UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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.)
Alcoa Corporate Center, 201 Isabella Street, Pittsburgh, Pennsylvania 15212-5858
(Address of principal executive offices) (Zip code)
Registrant's telephone number--area code 412
Investor Relations------------553-3042
Office of the Secretary------553-4707
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $1.00 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 .
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
As of February 17, 2000 there were 371,872,159 shares of common stock, par
value $1.00, of the registrant outstanding. The aggregate market value of such
shares, other than shares held by persons who may be deemed affiliates of the
registrant, was approximately $28,450 million.
Documents incorporated by reference.
Parts I and II of this Form 10-K incorporate by reference certain
information from the registrant's 1999 Annual Report to Shareholders. Part III
of this Form 10-K incorporates by reference the registrant's Proxy Statement
dated February 25, 2000, except for the performance graph and Compensation
Committee Report.
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ALCOA INC.
Formed in 1888 under the laws of the Commonwealth of Pennsylvania, Alcoa Inc.
has its registered office in Pittsburgh, Pennsylvania. The name of the Company
was changed, effective January 1, 1999, from Aluminum Company of America to
Alcoa Inc. In this report, unless the context otherwise requires, Alcoa or the
Company means Alcoa Inc. and all subsidiaries consolidated for the purposes of
its financial statements.
PART I
Item 1. Business.
Overview
- --------
Alcoa is the world's leading producer of primary aluminum, fabricated aluminum
and alumina and a major participant in all segments of the industry: mining,
refining, smelting, fabricating and recycling. Alcoa serves customers worldwide
primarily in the transportation (including aerospace, automotive, rail and
shipping), packaging, building and industrial markets with a great variety of
fabricated and finished products.
Alcoa is organized into 25 independently managed business units and has over 228
operating locations in 32 countries. Alcoa gives business unit leaders clear
responsibilities that concentrate authority closer to customers.
The U.S. remains the largest market for aluminum. Europe, Asia and Latin
America, however, present opportunities for substantial growth in aluminum use.
To take advantage of these growth opportunities, Alcoa has made acquisitions or
formed joint ventures and strategic alliances in key regional markets.
Recent Developments
- -------------------
In August 1999, Alcoa and Reynolds Metals Company (Reynolds) announced that they
had reached a definitive merger agreement under which Alcoa will acquire all
outstanding shares of Reynolds in a tax-free stock-for-stock transaction.
Reynolds shareholders will receive 1.06 shares of Alcoa common stock for each
share of Reynolds common stock.
The combined company will have about 127,000 employees and will operate in over
300 locations in 37 countries. Based on annualized 1999 results, the combined
company should have annual revenues that exceed $21 billion.
Alcoa and Reynolds have made all of the requisite competition notification
filings with the appropriate U.S. and international governmental authorities. On
February 11, 2000, the Reynolds stockholders voted to approve and adopt the
merger agreement. Completion of the merger is subject to satisfaction of
applicable regulatory requirements.
Market and Geographic Information
- ---------------------------------
Alcoa serves a variety of customers in a number of markets. Consolidated
sales from these markets during the past three years were:
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<TABLE>
<CAPTION>
(dollars in millions)
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Transportation $ 3,976 $ 3,738 $ 3,119
Packaging 3,169 3,304 3,201
Distributor and Other 2,896 2,764 2,151
Aluminum Ingot 2,241 2,012 1,521
Alumina and Chemicals 1,842 1,781 1,961
Building and Construction 2,199 1,741 1,366
----- ----- -----
Total $16,323 $15,340 $13,319
======= ======= =======
(dollars in millions)
1999 1998 1997
U.S. $10,392 $ 9,212 $ 7,593
Australia 1,398 1,470 1,875
Spain 1,059 965 44
Brazil 730 934 1,161
Germany 521 554 580
Other 2,223 2,205 2,066
----- ----- -----
Total $16,323 $15,340 $13,319
======= ======= =======
</TABLE>
Alcoa's Financial Reporting Segments
- ------------------------------------
In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," Alcoa reports four worldwide segments: Alumina and
Chemicals, Primary Metals, Engineered Products and Flat-Rolled Products. All of
the Company's products that do not fall into one of those four segments are
reported in the category entitled Other. See Note O to the Financial Statements
for information on segment and related geographic financial information.
I. Alumina and Chemicals
The Alumina and Chemicals segment includes the production and sale of:
o bauxite
o alumina
o alumina-based chemicals used principally in industrial applications
and
o transportation services for bauxite and alumina.
The segment consists of a group of companies and assets referred to as Alcoa
World Alumina and Chemicals (AWAC). Alcoa owns 60% and WMC Limited (WMC) owns
40% of the AWAC group of companies. AWAC has two businesses with distinct
product lines: Alcoa World Alumina (AWA) produces smelter grade alumina and
Alcoa Industrial Chemicals (AIC) makes alumina-based chemicals. AWA also has two
geographic regions: Alcoa World Alumina - Australia (AWA - Australia) and Alcoa
World Alumina - Atlantic (AWA - Atlantic). Alcoa World Alumina Australia is the
trading name for Alcoa of Australia Limited (AofA); all references throughout
this report will be to AWA - Australia instead of AofA.
Bauxite and Alumina
- -------------------
Bauxite is aluminum's principal raw material. Alcoa refines bauxite into alumina
using a chemical process. Alcoa processes into alumina most of the bauxite that
it mines. All of the Company's active bauxite interests are part of AWAC, except
in Brazil.
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Alcoa is the world's leading producer of alumina. The Company sells alumina
principally from operations in Australia, Jamaica and Suriname. Alcoa sold
approximately 53% of its alumina production in 1999 under supply contracts to
third parties worldwide. The Company consumed the remainder of its alumina
production in its smelting and industrial chemical operations. Alcoa negotiates
most of its alumina supply contracts on the basis of agreed volumes over
multi-year periods to assure a continuous supply to the smelters. The parties
negotiate the prices periodically. Prices may be based on formulas related to
aluminum ingot market prices or to alumina production costs.
AWA entities and Sino Mining Alumina Limited (SMAL) have a long-term agreement
for the purchase of alumina for the Chinese aluminum industry. SMAL is
ultimately owned by the China State Nonferrous Metals Industry Administration
(SNMIA), a Chinese state-owned enterprise that has succeeded the China National
Nonferrous Metals Industry Corporation as the entity responsible for the Chinese
aluminum industry as part of the ongoing governmental restructuring in China.
The agreement entitles a subsidiary of SMAL to purchase a minimum of 400,000
metric tons (mt) of alumina per year for 30 years. The ongoing restructuring of
SNMIA and the Chinese aluminum industry has not impacted this agreement. The
SMAL subsidiary also has the option to increase its alumina purchases as the
needs of the Chinese aluminum industry grow.
In November 1999, Alcoa and China Aluminum Corp. (Chalco) signed a memorandum of
understanding to form a strategic partnership. SNMIA witnessed the memorandum of
understanding. The parties are negotiating a master strategic partnership
agreement that is expected to involve an association of several Chalco and Alcoa
aluminum production facilities.
Alcoa World Alumina - Australia
- -------------------------------
AWA - Australia's bauxite mineral lease is due for renewal in 2002, but renewal
options allow AWA - Australia to extend the lease until 2044.
AWA - Australia's three alumina refineries, located in Kwinana, Pinjarra and
Wagerup, in Western Australia, have an aggregate annual capacity of 7.3 million
mt at the end of 1999. In October 1999, AWA - Australia announced that it had
completed its 440,000 mt per year expansion of the Wagerup refinery. This
expansion increased Wagerup's production capacity from approximately 1.7 million
mt per year to approximately 2.2 million mt per year. This is the first stage of
a planned expansion to 3.3 million mt per year at Wagerup, for which AWA -
Australia has obtained environmental approval.
AWA - Australia meets most of the energy requirements of its Australian
refineries through a contract with the North West Shelf Gas Joint Venture. The
contract extends through 2020.
In May 1999, AWA announced that it had applied for a patent for a
high-efficiency causticization invention for use in the alumina refining
process. A research team at the Kwinana refinery developed the new process,
which improves productivity at a refinery by reducing the amount of sodium
carbonate in the chemical solution for processing the bauxite ore.
AWA - Australia is exploring the possibility of selling three power stations in
Western Australia and has requested bids from interested parties. The three
natural gas-fired cogeneration power stations are located within each of AWA -
Australia's three alumina refineries in Western Australia.
Alcoa World Alumina - Atlantic
- ------------------------------
Suriname
Suriname Aluminum Company, L.L.C. (Suralco) mines bauxite in Suriname under
rights that expire in 2032. Suralco also holds a 24% minority interest in a
bauxite mining joint venture managed by the
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majority owner, an affiliate of Billiton plc (Billiton). Bauxite from both
mining operations serves Suralco's share of a refinery in Suriname. Suralco
expects to deplete the current mine reserves at both operations in the period
2005-2010.
Suralco owns 55% of a 1.7 million mt per year alumina refinery in Paranam,
Suriname and operates the plant. An affiliate of Billiton holds the remaining
45% interest.
Jamaica
Bauxite mining rights in Jamaica expire after the year 2020. The bauxite mining
rights are held in a joint venture (Jamalco) with the Government of Jamaica. In
January 2000, Jamalco entered into a cost-sharing and production-sharing joint
venture with Aluminum Partners of Jamaica to mine the bauxite.
An Alcoa subsidiary and a corporation owned by the Government of Jamaica are
equal participants in an alumina refinery in Clarendon Parish, Jamaica. The
Alcoa subsidiary manages the joint venture. At the end of 1999, the refinery's
annual capacity was approximately one million mt.
Brazil
Alcoa owns 59% of Alcoa Aluminio S.A. (Aluminio). Aluminio manages the operation
of the Alumar Consortium (Alumar), a cost-sharing and production-sharing venture
that owns a large refining and smelting project near Sao Luis, in the
northeastern state of Maranhao. For the refining project, Aluminio owns 35.1% of
Alumar, an affiliate of Billiton owns 36%, Abalco S.A. (owned 60% by Alcoa and
40% by WMC) owns 18.9% and an affiliate of Alcan Aluminium Limited (Alcan) owns
10%.
In 1999, the Alumar refinery completed an expansion of 260,000 mt, bringing the
total annual capacity to approximately 1.25 million mt. The smelter consumes
most of this alumina production.
Aluminio holds an 8.6% interest and Abalco S.A. holds a 4.6% interest in
Mineracao Rio do Norte S.A. (MRN), a mining company jointly owned by affiliates
of Alcan, Companhia Brasileira de Aluminio, Companhia Vale do Rio Doce,
Billiton, Norsk Hydro and Reynolds. Aluminio and Abalco S.A. purchase bauxite
from MRN under long-term supply contracts.
At Pocos de Caldas, Aluminio mines bauxite and operates a refinery. The refinery
has an annual capacity of 275,000 mt and primarily supplies Aluminio's nearby
smelter.
Spain
Alcoa and a WMC affiliate hold 60% and 40% interests, respectively, in the
refinery at San Ciprian. The refinery's current annual capacity is 1.1 million
mt. A modernization plan for the San Ciprian plant will increase alumina
production capacity by 220,000 mt per year. Basic engineering of the project has
been completed and the work is expected to finish by March 2001.
Africa
Alcoa has long-term contracts to purchase bauxite mined by a partially-owned
entity in the Republic of Guinea in Western Africa. This bauxite services most
of the requirements of the Pt. Comfort, Texas and San Ciprian, Spain alumina
refineries. The contracts expire after 2011.
United States
AWA, through a majority-owned entity, St. Croix Alumina, L.L.C., owns a 600,000
mt per year alumina refinery located on St. Croix, U.S. Virgin Islands. In
February 1998, AWA restarted the refinery due to
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an increase in worldwide demand for alumina. The refinery had been inactive as a
result of world alumina market conditions.
AWA owns an alumina refinery at Pt. Comfort, Texas with an annual capacity to
2.3 million mt.
Alcoa Industrial Chemicals
- --------------------------
Alcoa sells industrial chemicals to customers in a broad spectrum of markets.
These markets include:
o refractories
o ceramics
o abrasives
o chemicals processing and
o other specialty applications.
Alcoa produces or processes industrial chemicals, principally alumina-based
chemicals, at the following locations. Except for the plants located in Brazil,
all of the following facilities are part of AIC:
o Bauxite, Arkansas
o Dalton, Georgia
o Falta, India (joint venture)
o Ft. Meade, Florida
o Iwakuni and Naoetsu, Japan
o Kwinana and Rockingham, Australia
o Leetsdale, Pennsylvania
o Ludwigshafen, Germany
o Moerdijk and Rotterdam, the Netherlands
o Pocos de Caldas and Salto, Brazil
o Port Allen and Vidalia, Louisiana
o Pt. Comfort, Texas and
o Singapore.
In late 1998, AIC began construction of a facility in China to process tabular
alumina and other alumina-based materials for sale to the Chinese refractory
market. This facility is scheduled for completion in the first half of 2000.
Alcoa produces aluminum fluoride at two locations, Pt. Comfort and Ft. Meade,
both in the U.S. At Pt. Comfort, the aluminum fluoride is produced from
fluorspar and at Ft. Meade it is produced from hydrofluosilicic acid. Aluminum
fluoride is used in the aluminum smelting process.
AIC and PR Minerals, LLC formed a joint venture company named Great Lakes
Minerals, L.L.C. The new company processes industrial mineral products,
primarily refractory aggregates such as calcined bauxite and brown fused
alumina. A newly constructed processing facility in Wurtland, Kentucky began
operating in January 2000.
II. Primary Metals
The Company smelts primary aluminum from alumina obtained principally from its
alumina refineries. Alcoa's consolidated primary aluminum capacity is
approximately 3.2 million mt per year. When operating at capacity, Alcoa's
smelters satisfy most of the primary aluminum requirements of its fabricating
operations. Alcoa operations used most of the Company's primary aluminum
production in 1999 for alloying and/or further fabricating. Purchases of
aluminum scrap, principally used beverage cans, supplemented by purchases of
ingot when necessary, satisfy additional aluminum requirements.
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Since 1994, Alcoa has had 450,000 mt of its worldwide smelting capacity idle
because of an oversupply of ingot on world markets. In January 2000, Alcoa
announced that it will restart approximately 200,000 mt of its currently idled
aluminum smelting capacity. The Company plans to bring this capacity into
production over the course of the year. Alcoa will have approximately 250,000 mt
of aluminum smelting capacity that remains idle following this restart.
Alcoa produces aluminum from alumina by an electrolytic process requiring large
amounts of electric power. Electric power accounts for approximately 25% of the
Company's primary aluminum costs. Alcoa generates approximately 25% of the power
used at its smelters worldwide. Most purchase contracts for firm power tie
prices to aluminum prices or to prices based on various indices.
In February 1999, the Company entered into a 50/50 joint venture with C.C. Pace
Resource Management, LLC, an energy management and consulting company, to form
Pace Global Energy Services, LLC. The new company will provide a variety of
energy-related management and consulting services to Alcoa and to other
unaffiliated companies.
Australia
AWA - Australia is a participant in a joint venture smelter at Portland, in the
State of Victoria, with an annual capacity of 345,000 mt. The owners of the
smelter are:
o AWA - Australia (45% interest)
o China International Trust and Investment Corporation (22.5% interest)
o Marubeni Aluminium Australia Pty., Ltd. (22.5% interest) and
o Eastern Aluminum Ltd. (10% interest).
Each participant in this smelter contributes to the cost of operations and
construction in proportion to its interest in the venture. Each participant also
then receives a proportionate share of the output. AWA - Australia supplies the
alumina through individual commercially negotiated contracts and operates the
smelter.
