Massena, New York plant site contain varying levels of polychlorinated
biphenyl (PCB). Alcoa has been identified by the U.S. Environmental Protection
Agency (EPA) as potentially responsible for this contamination and, since 1989,
has been conducting investigations and studies of the river under order from the
EPA issued under the Comprehensive Environmental Response, Compensation and
Liability Act, also known as Superfund. During 1999, Alcoa continued to perform
studies and investigations on the Grasse River. A planned pilot test of certain
sediment capping techniques, intended for 1999, could not be completed because a
final scope of work could not be developed with EPA in time to complete the
project before the construction season concluded. In addition, in the 1999
fourth quarter, Alcoa submitted an Analysis of Alternatives to EPA. This report
identified potential courses of remedial action related to the PCB contamination
of the river. Alcoa has proposed to EPA that the planned pilot scale tests be
conducted to assess the feasibility of performing certain sediment-covering
techniques before selection and approval of a remedial alternative by EPA. The
costs of these pilot scale tests have been fully reserved. The results of these
tests and discussions with EPA regarding all of the alternatives identified
should provide additional information for the selection and approval of the
appropriate remedial alternative.
The Analysis of Alternatives report and the results of the pilot tests must
be reviewed and approved by EPA. Currently, no one of the alternatives is more
likely to be selected than any other. The range of additional costs associated
with the potential courses of remedial action is between zero and $53. During
meetings through September 2000, EPA has indicated to Alcoa that it believes
additional remedial alternatives need to be included in the Analysis of
Alternatives. Such additional remedies involve removal of more sediment from the
river than was included in the alternatives provided in the recent Analysis of
Alternatives report. The cost of such potential additional remedial alternatives
cannot be estimated at this time.
In 1988, Reynolds discovered that soils in the area of the heat transfer
medium system at Reynolds' primary aluminum production plant in Massena, New
York were contaminated with PCB and other contaminants. Remediation of the
contaminated soils and other contaminated areas of the plant were substantially
completed in 1998. Portions of the St. Lawrence River system adjacent to the
plant are also contaminated with PCB. Since 1989, Reynolds has been conducting
investigations and studies of the river system under order from the EPA issued
under Superfund. Reynolds has worked with EPA to better define the scope of the
dredging program, which is planned for 2001. Alcoa and Reynolds are also aware
of a natural resource damage claim that may be
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asserted by certain federal, state and tribal natural resource trustees at these
locations.
PT. COMFORT/LAVACA BAY. In 1990, Alcoa began discussions with certain state
and federal natural resource trustees concerning alleged releases of mercury
from its Pt. Comfort, Texas facility into the adjacent Lavaca Bay. In March
1994, EPA listed the "Alcoa (Point Comfort)/Lavaca Bay Site" on the National
Priorities List and, shortly thereafter, Alcoa and EPA entered into an
administrative order on consent under which Alcoa is obligated to conduct
certain remedial investigations and feasibility studies. In accordance with this
order, Alcoa has submitted a baseline risk assessment and a remedial
investigation report and a draft feasibility study to EPA. A final feasibility
study is being developed and is expected to be submitted to EPA within several
months. In addition, Alcoa has nearly completed construction of the EPA-approved
project to fortify an offshore dredge disposal island. The probable and
estimable costs of these actions are fully reserved. Since the order with EPA,
Alcoa and the natural resource trustees have continued efforts to understand
natural resource injury and ascertain appropriate restoration alternatives. That
process is currently expected to be completed by late 2000 or early 2001.
TROUTDALE, OREGON. In 1994, the EPA added Reynolds' Troutdale, Oregon
primary aluminum production plant to the National Priorities List of Superfund
sites. The company is cooperating with the EPA and, under a September 1995
consent order, is working with the EPA in investigating potential environmental
contamination at the Troutdale site and promoting more efficient cleanup at the
site. The shutdown of operations at Troutdale, announced June 28, 2000, could
affect the cleanup alternative selected for the site. The cost of such new
alternative is not currently estimable.
SHERWIN, TEXAS. In connection with the sale of the Sherwin Aluminum refinery
which was required to be divested as part of the Reynolds merger, (see Footnote
G) the company has agreed to retain responsibility for the remediation of
certain properties including former waste disposal areas and a share of the
ultimate closure costs of other active waste disposal areas. The cost of such
remediation is being evaluated.
Based on the above, it is possible that Alcoa's results of operations, in a
particular period, could be materially affected by matters relating to these
sites. However, based on facts currently available, management believes that the
disposition of these matters will not have a materially adverse effect on the
financial position or liquidity of the company.