Power is generated from extensive brown coal deposits covered by a long-term
mineral lease held by AWA - Australia, and that power currently provides
approximately 40% of the electricity for the Company's 180,000 mt per annum
smelter in Point Henry, Victoria. The State Electricity Commission of Victoria,
under contracts with AWA - Australia, provides the remaining power for this
smelter and all power for the Portland smelter. Using a formula, the parties
determine the power prices based on the price of aluminum. Negotiations have
been finalized to permit power interuptibility at both Point Henry and Portland
that will contribute to accommodating peak demands in the power grid serving the
State of Victoria.
Brazil
The Alumar smelter at Sao Luis, Brazil has an annual capacity of 365,000 mt.
Based on the cost-sharing and production-sharing structure, Aluminio receives
about 54% of the production from this smelter. The alumina requirements for its
share of the smelter production are supplied from Aluminio's share of the nearby
refinery. Aluminio purchases electric power from Central Eletricas de Minas
Gerais S.A. (CEMIG), the government-controlled electric utility, at a small
discount from the applicable industrial tariff price. There is a protective cap
on the price of the electric power based on the London Metal Exchange (LME)
aluminum price.
In February 1999, Aluminio and CEMIG entered into a new power purchase
agreement. Similar to the previous agreement, Aluminio purchased the plant's
anticipated full power requirements for 38 months, beginning April 1999, through
a single payment based on the price of energy on the date of the agreement.
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Aluminio participates in a consortium that is building the new Machadinho
hydroelectric power plant in Southern Brazil. In early 1998, after all of the
necessary environmental and other approvals had been obtained, the consortium
began construction of the dam and related facilities. At the end of 1999, over
40% of the project was completed. Aluminio will share in the output of the plant
beginning in 2002. Aluminio expects its share to be sufficient to supply
approximately one-half of the power requirements for the Pocos de Caldas
smelter.
Europe
The Company's aluminum smelters at Portovesme and Fusina, Italy have a combined
annual capacity of 187,000 mt. The owners of the Eurallumina refinery, located
on the island of Sardinia adjacent to the Portovesme smelter, supply
approximately 40% of the alumina for the smelters under an evergreen agreement.
The balance of the alumina requirements for the smelters is supplied by AWA.
ENEL, Italy's state-owned utility, supplies power for these smelters.
The Company also operates smelters at San Ciprian, La Coruna and Aviles, Spain,
with a combined annual capacity of 360,000 mt. The San Ciprian refinery supplies
alumina, and the government-controlled power grid currently supplies electric
power at the lowest applicable industrial tariff rate.
The Company reports equity earnings from its interest in two smelters in Norway.
Elkem Aluminium ANS, 50%-owned by an Alcoa subsidiary, is a partnership that
owns and operates the smelters.
North America
In May 1999, the Company filed with the Federal Energy Regulatory Commission,
and the states of New York and North Carolina, indicating its intent to combine
five of its wholly-owned utility subsidiaries, Yadin, Inc., Tapoco, Inc., Alcoa
Generating Corporation, Long Sault, Inc. and Colockum Transmission Company into
a single entity, to be called Alcoa Power Generating Inc. (APGI). The mergers
into APGI were effective January 1, 2000.
The Company generates approximately 35% of the power requirements for its 11
North American smelters and generally purchases the remainder under long-term
contracts. Alcoa obtains approximately 12% of the self-generated power from its
entitlement to a fixed percentage of the output from Chelan County Public
Utility District's Rocky Reach hydroelectric power facility located in the State
of Washington.
In addition, Alcoa has a contract with the Bonneville Power Administration (BPA)
that services the Wenatchee, Washington smelter. Several contractual provisions
allow power supply restrictions when power is in short supply. Beginning in
1995, power purchased from a local public utility district replaced a portion of
the power supplied under the BPA contract. The Wenatchee facility currently uses
no power from BPA, but instead purchases its additional power needs from the
local public utility district.
The Company has generated substantially all of the power used at its Warrick,
Indiana smelter using nearby coal reserves. A 1996 coal supply contract
satisfies 40% of the smelter's fuel requirements through 2006. Low-sulfur coal
contracts satisfied an additional 35% of the requirement through 1999.
Short-term contracts of less than two years satisfy the remainder of the fuel
requirements.
The Rockdale, Texas smelter uses lignite to generate power. Company-owned
generating units supply about one-half of the total requirements. Texas
Utilities Company supplies the balance through a long-term power contract
expiring in 2013.
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APGI owns and operates hydroelectric facilities under Federal Energy Regulatory
Commission licenses. These facilities provide electric power for the aluminum
smelters at Alcoa, Tennessee and Badin, North Carolina. The Tennessee smelter
also purchases firm and interruptible power from the Tennessee Valley Authority
under a contract recently extended to 2010. In mid-1999, APGI entered into a
power sales contract with Carolina Power & Light Company (CP&L), under which
APGI sells the capacity and energy produced at its hydroelectric units to CP&L
and, in return, CP&L supplies the power requirements of the Badin plant. This
arrangement continues through the end of August 2000.
The purchased power (primarily hydroelectric) contract for the Massena, New York
smelter expires not earlier than 2003. Alcoa, however, may terminate this
contract with one year's notice.
The Lauralco smelter located in Deschambault, Quebec purchases electricity under
a long-term contract that expires in 2014, subject to certain extension
provisions. The power rates are linked to the prevailing price of aluminum.
Alcoa also has ownership interests in the following smelters: Intalco, located
in Ferndale, Washington (61.00%); Eastalco, located in Frederick, Maryland
(61.00%); Mt. Holly, located in Goose Creek, South Carolina (50.33%); and
Becancour, located in Becancour, Quebec (24.95%). A Japanese consortium, led by
a subsidiary of Mitsui & Co. Ltd., owns an aggregate 39% interest in each of the
Intalco and Eastalco facilities. Subsidiaries of Century Aluminum Company, a
publicly traded domestic corporation, and Sudelektra Holding, AG, a Swiss
corporation, together own 49.67% of Mt. Holly. On February 7, 2000, Century
Aluminum Company announced that it had reached agreement in principle to acquire
Sudelektra Holding's 23% interest in Mt. Holly. The transaction is expected to
be completed by the end of the first quarter of 2000. Subsidiaries of Reynolds
own an aggregate 50% interest, and a subsidiary of Pechiney owns a 25.05%
interest in Becancour and operates the smelter. Intalco, Eastalco, Mt. Holly,
and Becancour are all cost-sharing and production-sharing joint ventures.
Intalco, Eastalco, Mt. Holly, and Becancour purchase electricity under long-term
contracts that expire in the years 2001, 2003, 2005 and 2014, respectively,
subject to certain extension provisions. Except for Intalco, each facility's
contract is with a single supplier. The power rate for all of the electricity
supplied to the Becancour facility is linked to the prevailing price of
aluminum. In late 1995, Intalco entered into a series of new long-term power
contracts with the BPA and British Columbia Power Exchange Corporation to
provide all of its electricity needs from September 1996 through 2001. Under
these contracts, Intalco's power costs are no longer linked to the price of
aluminum but are set at a fixed rate. Mt. Holly entered into a new electric
power supply agreement in 1997, while Eastalco amended its existing power supply
agreement during the same year. For the foreseeable future, these contracts are
expected to meet the power requirements of these facilities.
In addition, Alcoa produces and markets aluminum paste, particles, flakes and
atomized powder. The Company also produces high-purity aluminum.
Suriname
In March 1999, Alcoa shut down its 30,000 mt per year smelter in Paranam,
Suriname.
III. Flat-Rolled Products
Alcoa's flat-rolled products serve three principal markets: packaging,
transportation and building and construction. Light gauge sheet products, mainly
rigid container sheet and foil, serve the packaging market, and mill products
(sheet and plate) serve the other markets. Alcoa employs its own sales force for
most flat-rolled products.
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Rigid Container Sheet (RCS)
- ---------------------------
RCS accounted for most of the 1999 revenues in the packaging market. Can
companies purchase RCS for production of beverage and food cans and can ends.
The number of RCS customers in the U.S. is relatively small. Use of aluminum
beverage cans continues to increase by approximately 3% annually worldwide.
Aluminum's diverse characteristics, particularly its light weight, recyclability
and flexibility for package designs, are significant factors in packaging
markets. Aluminum competes with materials such as steel, plastic and glass in
these markets. Alcoa maintains leadership in the packaging markets by improving
processes and facilities. Alcoa also provides marketing, research and technical
support to its customers. Alcoa produces RCS at the following locations:
o Warrick, Indiana
o Alcoa, Tennessee
o Point Henry and Yennora, Australia (joint venture facilities)
o Moka, Japan (joint venture facility) and
o Swansea, U.K.
Kaal Australia Pty., Ltd., 50%-owned by Alcoa, owns and operates the former AWA
- - Australia rolling mill at Point Henry and the former Comalco Limited rolling
mill at Yennora. These mills produce RCS for the Australian and Asian markets.
AWA - Australia supplies Kaal Australia with aluminum ingot.
A subsidiary of Alcoa participates in a 50/50 joint venture with Kobe Steel,
Ltd. that produces RCS for markets in Japan and other Asian countries. In
connection with this venture, Alcoa has a long-term contract to supply metal to
Kobe Steel.
Used aluminum beverage cans are an important source of metal for RCS. Recycling
aluminum conserves raw materials, reduces litter and saves energy -- about 95%
of the energy needed to produce aluminum from bauxite. In addition, recycling
capacity costs much less than new primary aluminum capacity. The Company has can
recycling or remelt facilities at or near its plants in:
o Warrick, Indiana
o Alcoa, Tennessee and
o Yennora, Australia.
Foil
- ----
Alcoa's Lebanon, Pennsylvania facility produces industrial foil, laminated foil
and brazing sheet. The building and construction, packaging and automotive
markets use these products. Continuous casting facilities in Hawesville,
Kentucky and Badin, North Carolina produce reroll stock in support of the
Lebanon facility. The Company also owns and operates an additional casting
facility in St. Louis, Missouri. Foil products from this facility are sold
primarily to commercial users in the flexible packaging, converter, food service
and pharmaceutical industries. Alcoa also owns and operates a facility in
Russellville, Arkansas. The Russellville plant, which is supported by the
casting facility in St. Louis, produces foodservice and converter foil products.
Aluminio, near Recife, Brazil, manufactures light gauge sheet, foil products and
laminated evaporator panels. The Yennora, Australia plant also produces light
gauge sheet. In addition, the facilities at Alicante and Sabinanigo, Spain
produce foil products.
Alcoa and Shanghai Aluminum Fabrication Plant (SAFP) have a joint venture, owned
60% by Alcoa and 40% by SAFP, that operates the former SAFP aluminum foil
production facility in Shanghai, China. With
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the addition of a second caster in April 1998, the annual output of the joint
venture facility is now over 15,000 mt.
The Company owns a 56% interest in a foil mill in Kunming, Yunnan, China.
In August 1999, Alcoa and Kibar Holding Co. of Turkey signed a letter of intent
to form a strategic alliance with Kibar's Turkish aluminum business. Kibar's
aluminum business, known as Assan Aluminyum, is the leading rolled products
business in Turkey.
In November 1999, Alcoa purchased substantially all the assets of Golden
Aluminum Company, a subsidiary of ACX Technologies, Inc. Golden Aluminum's
operations include a shuttered rolling facility in San Antonio, Texas and a
rolling facility in Ft. Lupton, Colorado. Alcoa will retain the San Antonio
plant for development work and non-can sheet production. In January 2000, Alcoa
sold the Ft. Lupton facility to Quanex Corporation.
Mill Products
- -------------
Alcoa produces sheet and plate products that are used in the following markets:
o aerospace
o auto and truck
o lithographic
o railroad
o shipbuilding
o building and construction
o defense and
o other industrial and consumer markets.
The Company maintains its own sales force for most of the sheet and plate
products.
Differentiation of material properties, price and service are significant
competitive factors in these markets. Aluminum's diverse characteristics are
important in markets where competitive materials include steel and plastics for
automotive and building applications; magnesium, titanium, composites and
plastics for aerospace and defense applications; and wood and vinyl in building
and construction applications. Alcoa continues to develop alloys and products
for aerospace and defense applications, such as those developed for the Boeing
777 aircraft, the Lockheed F-16 aircraft, the Canadair aircraft, the Advanced
Amphibious Assault Vehicle and the Airbus A340-600 aircraft.
Davenport, Iowa is home to Alcoa's largest sheet and plate plant. The plant
produces products requiring special alloying, heat-treating and other
processing. Some of these products are unique and proprietary. Over the past two
years, the Davenport plant's heat-treating capacity for sheet and plate was
increased to meet aerospace and automotive demand. Alcoa also commissioned the
largest vertical heat-treat furnace in North America, thus tripling the plant's
capacity for wide-width fuselage sheet. A horizontal plate heat-treating
furnace, which was installed in 1997, has increased the plant's capacity by 30%.
Alcoa has a plant in Hutchinson, Kansas for further processing and just-in-time
stocking of aluminum sheet products for the U.S. aerospace market. Alcoa serves
European sheet and plate markets through a distribution center in Paal, Belgium.
Alcoa has a plant in Danville, Illinois for further processing and just-in-time
stocking of aluminum sheet products for the North American automotive market.
This facility began to operate in 1998 and became fully operational during the
second half of 1999.
11
<PAGE>
The Company also has plants in Lancaster, Pennsylvania and Texarkana, Texas that
produce sheet and plate, and semi-fabricated products, circles and blanks. The
Lancaster facility also produces semi-fabricated cast aluminum plate, engineered
to meet highly specialized industrial applications. The Texarkana mill is a
leased facility. The five-year operating lease for the facility expires in
November 2002, but is renewable for up to two additional years.
Alcoa's Memory Products business in Sidney, Ohio was closed in 1999 as the
memory disk market and customer base declined.
Alcoa's Brite Products business in Norcross, Georgia was closed in 1999.
Alcoa and Kobe Steel have a joint venture consisting of one company in the U.S.
and one in Japan. The focus of these ventures is to expand the use of aluminum
sheet products in passenger cars and light trucks. As a result of a
restructuring of the venture in January 2000, the U.S. company will focus on
research and development efforts, while the Japanese company will continue to
engage in commercial (manufacturing, marketing and sales) as well as research
and development efforts, to serve the transportation industry.
The Company's Hungarian subsidiary, Alcoa-Kofem Kft (Kofem), produces common
alloy flat and coiled sheet as well as soft alloy extrusions for the building,
construction, food, transportation and agricultural markets in central and
western Europe. Kofem delivers aluminum truck bodies to major beverage companies
in Europe and the Middle East.
The Company's Alcoa Italia S.p.A. subsidiary produces industrial plate and
common alloy flat and coiled sheet for the building and construction,
transportation and other industrial markets in Europe at its Fusina, Italy
rolling mill.
Alcoa has rolling mills at Amorebieta, Alicante and Sabinanigo, Spain. These
mills produce common alloy flat and coiled sheet for the building and
construction, and transportation markets, lithographic sheet and coil, bright
products for lighting, cosmetic and industrial uses and foil products for food,
pharmaceutical and industrial applications in Europe.
In April 1999, Alcoa completed the acquisition of the bright products business
of Pechiney's Rhenalu rolling plant located at Castelsarrasin near Toulouse,
France.
In August 1999, Alcoa, the Holding Company for Metallurgical Industries and the
Egypt Aluminum Company (Egyptalum) signed a memorandum of understanding relating
to the formation of a strategic alliance between Alcoa and Egyptalum. Egyptalum
is the largest aluminum company in Egypt, with substantial assets in smelting
and rolled products.
IV. Engineered Products
Engineered products include aluminum extrusions, forgings, castings and wire,
rod and bar.
Extrusions
- ----------
The North American extrusion business is comprised of Alcoa Engineered Products
and Alcoa Extruded Construction Products.
12
<PAGE>
Alcoa Engineered Products has nine operating locations:
o Baltimore, Maryland - hard alloy extrusions
o Catawba, North Carolina - specialized extrusions
o Chandler, Arizona - hard alloy extrusions, tube and forge stock
o Cressona, Pennsylvania - industrial and distribution common alloy
extrusions
o Elizabethton, Tennessee - industrial and distribution common alloy
extrusions
o Lafayette, Indiana - hard alloy extrusions and tube
o Massena, New York - cast rod, mechanical-grade redraw rod, wire and
cold-finished rod and bar extrusions
o Morris, Illinois - industrial and distribution common alloy extrusions
o Spanish Fork, Utah - industrial and distribution common alloy
extrusions
These facilities are supported by sales and administration centers in Illinois,
Indiana and Pennsylvania. Extruded aluminum products from these operations are
sold to original equipment manufacturers in aerospace/defense, automotive,
commercial transportation, machinery, electrical, recreation, consumer durables
and other industrial markets and to distributors who service these markets.
Alcoa Extruded Construction Products has nine operating locations: Arkansas,
Florida, Georgia (2), Ohio, Louisiana, Mississippi, South Dakota and an
international operation in Monterrey, Mexico. These facilities manufacture and
sell soft-alloy extruded products. Representative products include window and
door frames, bath and shower enclosures, patio and pool enclosures, stadium
seating, light poles and flag poles, and colored architectural shapes.
Alcoa Extruded Construction Products' shower and bath enclosures are distributed
through service centers in California, Florida, Georgia, Iowa, North Carolina,
Pennsylvania, Texas and Washington, as well as through independent distributors.
The Mexican operation consists of a two-press extrusion plant in Monterrey. All
plants and facilities are owned by the Company, except for the plant located in
Monterrey and the service centers, which are leased. The Company closed its
extrusion facility in West Chicago, Illinois in April 1999.
In January 2000, Alcoa purchased Excel Extrusions, Inc., a subsidiary of Noranda
Aluminum, Inc., located in Warren, Ohio. The facility produces soft-alloy
aluminum extrusions that are used primarily in the building and construction
markets.
A subsidiary in Argentina and Aluminio manufacture aluminum extruded products.
Aluminio operates five plants in Brazil, with a total of fifteen extrusion
presses.
Alcoa Extrusions Hannover GmbH & Co. KG produces and markets high-strength
aluminum extrusions and rod and bar to serve European transportation and defense
markets.
The subsidiaries of Alcoa Europe Holding B.V., formerly Alcoa Nederland Holding
B.V., produce extrusions, common alloy sheet products and a variety of finished
products for the building industry, such as aluminum windows, doors and aluminum
ceiling systems. These companies also manufacture products for agricultural
applications, such as automated greenhouse systems.
Alcoa Italia S.p.A. produces and markets industrial extrusions through plants in
Bolzano, Fossanova, Feltre and Iglesias, Italy. Also part of Alcoa Italia S.p.A.
is an extrusion die shop located in Mori, Italy.
The Company owns and operates extrusion plants in Valls, Noblejas and La Coruna,
Spain.
Alcoa also has extrusion plants in Hungary and the United Kingdom. In March
1999, Alcoa completed its acquisition of Reynolds' aluminum extrusion plant in
Irurzun, Spain as well as its distribution operation for architectural systems,
which has warehouses in several cities in Spain.
13
<PAGE>
Kawneer Company, Inc. (Kawneer) designs, manufactures and markets architectural
aluminum products and is a leading producer of these products in the U.S. and
Canada. These products include entrances, windows, framing and curtain wall
systems for the commercial building markets. Kawneer products also are
engineered for use on construction projects throughout the world.
Kawneer operates five integrated architectural plants, 17 service centers and
one additional manufacturing location in the U.S. Distribution is principally
through dealers, most of whom are glazing contractors.
Kawneer also operates two integrated architectural plants in Canada that provide
most of the product that is sold for large overseas projects, as well as two
service centers.
Alumax Europe N.V. manages Kawneer Europe's operations in the United Kingdom,
France, Germany and Poland. It also participates in a joint venture in Morocco.
Three manufacturing plants located in France, England and Germany, two of which
are owned and one of which is leased, provide architectural aluminum products
similar to those produced by Kawneer operations in the U.S. These products are
marketed under the Kawneer Europe name throughout Europe. Kawneer Europe's
subsidiaries also operate service centers in France, Poland and Morocco. Other
former operations of Alumax Europe, which included custom extrusion plants in
the United Kingdom and the Netherlands, and an aluminum recycling facility in
the Netherlands that produces soft-alloy extrusion billet, have been integrated
operationally into Alcoa Europe Extrusion and End Products Business Unit.
Forgings and Castings
- ---------------------
The Company's plant in Cleveland, Ohio produces aluminum forgings, sold
principally in the aerospace, automotive, commercial transportation and defense
markets. The Cleveland plant, along with the Company's facility in Barberton,
Ohio, also produces aluminum forged wheels for passenger automobiles, sport
utility vehicles and light trucks and wheels for the bus and Class 8 heavy-duty
truck industry.
Alcoa's plant in Szekesfehervar, Hungary manufactures forged aluminum truck
wheels for the European market. The plant also manufactures wheels for export to
Asian, South American and other geographic markets that use European-style
wheels.
Aluminio plans to build a 72,000-unit-per-year aluminum wheel plant in the state
of Pernambuco, Brazil. The new plant initially will operate by finishing Alcoa
wheels imported in unfinished form.
V. Other
This category includes the production and sale of high performance body
structures for cars, electrical, plastic and composite materials products,
manufacturing and packaging equipment, magnesium products and steel and titanium
forgings.
Alcoa Automotive
- ----------------
In 1999, Alcoa refocused its Automotive Structures business unit. The Company
formed two new businesses, Alcoa Automotive Castings (which includes a Finished
Extruded Components unit) and Alcoa Automotive Engineering. Alcoa Automotive
Castings offers high-quality, structural castings and formed and machined
extrusions, while Alcoa Automotive Engineering provides design, engineering,
prototyping and cost analysis for aluminum structures, assemblies and
components.
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<PAGE>
The manufacturing plant in Soest, Germany became part of the Alcoa Automotive
Castings business. Alcoa produces the components and selected sub-assemblies for
the Audi A8 spaceframe, the result of a cooperative effort between the two
companies that began in 1981. The Soest plant also produces the front end module
for the new Mercedes-Benz A Class car.
Alcoa Automotive Castings's Modena, Italy facility assembles spaceframes for the
Ferrari 360 Modena, which was introduced in 1999 to favorable automotive
industry reviews.
In August 1999, Alcoa acquired almost all of the remaining 50% interest in the
A-CMI partnership from Hayes Lemmerz International, Inc. A-CMI was a joint
venture formed in 1995 between Alcoa and CMI International, Inc. to produce cast
aluminum products for the automotive industry. Hayes Lemmerz purchased CMI
International, Inc. in February 1999. A-CMI, now part of Alcoa Automotive
Castings, has plants located in Fruitport, Michigan, Hawesville, Kentucky and
Lista, Norway. The Lista plant is located near the 50%-owned Elkem Aluminium ANS
smelter, which delivers molten aluminum to the plant. Current Automotive
Castings customers include DaimlerChrysler, Ford, Volvo, BMW and General Motors.
Alcoa also designs and builds specialized die-casting machines through a
subsidiary in Montreal, Canada.
Alcoa's plant in Northwood, Ohio manufactures DaimlerChrysler's Plymouth Prowler
frame and a variety of aluminum structural assemblies for the U.S. automotive
industry, including the Corvette windshield surround.
Alcoa is working with several other automobile manufacturers in North America
and Japan to develop new automotive applications for aluminum products.
Alcoa Automotive Engineering includes the design and engineering offices in
Esslingen (Stuttgart), Germany, Southfield (Detroit), Michigan and Alcoa
Technical Center, near Pittsburgh, Pennsylvania. The Company designs aluminum
auto body structures for a variety of car manufacturers and for Tier 1 suppliers
to the automotive industry at these locations.
Alumax Engineered Metal Processes, Inc. (AEMP) produced automotive components
with operations in Jackson, Tennessee and Bentonville, Arkansas using a
semi-solid forging process. In May 1999, Alcoa completed the sale of the
Jackson, Tennessee facility to the management of AEMP. In addition, Alcoa closed
the Bentonville, Arkansas plant.
Alcoa Fujikura Ltd. (AFL)
- -------------------------
AFL produces and markets electronic and electrical distribution systems (EDS)
for the automotive industry, as well as fiber optic products and systems for
selected electric utilities, telecommunications, cable television and datacom
markets. AFL supplies EDS to:
o Ford
o Subaru
o PACCAR
o Audi and
o Volkswagen.
AFL owns Michels GmbH & Co. K.G. (Michels), a European manufacturer of EDS for
automobiles. AFL also owns the Stribel group of companies, European
manufacturers of electromechanical and electronic components for the European
automotive market. The European facilities are located in Germany, Hungary,
Ireland and the United Kingdom.
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<PAGE>
AFL and Aluminio have a joint venture, AFL do Brasil Ltda., that manufactures
and sells EDS in Brazil. AFL also has an EDS manufacturing facility in
Venezuela.
Significant competitive factors in the EDS markets include price, quality and
full service supplier capability, as automakers increasingly require support
from selected suppliers on a global basis.
Six "R" Communications, L.L.C., part of AFL's telecommunications division, is a
Monroe, North Carolina-based provider of EF&I services (engineer, furnish and
install) to the telecom, CATV and electric utility industries. EF&I subsidiaries
of Six "R" Communications include T.I.C.S. Corporation in Charlotte, North
Carolina; MinTel Communications, L.L.C. in Norcross, Georgia; and Quality
Control Services, L.L.C. in Richmond, Virginia.
In October 1999, AFL's telecommunications division acquired 55% of the stock of
Tele-Tech Company, Inc., in Lexington, Kentucky and 55% of the stock of Digisys
Corp. in Alpharetta, Georgia. Both companies are providers of EF&I services
nationally to the telecom industry and cabling contracting services for LAN and
computer network installations.
In February 2000, AFL's telecommunications division acquired privately held
Noyes Fiber Systems, Inc., headquartered in Belmont, New Hampshire. Noyes Fiber
Systems is a manufacturer of fiber optic test equipment for measuring,
maintaining and documenting the performance of fiber optic networks.
Packaging and Closures
- ----------------------
Alcoa Closure Systems International, Inc. (ACSI), the world's largest producer
of plastic closures, manages all of Alcoa's worldwide closures businesses other
than in South America. ACSI coordinates its business from Indianapolis, Indiana.
The Company's South American closures business and PET (polyethylene
terephthalate) plastic bottles manufacturing facilities are managed separately
by Aluminio from Sao Paulo, Brazil.
The use of plastic closures has surpassed that of aluminum closures for beverage
containers in the U.S. and in many other countries. Alcoa has plastic closure,
PET plastic bottle, closure molding equipment and packaging equipment design and
assembly facilities at the following locations:
Packaging and Closures Facilities:
o Barcelona, Spain
o Barueri, Itapissuma, Lages and Queimados, Brazil
o Bogota, Colombia
o Buenos Aires, Argentina
o Crawfordsville, Indiana
o Englewood, Colorado
o Ensenada and Saltillo, Mexico
o Lima, Peru
o Lyubuchany, Russia
o Manama, Bahrain
o Manila, the Philippines
o Nogi, Japan
o Olive Branch, Mississippi
o Randolph, New York
o San Jose, Costa Rica
o Santiago, Chile
o Sidney, Ohio
o Szekesfehervar, Hungary
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<PAGE>
o Tianjin, China and
o Worms and Viernheim, Germany.
The Alcoa Packaging Equipment business unit designs, manufactures and services:
o can forming equipment
o can decoration equipment
o registered embossers
o end conversion presses
o a variety of testing equipment for the can-making industry
o plastic and aluminum closure handling, orientation, inspection and
capping equipment for the food and beverage industry and
o specialty aluminum components for the semiconductor equipment
industry.
Other Aluminum Products
- -----------------------
Aluminio and Phelps Dodge Corporation have a joint venture that produces
aluminum electric cable and copper wiring and cables in Brazil. The venture,
Phelps Dodge & Alcoa Fios e Cabos Eletricos S.A., is owned 60% by Phelps Dodge
and 40% by Aluminio. Production takes place at the venture's plant in Pocos de
Caldas.
Alcoa Building Products, Inc. (ABP) manufactures and markets residential
aluminum siding and other aluminum building products. ABP sells these products
principally to specialty distributors.
ASCI produces aluminum closures for bottles at Worms, Germany, Nogi, Japan and
Barcelona, Spain. In early 1999, the Company sold the assets subject to certain
liabilities of Capsulas Metalicas, S.A., its metal beverage closures business in
Barcelona, Spain, to Alucapvit, S.p.A.
Alcoa also owns a 36% interest in American Trim, L.L.C., a joint venture that
manufactures primarily auto parts and appliance control panels.
Other Nonaluminum Products
- --------------------------
ABP produces vinyl siding and accessories and other nonaluminum building
products for the residential building and construction markets.
Northwest Alloys, Inc., in Addy, Washington, produces magnesium from minerals in
the area owned by the Company. Alcoa uses the magnesium for certain aluminum
alloys and also sells it to third parties.
Aluminio owns 40% and affiliates of Alcatel of France own 60% of a joint
venture, called Alcatel Cabos Brazil. The venture manufactures, in Brazil, and
sells telecommunication cables and related accessories in South America.
The Alcoa facility at Cleveland, Ohio produces large press steel, titanium and
special super-alloy forgings. Aerospace and commercial customers are the
principal purchasers of these products.
Competition
- -----------
The markets for most aluminum products are highly competitive. Price, quality
and service are the principal competitive factors in most of these markets.
Where aluminum products compete with other materials, the diverse
characteristics of aluminum are also a significant factor, particularly its
light weight and recyclability.
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<PAGE>
The aluminum industry is highly cyclical, and the LME-based prices of primary
aluminum influence the Company's results of operations. This price sensitivity
impacts a portion of the Company's alumina sales and many of the Company's
aluminum products. There is, however, less impact on the more specialized and
value-added products.
The Company continues to examine all aspects of its operations and activities
and redesign them where necessary to enhance effectiveness and achieve cost
reductions. Alcoa believes that it enhances its competitive position through its
improved processes, extensive facilities and willingness and ability to commit
capital where necessary to meet growth in important markets, and by the
capability of its employees. This is being done through aggressive
implementation of the Alcoa Business System (ABS) that encompasses the entire
value chain, including manufacturing and supporting business processes. Research
and development has led to improved product quality and production techniques,
new product development and cost control.
ABS is based upon the complete integration of the Company's mission, vision and
values with manufacturing and its business processes and measures in order to
produce desired outcomes. The basic tenets of ABS are (1) making products for
use (not inventory), and working only on the needs of customers (external and
internal) (2) doing away with waste everywhere and (3) recognizing that success
can only be achieved through people.
Alcoa has realized significant achievements to date through the implementation
of ABS in its businesses, including:
o reduction of waste
o reduction in lead times
o improvement in delivery performance
o improvement in "throughput" and recovery
o increases in productivity
o reduction of inventory and backlogged orders
o reduction in handling equipment and
o emptying of factory floor space.
Alcoa believes that ABS will in time substantially improve its profitability
relative to its peers. In July 1998, Alcoa announced a $1.1 billion cost
reduction initiative to be achieved by January 1, 2001. The Company intends to
realize a significant portion of this reduction through ABS. At the end of 1999,
the Company had achieved $728 million in annualized cost savings towards the
$1.1 billion goal.
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.
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.