Alcoa's remediation reserve balance at September 30, 2000 was $319 (of which
$43 was classified as a current liability) and reflects the most probable costs
to remediate identified environmental conditions for which costs can be
reasonably estimated. Remediation expenses charged to the reserve in the 2000
third quarter were $23. They include expenditures currently mandated, as well as
those not required by any regulatory authority or third party.
Liquidity and Capital Resources
CASH FROM OPERATIONS
Cash from operations during the 2000 year-to-date period totaled $1,908,
compared with $1,410 in the 1999 period. The increase reflects higher net
income, increases in non-cash items such as depreciation and in the minority
interests' share of net income, partly offset by higher working capital
requirements.
FINANCING ACTIVITIES
Financing activities provided $1,669 of cash in the 2000 first nine months,
compared with $775 used in the 1999 period. The increase was mainly due to the
issuance of debt to fund acquisitions. Short-term borrowings and commercial
paper grew by $1,856 and $849, respectively, in the 2000 period, compared with
increases of $181 and $0, respectively, in the 1999 period. Long-term debt
increased by $1,703 in the 2000 nine-month period, versus an increase of $318 in
the 1999 period. Offsetting this were increases in payments on long-term debt,
$1,689 in the 2000 period versus $726 in the 1999 period, as well as in
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repurchases of common stock, $730 in the 2000 nine-month period versus $838 in
the 1999 period.
Dividends paid to shareholders were $310 in the 2000 nine-month period, an
increase of $87 over the 1999 period. The change was primarily due to a 24%
increase in Alcoa's total dividend, which paid out 37.5 cents per share in the
2000 nine-month period versus 30.2 cents per share in the 1999 period.
Investing Activities
Investing activities used $3,523 during the 2000 nine-month period, compared
with $762 in the 1999 period. Acquisitions accounted for the bulk of the change,
requiring $2,745 in the 2000 period versus $52 in the 1999 period. In the 2000
first quarter Alcoa acquired Excel Extrusions, Inc. from Noranda Aluminum. In
the second quarter, Alcoa acquired MCG from Wassall plc. as well as Cordant, the
portion of Howmet not owned by Cordant, and Reynolds. Also in the second
quarter, AofA acquired Eastern Aluminum Ltd. In the third quarter Alcoa acquired
Baco Consumer Products, Ltd., Southern Plastics, Inc, and C-KOE Aluminum, Inc.
while Aluminio acquired Itaipava.
During the 1999 period, Alcoa acquired the bright products business of
Pechiney's Rhenalu rolling plant located near Toulouse, France, Reynolds'
aluminum extrusion plant in Irurzun, Spain, and the remaining 50% of the A-CMI
joint venture with Hayes Lemmerz International.
.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
------------------
As previously reported, in March 1999 two search warrants were executed by
various federal and state agencies on the Alcoa Port Allen works of Discovery
Aluminas, Inc.,(Discovery) a subsidiary, in Port Allen, Louisiana. Also in
March, Discovery was served with a grand jury subpoena that required the
production to a federal grand jury of certain company records relating to
alleged environmental issues involving wastewater discharges and management of
solid or hazardous wastes at the plant. In April 1999, the Port Allen plant
manager was indicted for a single count of violating the Clean Water Act. In
early October 2000 a plea agreement was executed between Discovery and the
federal authorities. In addition, an agreement was reached between Discovery and
state/local authorities to resolve this matter. Under these agreements together,
Discovery will: (1) plead guilty to a one-count felony for violating the federal
Clean Water Act and its state analog; (2) pay a $700,000 fine to the United
States; (3) pay $50,000 in community restitution; and (4) pay $400,000 to the
State of Louisiana. Discovery's plea is scheduled to be entered in federal court
on October 30, 2000.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
12. Computation of Ratio of Earnings to Fixed Charges
15. Independent Accountants' letter regarding unaudited financial
information
27. Financial Data Schedule
(b) Reports on Form 8-K. During the third quarter of 2000, Alcoa filed with
the Securities and Exchange Commission (1) a Form 8-K/A on July 10, 2000,
providing additional financial information concerning the merger between
Alcoa and Reynolds, and 2) a Form 8-K, dated September 19, 2000,
concerning anticipated 2000 third quarter and nine-month earnings.
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Alcoa Inc.
October 20, 2000 By /s/ RICHARD B. KELSON
------------------------- ----------------------------
Date Richard B. Kelson
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
October 20, 2000 By /s/ TIMOTHY S. MOCK
--------------------------- ----------------------------
Date Timothy S. Mock
Vice President and Controller
(Chief Accounting Officer)
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EXHIBITS
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Page
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12. Computation of Ratio of Earnings to Fixed Charges 25
15. Independent Accountants' letter regarding unaudited 26
Financial information
27. Financial Data Schedule
24