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<PAGE>
In the U.S., Alcoa is net metal short and is subject to the risk of higher
aluminum prices for the anticipated metal purchases required to fulfill the
long-term customer contracts noted above. 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 December 31, 1999 and 1998, these contracts
totaled approximately 465,000 mt and 933,000 mt, respectively. These contracts
act to fix the purchase price for these metal purchase requirements, thereby
reducing Alcoa's risk to rising metal prices.
A hypothetical 10% change from the 1999 year-end, three-month LME aluminum ingot
price of $1,650 per mt would result in a pretax gain or loss to future earnings
of $77 million related to all of the futures and options contracts noted above.
However, it should be noted that any change in the value of these contracts,
real or hypothetical, would be significantly offset by an inverse change in the
value of the underlying metal purchase transactions.
Earnings were selected as the measure of sensitivity due to the historical
relationship between aluminum ingot prices and Alcoa's earnings. The
hypothetical change of 10% was calculated using a parallel shift in the existing
December 31, 1999 forward price curve for aluminum ingot. The price curve takes
into account the time value of money, as well as future expectations regarding
the price of aluminum ingot.
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 the options and the delivery dates of the futures
contracts noted above 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 options 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 if metal prices fall below the price of contracts
being rolled forward.
Alcoa also had 21,000 mt and 29,000 mt of futures and options contracts
outstanding at year-end 1999 and 1998, 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 gains of $12 million in 1999 and charges of $45 million in
1998 and $13 million in 1997. A hypothetical 10% change in aluminum ingot prices
from the year-end 1999 level of $1,650 per mt would result in a pretax gain or
loss of $3 million related to these positions. The hypothetical gain or loss was
calculated using the same model and assumptions noted earlier.
Alcoa sells products to various third parties at prices that are influenced by
changes in LME aluminum prices. From time to time, the Company may elect to
hedge a portion of these exposures to reduce the risk of fluctuating market
prices on these sales. Towards this end, Alcoa may enter into short positions
using futures and options contracts. At December 31, 1999, these contracts
totaled 244,000 mt. These contracts act to fix a portion of the sales price
related to these sales contracts. A hypothetical 10% change in aluminum ingot
prices from the year-end 1999 level of $1,650 per mt would result in a pretax
gain or loss of $29 million related to these positions. The hypothetical gain or
loss was calculated using the same model and assumptions noted earlier.
Alcoa also purchases certain other commodities, such as fuel oil, natural gas
and copper, for its operations and enters into futures and options contracts to
eliminate volatility in the prices of such products. None of these contracts are
material. For additional information on financial instruments, see Notes A and T
to the financial statements.
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<PAGE>
Foreign Exchange Risks
- ----------------------
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. A hypothetical 10% change in applicable 1999
year-end forward rates would result in a pretax gain or loss of approximately
$169 million related to these positions. However, it should be noted that any
change in the value of these contracts, real or hypothetical, would be
significantly offset by an inverse change in the value of the underlying hedged
item. The model assumes a parallel shift in the forward curve for the applicable
currencies and includes the foreign currency impacts of Alcoa's cross-currency
interest rate swaps. See Notes A and T for information related to the accounting
policies and fair market values of Alcoa's foreign exchange contracts at
December 31, 1999 and 1998.
Interest Rate Risks
- -------------------
Alcoa attempts to maintain a reasonable balance between fixed- and floating-rate
debt and uses interest rate swaps and caps to keep financing costs as low as
possible. At December 31, 1999 and 1998, Alcoa had $3,067 million and $3,489
million of debt outstanding at effective interest rates of 5.8% and 6.1%,
respectively, after the impact of interest rate swaps and caps is taken into
account. A hypothetical change of 10% in Alcoa's effective interest rate from
year-end 1999 levels would increase or decrease interest expense by $20 million.
The interest rate effect of Alcoa's cross-currency interest rate swaps has been
included in this analysis. For more information related to Alcoa's use of
interest rate instruments, see Notes A and T.
Risk Management
- ---------------
All of the aluminum and other commodity contracts, as well as the various types
of financial instruments, are straightforward and are held for purposes other
than trading. They are used primarily to mitigate uncertainty and volatility,
and principally cover underlying exposures.
Alcoa's commodity and derivative activities are subject to the management,
direction and control of the Strategic Risk Management Committee (SRMC). SRMC is
composed of the chief executive officer, the chief financial officer and other
officers and employees that the chief executive officer 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.
Material Limitations
- --------------------
The disclosures, with respect to aluminum prices and foreign exchange risk, do
not take into account the underlying anticipated purchase obligations and the
underlying transactional foreign exchange exposures. If the underlying items
were included in the analysis, the gains or losses on the futures and options
contracts may be offset. Actual results will be determined by a number of
factors that are not under Alcoa's control and could vary significantly from
those disclosed.
Year 2000 Issue
- ---------------
Alcoa, like other businesses, made substantial preparations for the Year 2000
issue. The Year 2000 issue arose from the past practice of utilizing two digits
(as opposed to four) to represent the year in some computer programs and
software. If uncorrected, this could have resulted in computational errors as
dates are compared across the century boundary. The vast majority of the
products produced and sold by Alcoa are unaffected by Year 2000 issues in use or
operation since they contain no microprocessors.
20
<PAGE>
Based on information available to date, Alcoa has not experienced any
significant events attributable to Year 2000 issues. The Company will continue
to monitor for potential issues at Alcoa, its customers and suppliers, in order
to permit a rapid response should any issues arise. Alcoa believes that if any
Year 2000 issues were to arise, they would not have a significant impact on its
operations and would most likely be isolated, short-term events.
Alcoa's Year 2000 program provided a focused effort across all of the Company's
locations that:
o identified, assessed, remediated and tested 26,232 Alcoa systems and
components;
o formally assessed 3,399 critical and important suppliers;
o conducted 202 formal on-site program verification reviews;
o provided Year 2000 readiness information to 2,802 separate customers
and
o updated and completed 1,890 contingency plans.
In 1999 and 1998, Alcoa incurred $38 million each year of direct costs in
connection with its Year 2000 program. These costs include external consulting
costs and the cost of hardware and software replaced as a result of Year 2000
issues. Alcoa does not expect to incur significant direct costs related to the
Year 2000 issue during the current year.
Employees
- ---------
Alcoa had approximately 107,700 employees worldwide at year-end 1999.
Alcoa and its unions ratified six-year labor agreements covering the majority of
Alcoa's U.S. production workers in mid-1996. As part of the agreements, Alcoa
and the unions agreed to an unprecedented partnership mandating that they work
cooperatively on customer requirements, business objectives and shareholder and
union interests. The agreements set broad goals for employee safety, job
security, and influence, control and accountability for the work environment.
Other major provisions include wage increases over the first five years,
enhanced pension benefits, increases in sickness and accident insurance, life
insurance and dental benefits and the amount of income a spouse may earn before
sharing medical benefit costs.
The agreements have five years of defined provisions. At the end of the fifth
year, Alcoa and the unions will reopen the entire contract. If the parties
cannot reach agreement, they will submit the economic provisions to arbitration.
Agreements negotiated under guidelines established by a national industrial
relations authority cover wages for AWA - Australia employees.
Aluminio negotiates wages for both hourly and salaried employees annually in
compliance with government guidelines. Each Aluminio location, however, has a
separate compensation package for its employees.
Research and Development
- ------------------------
Alcoa, a technology leader in the aluminum industry, engages in research and
development programs that include process and product development, and basic and
applied research. Alcoa conducts these activities within its business units and
at Alcoa Technical Center. Expenditures for R&D activities were $128 million in
1999, $128 million in 1998 and $143 million in 1997. The Company funds
substantially all R&D expenses.
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Each of the major process/product areas within the Company has a Technology
Management Review Board (TMRB), consisting of members from various worldwide
locations. The TMRB is responsible for formulating and communicating a
technology strategy for its particular process/product area, developing and
managing the technology portfolio and ensuring the global transfer of
technology.
Environmental
- -------------
Alcoa's Environment, Health and Safety Policy confirms its commitment to operate
worldwide in a manner that protects the environment and the health and safety of
employees and of the citizens of the communities where the Company operates.
Alcoa continues its efforts to develop and implement modern technology, and
standards and procedures, to meet its Environment, Health and Safety goals. The
Company spent approximately $90 million during 1999 for new or expanded
facilities for environmental control. Capital expenditures for such facilities
will approximate $99 million in 2000. These figures do not include the costs of
operating these facilities. Remediation expenses are continuing at many of the
Company's facilities. See Note U on Environmental Matters in the Annual Report
to Shareholders and "Item 3 -- Legal Proceedings" below.
Alcoa's operations worldwide, like those of others in manufacturing industries,
have in recent years become subject to increasingly stringent legislation and
regulations intended to protect human health and safety, and the environment.
The Company expects this trend to continue. Compliance with new laws,
regulations or policies could require substantial expenditures by the Company in
addition to those mentioned above.
Alcoa supports the use of sound scientific research and realistic risk criteria
to analyze environmental and human health and safety effects and to develop
effective laws and regulations in all countries where it operates. The Company
also relies on internal standards that it applies worldwide to ensure that its
facilities operate with minimal adverse environmental, health and safety
impacts, even where no regulatory requirements exist. Alcoa recognizes that
recycling and pollution prevention offer real solutions to many environmental
problems, and it continues vigorously to pursue efforts in these areas.
Item 2. Properties.
See "Item 1. Business." Alcoa believes that its facilities are suitable and
adequate for its operations.
Item 3. Legal Proceedings.
In the ordinary course of its business, Alcoa is involved in a number of
lawsuits and claims, both actual and potential, including some which it has
asserted against others. While the amounts claimed may be substantial, the
ultimate liability cannot now be determined because of the considerable
uncertainties that exist. It is possible that results of operations or liquidity
in a particular period could be materially affected by certain contingencies.
Management believes, however, that the disposition of matters that are pending
or asserted will not have a material adverse effect on the financial position of
the Company.
Environmental Matters
- ---------------------
Alcoa is involved in proceedings under the Superfund or analogous state
provisions regarding the usage, disposal, storage or treatment of hazardous
substances at a number of sites in the U.S. The Company has committed to
participate, or is engaged in negotiations with Federal or state authorities
relative to its alleged liability for participation, in clean-up efforts at
several such sites.
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In response to a unilateral order issued under Section 106 of the Comprehensive
Environmental Compensation and Liability Act of 1980 (CERCLA) by the U.S.
Environmental Protection Agency (EPA) Region II regarding releases of hazardous
substances, including polychlorinated biphenyls (PCBs), into the Grasse River
near its Massena, New York facility, Alcoa has been conducting investigations
and studies of the river under order from the EPA issued under CERCLA. In
December 1999, the Company submitted an Analysis of Alternatives report to EPA.
The report evaluates several alternative remedial approaches for the Grasse
River.
Representatives of various Federal and state agencies and a Native American
tribe, acting in their capacities as trustees for natural resources, have
asserted that Alcoa may be liable for loss or damage to such resources under
Federal and state law based on Alcoa's operations at its Massena facility. While
formal proceedings have not been instituted, the Company continues to actively
investigate these claims.
In March 1994, Alcoa and Region VI of the EPA entered into an administrative
order on consent, EPA Docket No. 6-11-94, concerning the Alcoa (Pt.
Comfort)/Lavaca Bay National Priorities List site that includes portions of
Alcoa's Pt. Comfort, Texas bauxite refining operations and portions of Lavaca
Bay, Texas, adjacent to the Company's plant. The administrative order requires
the Company to conduct a remedial investigation and feasibility study under EPA
oversight. Work under the administrative order is proceeding, including actions
to fortify an offshore dredge disposal island that may include the removal of
certain mercury-contaminated sediments adjacent to Alcoa's plant in and near
routinely dredged navigation channels. As required by the order, the Company
submitted a baseline risk assessment for the site. A Feasibility Study is
anticipated to be filed in March 2000. The Company and certain Federal and state
natural resource trustees, who previously served Alcoa with notice of their
intent to file suit to recover damages for alleged loss or injury of natural
resources in Lavaca Bay, have entered into several agreements to cooperatively
identify restoration alternatives and approaches for Lavaca Bay. Efforts under
those agreements are ongoing.
In March 1997, Alcoa Italia S.p.A. received an order from Italian governmental
authorities relating to several environmental deficiencies at its Fusina Plant.
Alcoa Italia and the governmental authorities commenced discussions that
resulted in a plan for sampling certain emission points. During 1998, Alcoa
Italia sampled air emissions at the Fusina Plant. The results of the samples,
which indicated that the emissions are within the authorized limits, were
submitted to the Italian governmental authorities, who have formally notified
Alcoa Italia that the emissions are satisfactory and that the order has been
closed.
On May 13, 1998, an action was filed in the Superior Court of Riverside County,
California allegedly on behalf of more than 500 plaintiffs who currently live,
or formerly lived, in the Glen Avon, California area, who claim to have suffered
personal injuries, both physical and emotional, as well as property damage, as a
result of air and water contamination due to the escape of toxic wastes from the
Stringfellow disposal site. The complaint, which names Alcoa, Alumax Inc. and
more than 130 other companies as defendants, was served on Alcoa and Alumax in
October 1998. Alcoa filed a motion in February 1999 stating that claims are
barred by the statute of limitations. Amended pleadings were filed by the
plaintiffs in August 1999, and demurrer motions are now pending before the
court.
In March 1998, Region V of the EPA referred various alleged environmental
violations at Alcoa's Warrick Operations to the civil division of the U.S.
Department of Justice (DOJ). The alleged violations stem from an April 1997
multi-media environmental inspection of Warrick Operations by the EPA relating
to water permit exceedances as reported on monthly discharge monitoring reports,
wastewater toxicity issues and alleged opacity violations. Alcoa and the DOJ
entered into a series of tolling agreements to suspend the statute of
limitations related to the alleged violations in this matter. The parties have
reached final agreement on the language of a consent decree that will formalize
settlement of this matter. The consent decree will be executed by the parties
and lodged with the court during the first quarter of 2000.
23
<PAGE>
In October 1998, Region V of the EPA referred various alleged environmental
violations at Alcoa's Lafayette Operations to the civil division of the DOJ. The
alleged violations relate to water permit exceedances as reported on monthly
discharge monitoring reports. Alcoa and the DOJ entered into a tolling agreement
to suspend the statute of limitations related to the alleged violations in order
to facilitate settlement discussions with the DOJ and EPA. The parties have been
unable to reach settlement on this matter. In June 1999, the DOJ and EPA filed a
complaint against Alcoa in the United States District Court for the Northern
District of Indiana. Alcoa filed a motion to dismiss and a motion to strike
certain parts of the government's complaint requesting sediment remediation in
August 1999. A discovery schedule had been entered into by the parties and this
matter is scheduled for trial in January 2002.
In March 1999, two search warrants were executed by various federal and state
agencies on the Alcoa Port Allen works of Discovery Aluminas, Inc., a
subsidiary, in Port Allen, Louisiana. Also in March, Discovery Aluminas, Inc.
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. The case has not been set for trial. In
October 1999, a second grand jury subpoena for documents was issued to Alcoa
requesting information regarding wastewater discharges from a Port Allen plant.
Alcoa has provided a complete and timely response to the subpoena. Alcoa also is
engaged in discussions with the U.S. Attorney's office and the EPA seeking to
resolve the situation.
Other Matters
- -------------
Alcoa initiated a lawsuit in King County, Washington in December 1992 against
nearly 100 insurance companies that provided insurance coverage for
environmental property damage at Alcoa plant sites between the years 1956 and
1985. The trial for the first three sites concluded in October 1996 with a jury
verdict partially in Alcoa's favor and an award of damages to Alcoa. In its
post-trial decisions, the trial court substantially reduced the amount that
Alcoa will be able to recover from its insurers on the three test sites. Alcoa
appealed these rulings to the Washington Court of Appeals, which, upon
completion of briefing, certified the appeal to the Washington Supreme Court.
Oral argument was heard in January 2000. A decision by the court is expected by
the third quarter 2000.
In April 1997, German customs authorities conducted a search of the offices of
Alcoa VAW Hannover Presswerk GmbH & Co. KG (Alcoa VAW) in Hannover, Germany,
seeking materials relating to export transactions dating from 1992. In November
1997, German customs authorities reported 53 documentary customs violations, and
in January 1998, the local district attorney opened legal proceedings on the
matter. Discussions between Alcoa VAW and German customs authorities continue.
Alcoa, along with various asbestos manufacturers, distributors and other
businesses, is a defendant in numerous individual lawsuits filed in the State of
Texas on behalf of persons claiming injury as a result of occupational exposure
to asbestos at various Alcoa facilities. In two of these cases, jury verdicts
were returned against the Company, and settlements have been reached.
Following the March 9, 1998 announcement of the proposed acquisition of Alumax
by Alcoa and AMX Acquisition Corporation, five putative class actions on behalf
of stockholders of Alumax were filed in the Delaware Court of Chancery against
Alumax and certain of Alumax's directors. Four of these actions also named Alcoa
as a defendant. The plaintiffs in those actions alleged, among other things,
that the director defendants agreed to a buyout of Alumax at an inadequate
price, that they failed to provide Alumax's stockholders with all necessary
information about the value of Alumax, that they failed to make an informed
decision as no market check of Alumax's value was obtained and the acquisition
24
<PAGE>
was structured to ensure that stockholders would tender their shares and was
coercive. In addition, the plaintiffs alleged that the Schedules 14D-1 and 14D-9
filed by Alcoa, AMX Acquisition Corporation and Alumax, respectively, failed to
disclose certain information necessary for Alumax's stockholders to make an
informed decision regarding the offer and the other transactions contemplated by
the merger agreement. Plaintiffs sought to enjoin the acquisition or to rescind
it in the event that it was consummated and to cause Alumax to implement a "full
and fair" auction for Alumax. Plaintiffs also sought compensatory damages in an
unspecified amount, costs and disbursements, including attorneys' fees, and such
other relief as the Delaware Court of Chancery may deem appropriate. The matter
has been dismissed.
The Internal Revenue Service (IRS) asserted that Alumax and certain of its
subsidiaries were improperly included in the 1984, 1985, and 1986 consolidated
income tax returns of AMAX Inc. and on that basis assessed a Federal income tax
deficiency against Alumax of $129 million. Alumax filed a petition in the United
States Tax Court seeking a redetermination of the purported deficiency. On
September 30, 1997, the Tax Court decided in favor of the IRS, stating that AMAX
Inc. did not have the 80% control necessary to consolidate. On October 27, 1997,
Alumax paid an aggregate of $411 million to the IRS, representing the deficiency
and accrued interest. On December 24, 1997, Alumax filed a notice of appeal of
the Tax Court's decision to the United States Court of Appeals for the Eleventh
Circuit. A decision affirming the Tax Court's decision was handed down by the
Court of Appeals on January 21, 1999. The Company requested a rehearing of the
issue. Under the terms of a Tax Disaffiliation Agreement executed by Alumax and
AMAX in connection with the merger of AMAX into Cyprus Minerals Company and the
public distribution of all of Alumax's shares in November 1993, Alumax assumed
responsibility for all proceedings relating to the above-described deficiency
and payment of any additional taxes, along with interest that may ultimately be
due; and Cyprus Amax Minerals Company will share certain tax benefits that will
become available to it in the event of a final adverse determination. An appeal
was decided against the Company, and the case has been closed.
In July 1999, Alcoa Aluminio received notice that an administrative proceeding
was commenced by Brazil's Secretary of Economic Law of the Ministry of Justice
against Brazilian producers of primary aluminum, including Alcoa Aluminio. The
suit alleges collusive action in the pricing of primary aluminum in violation of
Brazilian antitrust law. Alcoa Aluminio has presented its defense and is
awaiting the decision of the Secretary of Economic Law. If the Secretary of
Economic Law determines that the antitrust law was violated, then the action may
be further prosecuted by the Administrative Council of Economic Defense.
Brazilian law provides for civil and criminal sanctions for violations of
antirust law, including fines ranging from 1% to 30% of a company's revenue
during the last fiscal year.
On October 15, 1999, Victoria Shaev, who represents that she is an Alcoa
shareholder, filed a purported derivative action on behalf of the Company in the
United States District Court for the Southern District of New York, naming as
defendants the Company, each member of Alcoa's Board of Directors, certain
officers of the Company and PricewaterhouseCoopers LLP, Alcoa's independent
accountants. The shareholder did not make a demand on the Company prior to
filing this lawsuit. Under relevant law, this demand is required. The lawsuit
alleges, among other things, that Alcoa's proxy statement dated March 8, 1999
contained materially false and misleading representations and omissions
concerning the Company's proposed Alcoa Stock Incentive Plan and that the
shareholder approval of the plan, based upon these alleged representations and
omissions, was defective. The Plaintiff seeks to invalidate the shareholder
approval of the plan and enjoin its implementation. She also requests that Alcoa
pay the costs and disbursements of the action, including the fees of her
accountants, counsel and experts. The matter is being defended.
25
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the Company's security holders during the
fourth quarter of 1999.
Item 4A. Executive Officers of the Registrant.
The names, ages, positions and areas of responsibility of the executive officers
of the Registrant as of February 15, 2000 are listed below.
Paul H. O'Neill, 64, Director and Chairman of the Board. Mr. O'Neill was elected
a director of Alcoa in 1986 and became Chairman of the Board in 1987. He was
Chief Executive Officer from June 1987 to May 1999. Before joining Alcoa, Mr.
O'Neill had been an officer since 1977 and President and a director since 1985
of International Paper Company.
Alain J. P. Belda, 56, Director, President and Chief Executive Officer. Mr.
Belda was elected to Alcoa's Board of Directors in September 1998. He has been
Chief Executive Officer since May 1999 and President since January 1997. He was
elected Chief Operating Officer in January 1997, Executive Vice President in
1994 and Vice Chairman in 1995. Mr. Belda was President of Alcoa Aluminio S.A.
in Brazil from 1979 to March 1994. He was elected Vice President of Alcoa in
1982 and, in 1989, was given responsibility for all of Alcoa's interests in
Latin America (other than Suriname). In August 1991 Mr. Belda was named
President - Latin America for the Company.
Michael Coleman, 49, Vice President and President - Alcoa Rigid Packaging
Division. Mr. Coleman joined Alcoa in January 1998. He had been Vice President -
Operations of North Star Steel from 1993 to 1994, Executive Vice President -
Operations from 1994 to 1996 and President from 1996 through 1997. Mr. Coleman
joined North Star Steel in 1982.
L. Patrick Hassey, 54, Vice President and President - Alcoa Europe. Mr. Hassey
joined Alcoa in 1967 and was named Davenport Works Manager in 1985. In 1991, he
was elected a Vice President of Alcoa and appointed President -
Aerospace/Commercial Rolled Products Division. He was appointed President -
Alcoa Europe in November 1997.
Barbara S. Jeremiah, 48, Vice President-Corporate Development. Ms. Jeremiah
joined Alcoa in 1977 as an attorney and was elected Assistant General Counsel in
1992 and Corporate Secretary in 1993. She was elected to her current position in
1998, where she heads Alcoa corporate development activities.
Richard B. Kelson, 53, Executive Vice President and Chief Financial Officer. Mr.
Kelson was elected Assistant General Counsel in 1989, Senior Vice President -
Environment, Health and Safety in 1991 and Executive Vice President and General
Counsel in May 1994. He was named to his current position in May 1997.
Frank L. Lederman, 50, Vice President and Chief Technical Officer. Mr. Lederman
was Senior Vice President and Chief Technical Officer of Noranda, Inc., a
Canadian-based, diversified natural resource company, from 1988-1995. He joined
Alcoa as a Vice President in May 1995 and became Chief Technical Officer in
December 1995. In his current position Mr. Lederman directs operations of the
Alcoa Technical Center.
26
<PAGE>
Joseph C. Muscari, 53, Vice President-Environment, Health and Safety, Audit and
Compliance. Mr. Muscari joined Alcoa in 1969 and was named President-Alcoa Asia
in 1993. In 1997, he was elected Vice President-Audit. He was named to his
current position in May 1999 and is responsible for EHS policy, standards and
strategy and the Alcoa integrated audit process. In addition, Mr. Muscari is the
chief compliance officer for the company.
G. John Pizzey, 54, Vice President and President - Alcoa World Alumina and
Chemicals. Mr. Pizzey joined Alcoa of Australia Limited in 1970 and was
appointed to the board of Alcoa of Australia as Executive Director - Victoria
Operations and Managing Director of Portland Smelter Services in 1986. He was
named President - Bauxite and Alumina Division of Alcoa in 1994 and President -
Primary Metals Division of Alcoa in 1995. Mr. Pizzey was elected a Vice
President of Alcoa in 1996 and was appointed President - Alcoa World Alumina in
November 1997.
Lawrence R. Purtell, 52, Executive Vice President and General Counsel. Mr.
Purtell joined Alcoa in November 1997. He had been Corporate Secretary and
Associate General Counsel of United Technologies Corporation from 1989 to 1992.
Mr. Purtell was Vice President and General Counsel of Carrier Corporation, a
unit of United Technologies Corporation and international designer, manufacturer
and marketer of heating, ventilating and air conditioning equipment and
services, from 1992 to 1993. He was Senior Vice President and General Counsel
and Corporate Secretary of McDermott International, Inc. from 1993 to 1996. In
1996, Mr. Purtell joined Koch Industries, Inc. as Senior Vice President, General
Counsel and Corporate Secretary.
Robert F. Slagle, 59, Executive Vice President, Human Resources and
Communications. Mr. Slagle was elected Treasurer in 1982 and Vice President in
1984. In 1986, he was named Vice President - Industrial Chemicals and, in 1987,
Vice President - Industrial Chemicals and U.S. Alumina Operations. Mr. Slagle
served as Vice President - Raw Materials, Alumina and Industrial Chemicals in
1989, and Vice President of Alcoa and Managing Director - Alcoa of Australia
Limited in 1991. He was named President - Alcoa World Alumina in 1996 and was
elected to his current position in November 1997.
G. Keith Turnbull, 64, Executive Vice President - Alcoa Business System. Dr.
Turnbull was appointed Assistant Director of Alcoa Laboratories in 1980. He was
named Director - Technology Planning in 1982, Vice President - Technology
Planning in 1986 and Executive Vice President - Strategic Analysis/Planning and
Information in 1991. In January 1997 he was named to his current position, with
responsibility for company-wide implementation of the Alcoa Business System.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
Dividend per share data, high and low prices per share and the principal
exchanges on which the Company's common stock is traded are set forth on page 65
of the 1999 Annual Report to Shareholders (Annual Report) and are incorporated
herein by reference.
On January 10, 2000, the Board of Directors declared a two-for-one common stock
split. The stock split is subject to the approval of Alcoa shareholders, who
must approve an amendment to Alcoa's Articles of Incorporation to increase the
authorized shares of Alcoa common stock at the Company's annual meeting on May
12, 2000. If approved, shareholders of record on May 26, 2000 will receive an
27
<PAGE>
additional common share for each share held. The additional shares will be
distributed on or about June 9, 2000. Per-share amounts and number of shares
outstanding have not been adjusted for the stock split since it is subject to
shareholder approval.
At February 14, 2000 (the record date for the Company's 2000 annual shareholders
meeting), there were approximately 185,000 Alcoa shareholders, including both
record holders and an estimate of the number of individual participants in
security position listings.
Item 6. Selected Financial Data.
The comparative table showing selected financial data for the Company is on page
28 of the Annual Report and is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
Management's review and comments on the consolidated financial statements are on
pages 29 through 38 of the Annual Report and are incorporated herein by
reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information regarding quantitative and qualitative disclosures about market
risk is on pages 35 through 37 of the Annual Report and is incorporated herein
by reference.
Item 8. Financial Statements and Supplementary Data.
The Company's consolidated financial statements, the notes thereto and the
report of the independent public accountants are on pages 39 through 55 of the
Annual Report and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information regarding Directors is contained under the caption "Board of
Directors" on pages 5 through 11 of the Registrant's definitive Proxy Statement
dated February 25, 2000 (Proxy Statement) and is incorporated herein by
reference.
The information regarding executive officers is set forth in Part I, Item 4A
under "Executive Officers of the Registrant."
The information required by Item 405 of Regulation S-K contained under the
caption "Compliance With Section 16(a) Reporting" on page 13 of the Proxy
Statement is incorporated herein by reference.
28
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Item 11. Executive Compensation.
This information is contained under the caption "Executive Compensation" on
pages 15 through 25 of the Proxy Statement and is incorporated herein by
reference. The performance graph and Report of the Compensation Committee shall
not be deemed to be "filed."
Item 12. Security Ownership of Certain Beneficial Owners and Management.
This information is contained under the caption "Alcoa Stock Ownership and
Performance" on pages 12 through 13 of the Proxy Statement and is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions.
This information is contained under the caption "Transactions with Directors'
Companies" on page 5 of the Proxy Statement and is incorporated herein by
reference.
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.
(a) The consolidated financial statements, financial statement schedule and
exhibits listed below are filed as part of this report.
(1) The Company's consolidated financial statements, the notes thereto
and the report of the independent public accountants are on pages 39
through 55 of the Annual Report and are incorporated herein by reference.
(2) The following report and schedule should be read with the
Company's consolidated financial statements in the Annual Report:
Independent Accountant's Report of PricewaterhouseCoopers LLP dated
January 10, 2000, except for Note V, for which the date is February
11, 2000, on the Company's financial statement schedule filed as a
part hereof for the fiscal years ended December 31, 1999, 1998 and
1997.
Schedule II - Valuation and Qualifying Accounts - for the fiscal years
ended December 31, 1999, 1998 and 1997.
(3) Exhibits
Exhibit
Number Description *
- ------ -------------
2. Agreement and Plan of Merger among the Company, RLM Acquisition Corp.
and Reynolds Metals Company dated as of August 18, 1999, incorporated
by reference to exhibit 99.1 to the Company's Report on Form 8-K filed
August 27, 1999.
3(a). Articles of the Registrant as amended, incorporated by reference to
exhibit 3(a) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998.
29
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3(b). By-Laws of the Registrant as amended, incorporated by reference to
exhibit 3(b) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
10(a). Alcoa Stock Acquisition Plan, effective January 1, 1999.
10(b). Employees' Excess Benefit Plan, Plan A, incorporated by reference to
exhibit 10(b) to the Company's Annual Report on Form 10-K (Commission
file number 1-3610) for the year ended December 31, 1980.
10(c). Incentive Compensation Plan, as amended effective January 1, 1993,
incorporated by reference to exhibit 10(c) to the Company's Annual
Report on Form 10-K (Commission file number 1-3610) for the year ended
December 31, 1992.
10(d). Employees' Excess Benefit Plan, Plan C, as amended and restated in
1994, effective January 1, 1989, incorporated by reference to exhibit
10(d) to the Company's Annual Report on Form 10-K (Commission file
number 1-3610)for the year ended December 31, 1994.
10(e). Employees' Excess Benefit Plan, Plan D, as amended effective October
30, 1992, incorporated by reference to exhibit 10(e) to the Company's
Annual Report on Form 10-K (Commission file number 1-3610) for the
year ended December 31, 1992 and exhibit 10(e)(1) the Company's Annual
Report on Form 10-K (Commission file number 1-3610) for the year ended
December 31, 1994.
10(f). Employment Agreement of Paul H. O'Neill, as amended through February
25, 1993, incorporated by reference to exhibit 10(h) to the Company's
Annual Report on Form 10-K (Commission file number 1-3610) for the
year ended December 31, 1987, exhibit 10(g) to the Company's Annual
Report on Form 10-K (Commission file number 1-3610) for the year ended
December 31, 1990 and exhibit 10(f)(2) to the Company's Annual
Report on Form 10-K (Commission file number 1-3610) for the year ended
December 31, 1992.
10(g). Deferred Fee Plan for Directors, as amended effective November 10,
1995, incorporated by reference to exhibit 10(g) to the Company's
Annual Report on Form 10-K (Commission file number 1-3610) for the
year ended December 31, 1995.
10(h). Restricted Stock Plan for Non-Employee Directors, as amended effective
March 10, 1995, incorporated by reference to exhibit 10(h) to the
Company's Annual Report on Form 10-K (Commission file number 1-3610)
for the year ended December 31, 1994.
10(h)(1). Amendment to Restricted Stock Plan for Non-Employee Directors,
effective November 10, 1995, incorporated by reference to exhibit
10(h)(1) to the Company's Annual Report on Form 10-K (Commission file
number 1-3610) for the year ended December 31, 1995.
10(i). Fee Continuation Plan for Non-Employee Directors, incorporated by
reference to exhibit 10(k) to the Company's Annual Report on Form 10-K
(Commission file number 1-3610) for the year ended December 31, 1989.
10(i)(1). Amendment to Fee Continuation Plan for Non-Employee Directors,
effective November 10, 1995, incorporated by reference to exhibit
10(i)(1) to the Company's Annual Report on Form 10-K (Commission file
number 1-3610) for the year ended December 31, 1995.
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10(j). Deferred Compensation Plan, as amended effective October 30, 1992,
incorporated by reference to exhibit 10(k) to the Company's Annual
Report on Form 10-K (Commission file number 1-3610) for the year ended
December 31, 1992.
10(j)(1). Amendments to Deferred Compensation Plan, effective January 1, 1993,
February 1, 1994 and January 1, 1995, incorporated by reference to
exhibit 10(j)(1) to the Company's Annual Report on Form 10-K
(Commission file number 1-3610) for the year ended December 31, 1994.
10(j)(2). Amendment to Deferred Compensation Plan, effective June 1, 1995,
incorporated by reference to exhibit 10(j)(2) to the Company's Annual
Report on Form 10-K (Commission file number 1-3610) for the year ended
December 31, 1995.
10(j)(3). Amendment to Deferred Compensation Plan, effective November 1, 1998.
10(j)(4). Amendments to Deferred Compensation Plan, effective January 1, 1999.
10(k). Summary of the Executive Split Dollar Life Insurance Plan, dated
November 1990, incorporated by reference to exhibit 10(m) to the
Company's Annual Report on Form 10-K (Commission file number 1-3610)
for the year ended December 31, 1990.
10(l). Dividend Equivalent Compensation Plan, effective February 3, 1997,
incorporated by reference to exhibit 10(l) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
10(m). Form of Indemnity Agreement between the Company and individual
directors or officers, incorporated by reference to exhibit 10(j) to
the Company's Annual Report on Form 10-K (Commission file number
1-3610) for the year ended December 31, 1987.
10(n). Amended and Restated Revolving Credit Agreement (364-Day), dated as of
August 13, 1999, incorporated by reference to exhibit 10(n) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999.
10(o). Revolving Credit Agreement (Five-Year), dated as of August 14, 1998,
incorporated by reference to exhibit 10(o) to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998.
10(p). Alcoa Stock Incentive Plan, effective June 1, 1999, incorporated by
reference to exhibit 10(p) to the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
10(q). Alcoa Supplemental Pension Plan for Senior Executives, effective
January 1, 1999, incorporated by reference to exhibit 10(q) to the
Company's Annual Report on Form 10-K for the year ended December 31,
1998.
10(r). Deferred Fee Estate Enhancement Plan for Directors, effective July 10,
1998, incorporated by reference to exhibit 10(r) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
10(s). Alcoa Deferred Compensation Estate Enhancement Plan, effective July
10, 1998, incorporated by reference to exhibit 10(s) to the
Company's Annual Report on Form 10-K for the year ended December 31,
1998.
31
<PAGE>
10(s)(1). Amendments to Alcoa Deferred Compensation Estate Enhancement Plan,
effective January 1, 2000.
12. Computation of Ratio of Earnings to Fixed Charges.
13. Portions of Alcoa's 1999 Annual Report to Shareholders.
21. Subsidiaries and Equity Entities of the Registrant.
23. Consent of Independent Certified Public Accountants.
24. Power of Attorney for certain directors.
27. Financial data schedule.
*Exhibit Nos. 10(a) through 10(l) and 10(p) through 10(s)(1) are management
contracts or compensatory plans required to be filed as Exhibits to this Form
10-K.
Amendments and modifications to other Exhibits previously filed have been
omitted when in the opinion of the Registrant such Exhibits as amended or
modified are no longer material or, in certain instances, are no longer required
to be filed as Exhibits.
No other instruments defining the rights of holders of long-term debt of
the Registrant or its subsidiaries have been filed as Exhibits because no such
instruments met the threshold materiality requirements under Regulation S-K. The
Registrant agrees, however, to furnish a copy of any such instruments to the
Commission upon request.
(b) Reports on Form 8-K. Alcoa filed a Form 8-K, dated November 12, 1999,
with the Securities and Exchange Commission to report that a shareholder filed a
purported derivative action on behalf of the Company alleging that the Company's
proxy statement, dated March 8, 1999, contained materially false and misleading
representations and omissions concerning the Company's proposed Alcoa Stock
Incentive Plan.
32
<PAGE>
Independent Accountant's Report on
Financial Statement Schedule
To the Shareholders and Board of Directors
of Alcoa Inc. (Alcoa)
Our audits of the consolidated financial statements referred to in our report
dated January 10, 2000, except for Note V for which the date is February 11,
2000, appearing in the 1999 Annual Report to Shareholders of Alcoa (which report
and consolidated financial statements are incorporated by reference in this
Annual Report on Form 10-K) also included an audit of the financial statement
schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
600 Grant Street
Pittsburgh, Pennsylvania
January 10, 2000, except for
Note V, for which the date is
February 11, 2000
33
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31
(in millions)
Col. A Col. B Col. C Col. D Col E
- ------ ------ ------ ------ -----
Additions
---------
Balance at Charged to Charged to
beginning of costs and other Balance at
Description period expenses accounts (A) Deductions (B) end of period
----------- ------ -------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
1999 $ 61 $10 $ (5)(A) $ 8(B) $ 58
1998 $ 37 $11 $ 23(A) $10(B) $ 61
1997 $ 48 $ 6 $ (4)(A) $14(B) $ 37
Income tax valuation allowance:
1999 $135 $12 $ 6(A) $19(D) $134
1998 $104 $16 $ 21(A) $ 6(C) $135
1997 $110 $12 $(13)(A) $ 5(C) $104
<FN>
Notes: (A) Collections on accounts previously written off, acquisition/divestiture of subsidiaries and foreign
currency translation adjustments.
(B) Uncollectible accounts written off.
(C) Related primarily to reductions in the valuation reserve based on a change in circumstances.
(D) Related primarily to utilization of tax loss carryforwards.
</TABLE>
34
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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.
February 28, 2000 By /s/Timothy S. Mock
Timothy S. Mock
Vice President and Controller
(Also signing as Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/Alain J. P. Belda President February 28, 2000
Alain J. P. Belda and Chief Executive Officer
(Principal Executive Officer
and Director)
/s/Richard B. Kelson Executive Vice President and February 28, 2000
Richard B. Kelson Chief Financial Officer
(Principal Financial Officer)
Kenneth W. Dam, Joseph T. Gorman, Judith M. Gueron, Sir Ronald Hampel, Hugh M.
Morgan, John P. Mulroney, Paul H. O'Neill, Henry B. Schacht, Franklin A. Thomas
and Marina v.N. Whitman, each as a Director, on February 28, 2000, by Denis A.
Demblowski, their Attorney-in-Fact.*
*By /s/Denis A. Demblowski
Denis A. Demblowski
Attorney-in-Fact
35
<PAGE>
Alcoa Logo
Form A07-15899
Exhibit 10(a)
ALCOA STOCK ACQUISITION PLAN
(EFFECTIVE JANUARY 1, 1999)
The Compensation Committee of the Board of Directors of Alcoa Inc. is
adopting this Alcoa Stock Acquisition Plan for the exclusive benefit of select
management and highly compensated employees. The purpose of this Plan is to
provide eligible employees with a match on incentive compensation which is
deferred and invested in an Alcoa stock fund.
ARTICLE I - DEFINITIONS
1.1 The following terms have the specified meanings.
"Affiliate" means any business entity which the Company and/or one or more
Subsidiaries control in fact.
"Alcoa Stock" means shares of Company common stock, par value $1.00 per share,
as well as share-equivalent credits standing in a Participant's account in the
Equivalent Company Stock Fund.
"Alcoa Stock Ownership Guidelines" means the guidelines established by Alcoa
Inc. from time to time regarding the ownership levels of Alcoa Stock by
employees in Job Grades 27 and above.
"Award" means the annual award, which an Eligible Employee is eligible to
receive under the provisions of the Alcoa Incentive Compensation Plan.
"Award Date" means February of the calendar year following the Award Year except
as may be otherwise designated in accordance with the provisions of the Alcoa
Incentive Compensation Plan.
"Award Year" means the calendar year for which Awards are made under the
provisions of the Alcoa Incentive Compensation Plan.
"Beneficiary" means the Beneficiary under the Alcoa Deferred Compensation Plan,
or for Participants ineligible for that plan, the Beneficiary is the
Participant's spouse unless otherwise designated in writing by the Participant
and such other designated Beneficiary has been agreed to in writing by the
Participant's spouse on a form approved by the Committee.
"Board" means the Board of Directors of the Company or any duly authorized
committee thereof.
"Change in Control" means a Change in Control as defined in the Alcoa Rabbi
Trust Agreement by and between the Company and Mellon Bank N.A. dated as of
August, 1998.
"Committee" means the administrative committee created under the Savings Plan
which has complete authority to control and manage the operation and
administration of that plan.
"Company" means Alcoa Inc.
"Continuous Service" means Continuous Service as defined in the Savings Plan.
"Eligible Employee" means any employee who meets the eligibility requirements as
provided in Article II.
"Equivalent Fixed Income Fund" means the phantom investment vehicle which is
deemed to be equivalent in all respects, including value, to the Fixed Income
Fund established under the Savings Plan.
"Equivalent Company Investment Funds" means the phantom investment vehicles
under this Plan which are deemed to be equivalent in all respects, including
value, to the Investment Funds established under the Savings Plan.
"Equivalent Company Stock Fund" means the phantom investment vehicle under this
Plan, which is deemed to be equivalent in all respects, including value, to the
Company Stock Fund established under the Savings Plan.
"Incentive Compensation Deferral Credits" means
(a) any amounts credited to a Participant's account under
the Alcoa Deferred Compensation Plan on the applicable Award
Date equivalent to the dollar amount which the Participant
has elected to defer from an Award for the 1999 or any later
Award Year, or
(b) for Participant's ineligible to participate in the
Alcoa Deferred Compensation Plan, any amounts credited under
this Plan on the applicable Award Date, equivalent to the
dollar amount which the Participant has elected to defer
from an Award for the 1999 or any later Award Year. Awards,
Incentive Compensation Deferral Credits, and Matching
Company Credit Awards will, if applicable, be based on the
amount of such awards or credits in local currency converted
into US Dollars, based on the exchange rate as determined by
Alcoa's Corporate Finance Department.
"Matching Company Credit Award" means an amount equivalent to 25% of the dollar
value of the Incentive Compensation Deferral Credits deferred on an Award Date.
"Nonforfeitable Circumstance" means a Nonforfeitable Circumstance as defined in
the Savings Plan.
"Participant" means any Eligible Employee who commences participation in this
Plan as provided in Article II.
"Plan" means the Alcoa Stock Acquisition Plan, as it is now in existence or as
hereafter amended.
"Savings Plan" means the Alcoa Savings Plan for Non-Bargaining Employees, or as
hereafter amended.
"Subsidiary" means a corporation at least 50% of whose outstanding voting stock
is owned or controlled by the Company and/or one or more other Subsidiaries, and
any non-corporate business entity in which the Company and/or one or more other
Subsidiaries have at least a 50% interest in capital or profits.
ARTICLE II - PARTICIPATION AND MATCHING COMPANY CREDIT AWARDS
2.1 An Eligible Employee means any employee who is a member of the group of
select management and highly compensated employees who on the date the deferral
election for Incentive Compensation Deferral Credits is made and recorded, and
who on the Award Date for that deferral:
(a) is actively at work for the Company, a Subsidiary or
Affiliate,
(b) has a job grade of 27 or higher,
(c) is not in a collective bargaining unit,
(d) has less than five years of Continuous Service,
(e) is subject to the Alcoa Stock Ownership Guidelines, and
(f) does not hold, nor at any time has held the requisite
number of shares for their current job grade as
provided under the Alcoa Stock Ownership Guidelines.
2.2 An Eligible Employee commences participation in this Plan:
(a) If eligible for the Alcoa Deferred Compensation Plan,
on the Award Date applicable to the portion of any Award
which he or she has deferred for the 1999 Award Year or any
later Award Year under the Alcoa Deferred Compensation Plan,
and has elected to invest such deferral into the Equivalent
Company Stock Fund under the Alcoa Deferred Compensation
Plan. On or before December 31, 1999, an Eligible Employee
may make a one time deferral election to the Alcoa Deferred
Compensation Plan for any portion of the Award for the 1999
Award Year. Thereafter, elections must be made pursuant to
the Alcoa Deferred Compensation Plan, or
(b) If ineligible for the Alcoa Deferred Compensation Plan,
on the Award Date applicable to the portion of any Award
which he or she has deferred for the 1999 Award Year or any
later Award Year under this Plan. On or before December 31,
1999, an Eligible Employee may make a one time deferral
election to this Plan for any portion of the Award for the
1999 Award Year. Participation in this Plan by any non-
resident Eligible Employee under this subsection, is
conditioned on any approval that is required by a non-US
governmental entity.
2.3 Commencing with the 1999 Award Year and later Award Years a Participant who
by proper election has deferred all or a portion of an Award, and elected to
invest such deferral into the "equivalent company stock fund" under the Alcoa
Deferred Compensation Plan or the Equivalent Company Stock Fund under this Plan,
will be credited with a Matching Company Credit Award.
ARTICLE III - INVESTMENTS
3.1 Matching Company Credit Awards are invested in the Equivalent Company Stock
Fund.
3.2 Incentive Compensation Deferral Credits made under this Plan, and Matching
Company Credit Awards on those amounts, which have vested, may be invested in
10% increments, at the election of the Participant, in the Equivalent Fixed
Income Fund or the Equivalent Company Stock Fund. A Participant may change his
or her investment election, effective for the first full payroll period
following the date the appropriate direction has been properly received by the
Company or its designee, in accordance with uniform rules established by the
Committee.
3.3 The Company reserves the right to refuse to honor any Participant direction
related to investments or withdrawals, including transfers among investment
options, where necessary or desirable to assure compliance with applicable law
including U.S. and other Securities laws. However, the Company does not assume
any responsibility for compliance by officers or others with any such laws, and
any failure by the Company to delay or dishonor any such direction will not be
deemed to increase the Company's legal exposure to the Participant or third
parties.
ARTICLE IV - VESTING
4.1 Each Matching Company Credit Award will vest on the third Award Date
following the Award Date on which the Matching Company Credit Award was made. If
at any time prior to a Matching Company Credit Award vesting, the Incentive
Compensation Deferral Credit, or any part of the Incentive Compensation Deferral
Credit, on which the Matching Company Credit Award was based, is transferred out
of the "equivalent company stock fund" in the Alcoa Deferred Compensation Plan
or the Equivalent Company Stock Fund under this Plan, the Matching Company
Credit Award will be forfeited.
4.2 Notwithstanding the foregoing, upon a Participant's termination of
employment, for any reason other than a Nonforfeitable Circumstance or a Change
in Control, any Matching Company Credits which have not vested will be
forfeited. Upon a Participant's termination of employment due to a
Nonforfeitable Circumstance, or in the event of a Change in Control, any
Matching Company Credits will vest.
4.3
(a) If the Participant is eligible for the Alcoa Deferred
Compensation Plan, Matching Company Credit Awards, which
vest will be transferred to the Equivalent Company Stock
Fund in the Alcoa Deferred Compensation Plan, and thereafter
are subject to the provisions of that plan.
(b) If the Participant is ineligible for the Alcoa Deferred
Compensation Plan, Matching Company Credit Awards, which
have vested, may be invested pursuant to Section 3.2.
ARTICLE V - DISTRIBUTIONS
5.1 (a) If the Participant is eligible for the Alcoa Deferred
Compensation Plan, all vested benefits will be transferred
to and distributed through the Alcoa Deferred Compensation
Plan, and are subject to the provisions of that plan.
(b) If the Participant is ineligible for the Alcoa Deferred
Compensation Plan, all vested benefits will be distributed
in cash through this Plan in accordance with the provisions
of this Article. All distributions will be paid to the
Participant or the Beneficiary in U.S. Dollars.
5.2 Except as otherwise specified in this Article, the amount of vested Matching
Company Credit Awards and Incentive Compensation Deferral Credits in a
Participant's account will be distributed to the Participant upon his or her
termination of Continuous Service, for any reason.
5.3 All distributions made pursuant to the termination of the Participant's
Continuous Service by reason other than death or retirement will be paid to the
Participant as soon as administratively practical in a lump sum.
5.4 Prior to his or her retirement date, a Participant may elect that the value
of his or her account be distributed either in a lump sum at retirement or in
annual installments of any number designated by the Participant up to, but not
more than ten (10) following his or her retirement, commencing the January 31 of
the first calendar year following such retirement and each January 31 thereafter
until he or she has received all installments. A Participant's election to
receive installments must be made at least one year prior to his or her
retirement date. The Participant's election to receive either a lump sum or
annual installments becomes irrevocable one year prior to the Participant's
retirement date, or at such other time as may be approved by the Committee. In
the event the Participant fails to make such an election, all amounts in his or
her account will be distributed as a lump sum distribution as soon as
administratively practical after his or her retirement.
5.5 Distributions from this Plan to a Beneficiary are in a lump sum or in annual
installments of any number designated by the Participant up to, but not more
than ten (10) following his or her death commencing the first January 31 after
the Participant's death and each January 31 thereafter until all installments
have been distributed. In the event a Beneficiary dies prior to receiving all
the annual installments which he or she is entitled to receive from this Plan,
any remaining installments will be distributed as soon as administratively
practical in a lump sum to the Beneficiary's estate.
5.6 (a) Benefits payable hereunder are payable in cash out of
the general assets of the Company, and no segregation of
assets for such benefits will be made. The right of a
Participant or any Beneficiary to receive benefits under
this Plan is that of an unsecured claim against the assets
and is no greater than the rights of an unsecured general
creditor to the Company. Notwithstanding the foregoing, in
the event the Company establishes a trust, to which it may,
but is not required to contribute money or other property of
the Company in contemplation of paying benefits under this
Plan, such money or other property remains subject to the
claims of creditors of the Company.
(b) Notwithstanding any other provisions of this Plan, if
any amounts held in a trust of the above described nature
are found, due to the creation or operation of said trust,
in a final decision by a court of competent jurisdiction, or
under a "determination" by the Internal Revenue Service in a
closing agreement in audit or a final refund disposition
(within the meaning of Section 1313(a) of Internal Revenue
Code of 1986, as amended), to have been includable in the
gross income of a Participant or Beneficiary prior to
payment of such amounts from said trust, the trustee for the
trust will, as soon as practicable, pay to such Participant
or Beneficiary an amount equal to the amount determined to
have been includable in gross income in such determination,
and will accordingly reduce the Participant's or
Beneficiary's future benefits payable under this Plan. The
trustee will not make any distribution to a Participant or
Beneficiary pursuant to this paragraph unless it has
received a copy of the written determination described above
together with any legal opinion which it may request as to
the applicability thereof.
ARTICLE VI - ADMINISTRATION AND EXPENSES OF THE PLAN
6.1 The Committee or its delegate administers the Plan. The Committee's
resolution of any matter concerning this Plan is final and binding upon the
Company, Subsidiary or Affiliate and any Participant and/or Beneficiary affected
thereby. Any individual disputing any decision has 60 days from the date of the
decision to file an appeal to the Committee. The Committee has the discretionary
authority to interpret the provisions of the Plan, make credibility decisions,
and take any and all actions in determining the eligibility, participation and
coverage of any individual claiming benefits under this Plan.
6.2 The Plan will pay all costs and expenses incurred in its administration.
6.3 Notwithstanding the foregoing, for any Affiliate of which the Company owns
less than an 80% interest as defined under Internal Revenue Code Section 1504,
the obligation of and liability for the benefits accrued under this Plan for
Participants employed by such an Affiliate, remain the sole obligation and
liability of the Affiliate by express resolution of its board or other governing
body.
ARTICLE VII - AMENDMENT AND TERMINATION
7.1 This Plan may be amended, suspended or terminated at any time by the Board;
provided, however, that no such act may reduce or in any manner adversely affect
any Participant's or Beneficiary's right with respect to benefits that are
credited to the Participant's account as of the date of such act.
ARTICLE VIII - MISCELLANEOUS
8.1 This Plan does not confer any rights upon any Participant for continuation
of employment with the Company, Subsidiary or Affiliate, nor does it interfere
with the rights of the Company, Subsidiary or Affiliate to terminate the
employment of any Participant and/or to take any personnel action affecting any
Participant without regard to the effect that such action may have upon such
Participant as to recipient of benefits under this Plan.
8.2 No benefit under this Plan may be assigned, transferred, pledged or
encumbered or be subject in any manner to alienation or anticipation.
8.3 This Plan is construed, regulated and administered under the laws of the
Commonwealth of Pennsylvania, United States of America, except for laws relating
to choice or conflict of laws, and except to the extent preempted by federal
law. All claims or disputes, must be brought within the jurisdiction of the
federal courts of the United States of America sitting in the Western District
of Pennsylvania.
Exhibit 10(j)(3)
AMENDMENT TO
ALCOA DEFERRED COMPENSATION PLAN
1. Effective as of November 1, 1998, Section 8.6 is deleted in its entirety and
replaced with the following:
8.6 No benefit under this Plan may be assigned, transferred, pledged
or encumbered or be subject in any manner to alienation or anticipation.
2. In all other respects the Plan is hereby ratified and confirmed.
Exhibit 10(j)(4)
AMENDMENTS TO THE ALCOA DEFERRED COMPENSATION PLAN
Pursuant to Article 10 of the Plan which provides that the Plan may be
amended or modified, the Plan is amended effective as of January 1, 1999, or
such other date as provided below, as follows:
1. The definition of "Continuous Service" is amended by the addition of the
following sentence to the end of last paragraph:
Effective as of July 1, 1998 all years of service
accrued with Alumax, Inc. or any of its subsidiaries
("Alumax") on and after June 16, 1998, by any
Participant who was actively employed with Alumax on
June 16, 1998, will be taken into account to determine
Continuous Service.
2. The definition of "Eligible Employee" is deleted in its entirety and
replaced with the following:
"Eligible Employee" means any employee who is a member
of the group of select management and highly
compensated employees (a) who on or after June 1, 1990
are actively at work for the Company, a Subsidiary or
Affiliate, have a job grade of 19 or higher, as
determined by the Company, are eligible for
participation in the Savings Plan, and are not in a
collective bargaining unit, or (b) who on or after
January 1, 1999 is eligible to participate in the
Alumax Inc. Thrift Plan for Salaried Employees and is
named as an Eligible Employee by the Inside Director
Committee as provided on Schedule A hereto. Such
Alumax eligible employees will be eligible to make
Salary Reduction Credits and/or Incentive Compensation
Deferral Credits, in accordance with this plan, as
provided on Schedule A.
3. The definition of "Salary" is deleted in its entirety and replaced with the
following:
"Salary" means "Eligible Compensation" as defined in
the Savings Plan or "Compensation" as defined in the
Alumax Inc. Thrift Plan for Salaried Employees, as
applicable, without regard to the limitations imposed
by Section 401(a)(17) of the Internal Revenue Code.
4. Effective July 1, 1999, Section 7 is amended by deleting subsections (b)
and (c) in their entirety and replacing them with the following:
(b) (i) Commencing on January 1, 1993 once every
month a Participant may, by appropriate direction which
is properly received by the Company or its designee, in
accordance with uniform rules established by the
Company ("Appropriate Direction"), elect to transfer in
increments of 10% all or part of the deemed value of
his or her Salary Reduction Credits, Additional Salary
Reduction Credits, Incentive Compensation Deferral
Credits, Excess D Deferral Credits, except as may be
limited by the Committee, from any one or more
investment Options to any one or more other such
Investment Options. Such a transfer shall not
constitute a change in the Participant's current
investment election.
(ii) Commencing on July 1, 1999 a Participant
may, by appropriate direction which is properly
received by the Company or its designee, in accordance
with uniform rules established by the Company
("Appropriate Direction"), elect to transfer in
increments of 10% all or part of the deemed value of
his or her Salary Reduction Credits, Additional Salary
Reduction Credits, Incentive Compensation Deferral
Credits, Excess D Deferral Credits, except as may be
limited by the Committee, from any one or more
investment Options to any one or more other such
Investment Options. Such a transfer may be made daily,
with the exception of a transfer from the Alcoa Stock
which may be made no more frequently than once every 15
calendar days. Such a transfer shall not constitute a
change in the Participant's current investment
election.
(c) (i) Commencing on January l, 1993 once every
month a Participant who has attained 5 Years of Plan
Participation may, after Appropriate Direction, elect
to transfer in increments of 10% all or part of his or
her Matching Company Credits, except as may be limited
by the Committee, which have been in his or her account
for two full calendar years from the date that said
Matching Company Credits were deemed to be allocated to
the Participant's account, from the Investment Option
in which such Credits are deemed to be invested, to any
one or more other Investment Option.
(ii) Commencing on July 1, 1999 a Participant
who has attained 3 Years of Plan Participation may,
after Appropriate Direction, elect to transfer in
increments of 10% all or part of his or her Matching
Company Credits, except as may be limited by the
Committee, which have been in his or her account for
two full calendar years from the date that said
Matching Company Credits were deemed to be allocated to
the Participant's account, from the Investment Option
in which such Credits are deemed to be invested, to any
one or more other Investment Option. Such a transfer
may be made daily, with the exception of a transfer
from the Alcoa Stock which may be made no more
frequently than once every 15 calendar days.
5. In all other respects the Plan is ratified and confirmed.
SCHEDULE A
Alumax Participants
As of 1/1/00
(italics indicates subsequent transfer to Alcoa)
<TABLE>
<CAPTION>
Eligible for Salary
Deferrals as well as
Incentive Compensation:
Name SS# Eligibility
Date
<S> <C> <C>
Campbell, Paul G. ###-##-#### 01/01/99
Centa, Thomas ###-##-#### 07/02/99
Gianneschi, Thomas ###-##-#### 05/01/99
Hagen, Veronica ###-##-#### 01/01/99
Madison, Karen ###-##-#### 12/01/99
Meyer, Randall ###-##-#### 04/09/99
Kramer, William D. ###-##-#### 1/1/1999
Eligibile for
Incentive
Compensation
Deferrals only:
Name SS# Eligibility
Date
Degler, William D. ###-##-#### 01/01/00
Elder, Edmund J. ###-##-#### 01/01/99
Farmer, Kerry J. ###-##-#### 01/01/99
Gwynne, Russell M. ###-##-#### 01/01/00
Jurges, Charles D. ###-##-#### 01/01/99
Kline, Ronald L. ###-##-#### 01/01/00
Leach, Thomas ###-##-#### 01/01/99
Leyland, Robert G. ###-##-#### 01/01/99
Maniez, Leon ###-##-#### 01/01/99
Marken, Oatha ###-##-#### 01/01/00
Martin, Richard ###-##-#### 01/01/00
McHale, Robert ###-##-#### 01/01/99
Newsted, Guy ###-##-#### 01/01/99
Ribble, Ronnie J. ###-##-#### 01/01/99
Scopel, Tyrone ###-##-#### 01/01/00
Shuman, David ###-##-#### 01/01/99
Stehlik, James E. ###-##-#### 01/01/99
Wahl, Harry J. ###-##-#### 01/01/99
Chan, Joseph ###-##-#### 1/1/1999
Dwyer, James ###-##-#### 1/1/1999
Paid out at
Termination:
Name SS# Eligibility
Date
Goode, Denny P. ###-##-#### 1/1/1999
</TABLE>
EXHIBIT 10(s)(1)
AMENDMENTS TO THE
ALCOA DEFERRED COMPENSATION ESTATE ENHANCEMENT PLAN
Pursuant to Article 10 of the Plan which provides that the Plan may be
amended or modified, the Plan is amended effective as of January 1, 1999, or
such other date as provided below, as follows:
1. The definition of "Continuous Service" is amended by the addition of the
following sentence to the end of last paragraph:
Effective as of July 10, 1998 all years of service
accrued with Alumax, Inc. or any of its subsidiaries
("Alumax") on and after June 16, 1998, by any
Participant who was actively employed with Alumax on
June 16, 1998, will be taken into account to determine
Continuous Service.
2. The definition of "Salary" is deleted in its entirety and replaced with the
following:
"Salary" means "Eligible Compensation" as defined in
the Savings Plan or "Compensation" as defined in the
Alumax Inc. Thrift Plan for Salaried Employees, as
applicable, without regard to the limitations imposed
by Section 401(a)(17) of the Internal Revenue Code.
3. Effective July 1, 1999, Section 7 is amended by deleting subsections (a)
and (b) in their entirety and replacing them with the following:
(a) (i) Commencing on July 10, 1998 once every
month a Participant may, by appropriate direction which
is properly received by the Company or its designee, in
accordance with uniform rules established by the
Company ("Appropriate Direction"), elect to transfer in
increments of 10% all or part of the deemed value of
his or her Salary Reduction Credits, Additional Salary
Reduction Credits, Incentive Compensation Deferral
Credits, Excess D Deferral Credits, except as may be
limited by the Committee, from any one or more
investment Options to any one or more other such
Investment Options. Such a transfer shall not
constitute a change in the Participant's current
investment election.
(ii) Commencing on July 1, 1999 a Participant
may, by appropriate direction which is properly
received by the Company or its designee, in accordance
with uniform rules established by the Company
("Appropriate Direction"), elect to transfer in
increments of 10% all or part of the deemed value of
his or her Salary Reduction Credits, Additional Salary
Reduction Credits, Incentive Compensation Deferral
Credits, Excess D Deferral Credits, except as may be
limited by the Committee, from any one or more
investment Options to any one or more other such
Investment Options. Such a transfer may be made daily,
with the exception of a transfer from the Alcoa Stock
which may be made no more frequently than once every 15
calendar days. Such a transfer shall not constitute a
change in the Participant's current investment
election.
(b) (i) Commencing on July 10, 1998 once every
month a Participant who has attained 5 Years of Plan
Participation may, after Appropriate Direction, elect
to transfer in increments of 10% all or part of his or
her Matching Company Credits, except as may be limited
by the Committee, which have been in his or her account
for two full calendar years from the date that said
Matching Company Credits were deemed to be allocated to
the Participant's account, from the Investment Option
in which such Credits are deemed to be invested, to any
one or more other Investment Option.
(ii) Commencing on July 1, 1999 a Participant
who has attained 3 Years of Plan Participation may,
after Appropriate Direction, elect to transfer in
increments of 10% all or part of his or her Matching
Company Credits, except as may be limited by the
Committee, which have been in his or her account for
two full calendar years from the date that said
Matching Company Credits were deemed to be allocated to
the Participant's account, from the Investment Option
in which such Credits are deemed to be invested, to any
one or more other Investment Option. Such a transfer
may be made daily, with the exception of a transfer
from the Alcoa Stock which may be made no more
frequently than once every 15 calendar days.
4. Effective January 1, 2000, Sections 8.7(a) and (b) are amended by adding
the following to the beginning of each subsection:
Except for Participant Elections related to the
deferrals of "special payments," as provided for in
Section 3.5,
5. Effective January 1, 2000, a new subsections 8.7(e) is added as follows:
(e) Participant Elections related to the
deferrals of "special payments," as provided for in
Section 3.5, which were elected prior to the
Participant's Termination of Service, will be credited
to the Participant's Plan account at the time payment
would otherwise have been made.
6. In all other respects the Plan is ratified and confirmed.
Exhibit 12
<TABLE>
<CAPTION>
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
FOR THE YEAR ENDED DECEMBER 31
(in millions, except ratios)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings:
Income before taxes on income, and
before extraordinary loss and accounting
changes $1,849 $1,605 $1,602 $1,082 $1,470
Minority interests' share of earnings of
majority-owned subsidiaries
without fixed charges - (2) 3 4 2
Less equity (earnings) losses (55) (50) (42) (30) (59)
Fixed charges added to net income 232 245 182 171 151
Proportionate share of income (loss)
of 50% owned persons 42 37 35 25 58
Distributed income of less than 50%
owned persons 9 - - - -
Amortization of capitalized interest:
Consolidated 15 20 20 22 23
Proportionate share of 50% owned persons - - 1 1 1
----- ----- ----- ----- -----
Total earnings $2,092 $1,855 $1,801 $1,275 $1,646
====== ====== ====== ====== ======
Fixed Charges:
Interest expense:
Consolidated $195 $198 $141 $134 $120
Proportionate share of 50% owned persons 4 3 3 5 7
--- --- --- --- ---
199 201 144 139 127
--- --- --- --- ---
Amount representative of the interest
factor in rents:
Consolidated 32 43 37 32 24
Proportionate share of 50% owned persons 1 1 1 - -
--- --- --- --- ---
33 44 38 32 24
--- --- --- --- ---
Fixed charges added to earnings 232 245 182 171 151
--- --- --- --- ---
Interest capitalized:
Consolidated 21 13 9 5 2
Proportionate share of 50% owned persons - - - - -
--- --- --- --- ---
21 13 9 5 2
--- --- --- --- ---
Preferred stock dividend requirements
of majority-owned subsidiaries - - - - 5
--- --- --- --- ---
Total fixed charges $253 $258 $191 $176 $158
==== ==== ==== ==== ====
Ratio of earnings to fixed charges 8.3 7.2 9.4 7.2 10.4
==== ==== ==== ==== ====
</TABLE>
EXHIBIT 13
SELECTED FINANCIAL DATA
(dollars in millions, except per-share amounts and ingot prices)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 16,323 $ 15,340 $ 13,319 $ 13,061 $ 12,500
Net income* 1,054 853 805 515 791
Earnings per common share
Basic 2.87 2.44 2.33 1.47 2.22
Diluted 2.82 2.42 2.31 1.46 2.20
- -----------------------------------------------------------------------------------------------------------------------------------
Alcoa's average realized price per
pound for aluminum ingot .67 .67 .75 .73 .81
Average U.S. market price per pound
for aluminum ingot (Metals Week) .66 .66 .77 .71 .86
- -----------------------------------------------------------------------------------------------------------------------------------
Cash dividends paid per common share .805 .75 .488 .665 .45
Total assets 17,066 17,463 13,071 13,450 13,643
Long-term debt (noncurrent) 2,657 2,877 1,457 1,690 1,216
- -----------------------------------------------------------------------------------------------------------------------------------
<FN>
*Includes net after-tax gains of $44 in 1997, and net after-tax charges of $122
in 1996 and $10 in 1995
</TABLE>
28
RESULTS OF OPERATIONS
(dollars in millions, except share amounts and ingot prices;
shipments in thousands of metric tons [mt])
EARNINGS SUMMARY
1999 was a milestone year for Alcoa, as net income exceeded $1 billion for the
first time in the company's 111-year history. Highlights from the year include:
> Net income of $1,054, a 24% increase from 1998;
> Aluminum shipments of 4,478 mt, up 13% from 1998;
> Revenues of $16,323, driven by higher volumes; and
> Return on average shareholders' equity of 17.2%.
The improvement in Alcoa's 1999 net income was the result of higher
aluminum revenues, operating improvements and a lower effective tax rate.
Revenues increased as a result of higher volumes, partly offset by lower overall
aluminum prices.
Alcoa's financial results for 1998 also were strong, as summarized below:
> Net income of $853, 6% above 1997;
> Aluminum shipments of 3,951 mt, up 34% from 1997;
> Revenues of $15,340, resulting from higher volumes; and
> Return on average shareholders' equity of 16.3%.
Improved financial results for 1998 relative to 1997 were the result of
higher volumes, aided in part by the Alumax and Inespal acquisitions, and good
cost performance. Partially offsetting these positive factors were lower overall
aluminum and alumina prices and the impact of higher debt levels.
SEGMENT INFORMATION
Alcoa's operations consist of four worldwide segments: Alumina and Chemicals,
Primary Metals, Flat-Rolled Products, and Engineered Products. Alcoa businesses
that are not reported to management as part of one of these four segments are
aggregated and reported as "Other." Alcoa's management reporting system measures
the after-tax operating income (ATOI) of each segment. Nonoperating items, such
as interest income, interest expense, foreign exchange gains/losses, the effects
of 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. Segment assets exclude cash, cash
equivalents, short-term investments and all deferred taxes. Segment assets also
exclude items such as corporate fixed assets, LIFO reserve, goodwill allocated
to corporate and other amounts. In 1999, Alcoa changed its internal reporting
system to include the results of aluminum hedging in the Primary Metals segment.
Previously, these results were included as reconciling items between segment
ATOI and net income. Segment results for 1998 and 1997 have been restated to
reflect this change.
ATOI for all segments totaled $1,489 in 1999, compared with $1,344 in 1998
and $1,247 in 1997. See Note O to the financial statements for additional
information. The following discussion provides shipment, revenue and ATOI data
for each segment for the years 1997 through 1999.
29
I. ALUMINA AND CHEMICALS
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Third-party alumina
shipments (mt) 7,054 7,130 7,223
Third-party sales $1,842 $1,847 $1,978
Intersegment sales 925 832 634
- ------------------------------------------------------------------------------
Total sales $ 2,767 $ 2,679 $ 2,612
- ------------------------------------------------------------------------------
After-tax operating income $ 307 $ 318 $ 302
- ------------------------------------------------------------------------------
</TABLE>
This segment's activities include the mining of bauxite, which is then refined
into alumina. Alumina is sold to internal and external customers worldwide or is
processed into industrial chemical products. Approximately two-thirds of the
third-party sales from this segment are from alumina.
In 1999, third-party sales of alumina were up 5% compared with 1998.
Shipments fell 1% while realized prices rose 6%. For 1998, third-party sales of
alumina fell 14% from 1997, as realized prices fell 13% and shipments fell 1%.
Lower third-party shipments, as a consequence of higher intersegment sales in
1999 and 1998, were a direct result of the Alumax acquisition. Previously, sales
of alumina to Alumax were classified as third-party revenues; these sales are
now recorded as intersegment. Including intersegment sales, shipments were down
slightly in 1999 and up in 1998.
Third-party sales of alumina-based chemical products were down 3% in 1999,
as the divestiture of Alcoa Specialty Chemicals in 1998, lower prices and a
lower value-added mix more than offset higher shipments. In 1998, sales were
unchanged compared with 1997, as higher shipments, aided by acquisitions, were
offset by lower prices.
Segment ATOI for 1999 fell 3% from 1998 to $307. Alumina ATOI fell 4%, as
intersegment sales comprised a higher percentage of total sales. Offsetting a
portion of this decline was improved cost performance in Brazil, along with
lower energy and raw material costs at operations in Australia and the U.S.,
respectively. Chemicals ATOI for 1999 rose 13%, as the impact of lower
third-party sales was more than offset by cost improvements relating to
productivity enhancements at North American operations and lower production
costs. Segment ATOI in 1998 rose 5% over 1997, as lower operating costs and the
impact of the Inespal acquisition were partly offset by lower realized prices.
In 1999, Alcoa completed the expansion of its Wagerup alumina refinery in
Australia. This expansion, which increases Wagerup's capacity by 440,000 mt to a
total plant capacity of 2.2 million mt per year, was completed on time and on
budget.
II. PRIMARY METALS
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Third-party aluminum
shipments (mt) 1,442 1,392 940
Third-party sales $2,241 $2,105 $1,600
Intersegment sales 2,793 2,509 1,883
- ------------------------------------------------------------------------------
Total sales $5,034 $4,614 $3,483
- ------------------------------------------------------------------------------
After-tax operating income $ 535 $ 372 $ 399
- ------------------------------------------------------------------------------
</TABLE>
The focus of this segment is Alcoa's worldwide smelter system. Primary Metals
receives alumina from the Alumina and Chemicals segment and produces aluminum
ingot to be used by Alcoa's fabricating businesses, as well as sold to outside
customers. Other products produced and sold by this segment include powder and
scrap.
30
Alcoa's aluminum hedging activities also are included in this segment. Aluminum
ingot produced by Alcoa and used internally is transferred to other segments at
prevailing market prices. Third-party sales of ingot, which make up the majority
of this segment's third-party revenues, rose 4% from 1998. The increase was due
to higher shipments, which also rose 4%. On average, prices in 1999 compared
with 1998 were unchanged. In 1998, third-party sales of ingot rose 32% from
1997. The increase was the result of additional shipments from the smelting
operations of acquired companies, which were partially offset by an 11% decline
in realized prices.
Intersegment sales increased in 1999 relative to 1998, and in 1998 relative
to 1997, as Alumax and Inespal sourced the majority of their metal needs
internally.
Alcoa's average realized price for ingot in 1999 was 67 cents per pound,
unchanged from 1998. In 1997, the average realized price was 75 cents. This
compares with average prices on the London Metal Exchange (LME) of 63 cents per
pound in 1999 and 1998, and 74 cents in 1997.
Alcoa operated its worldwide smelting system at 90% of rated capacity in
1999. In January 2000, Alcoa announced that it will restart approximately
200,000 mt of idle smelting capacity by the end of the current year. Alcoa
continues to have 250,000 mt of smelting capacity idle.
Primary Metals ATOI rose 44% in 1999 from 1998. Driving the improvement was
a 7% increase in shipments due to including a full year's results from the 1998
July purchase of Alumax. Lower raw material prices, $45 of productivity
improvements at U.S. operations and cost efficiencies in Brazil also had a
positive impact on segment ATOI. Mark-to-market gains in 1999 versus losses in
1998 added $57 to ATOI in 1999. Primary metals ATOI fell 7% in 1998 from 1997,
as lower metal prices and higher mark-to-market losses more than offset the
impact of acquired companies and the results of internal hedging. Lower
operating costs in 1998 helped ease the decline, muting the impact of lower
prices.
III. FLAT-ROLLED PRODUCTS
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Third-party aluminum
shipments (mt) 1,982 1,764 1,469
Third-party sales $5,113 $4,900 $4,188
Intersegment sales 51 59 53
- ------------------------------------------------------------------------------
Total sales $5,164 $4,959 $4,241
- ------------------------------------------------------------------------------
After-tax operating income $ 281 $ 306 $ 269
- ------------------------------------------------------------------------------
</TABLE>
This segment's principal business is the production and sale of aluminum plate,
sheet and foil. This segment includes rigid container sheet (RCS), which is used
to produce aluminum beverage cans, and mill products used in the transportation
and distributor markets. Approximately 45% of the third-party shipments and
sales in this segment are derived from the sale of RCS, while a similar amount
is obtained from mill products. Other flat-rolled products, such as foil,
comprise the remainder of this segment. Third-party sales from this segment in
1999 increased 4% from 1998, as shipments, aided by a full year's results from
the former Alumax locations, rose 12%. Third-party sales in 1998 increased 17%
over 1997, as the impact from acquisitions was partially offset by a 2% decline
in prices.
Third-party sales from RCS were down 5% in 1999 primarily as a result of
lower prices. RCS pricing tends to lag movements in the
31
LME by three to six months, resulting in RCS prices falling year over year. For
the industry as a whole, 1999 shipments of beverage cans by U.S. can
manufacturers fell .7% from 1998. In 1998, these shipments rose 2.2%.
Third-party sales were essentially unchanged in 1998 from 1997, as were
shipments and prices.
Mill products third-party sales were up 14% from 1998, as shipments rose
32% and average prices fell 14%. Higher shipments in the U.S. and the impact of
acquisitions were partly offset by lower shipments in Latin America. Average
realized prices fell in part due to acquisitions, as post- Alumax, lower
value-added products made up a higher percentage of total shipments. Third-party
sales from mill products in 1998 were up 21% over 1997. Shipments, aided by
acquisitions, increased 23%, while prices fell 2%.
ATOI for Flat-Rolled Products fell 8% in 1999, as higher revenues and cost
reductions were overshadowed by lower prices and lower equity earnings. RCS ATOI
fell 14%, as a $16 decline in equity earnings from Kaal, a 50%-owned joint
venture that operates RCS facilities in Australia and Japan, had a negative
impact on financial performance. The decline in Kaal's earnings was primarily
the result of lower revenues from Japan. Lower prices, $3 of higher advertising
costs and a less profitable mix, partially offset by $7 of cost improvements
related to purchased materials, also had a negative impact on RCS ATOI. Mill
products ATOI fell 9%, as improved results for U.S. operations were more than
offset by weaker performance in Latin America and Europe. U.S. mill products
results were aided by acquisitions, which increased volumes, along with $11 of
improved productivity and cost performance. A shift in mix towards lower value-
added products offset a portion of these gains. In Europe and Latin America,
lower prices were partly offset by productivity and cost improvements. Partly
offsetting the decline in RCS and mill products ATOI were improved results from
foil operations and the shutdown of Alcoa Memory Products in 1999.
In 1998, ATOI for Flat-Rolled Products rose 14%, as increases from mill
products and foil were partially offset by declines in RCS. RCS ATOI was down,
as higher costs for labor and services reduced margins. Mill products ATOI rose,
as acquisitions and higher prices for products used in the transportation market
offset losses related to the production and sale of computer memory disks.
IV. ENGINEERED PRODUCTS
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Third-party aluminum
shipments (mt) 989 729 441
Third-party sales $3,728 $3,110 $2,077
Intersegment sales 26 11 9
- ------------------------------------------------------------------------------
Total sales $3,754 $3,121 $2,086
- ------------------------------------------------------------------------------
After-tax operating income $ 180 $ 183 $ 100
- ------------------------------------------------------------------------------
</TABLE>
This segment includes hard and soft alloy extrusions, aluminum forgings, rod and
bar. These products serve the transportation, construction and distributor
markets. Third-party shipments for this segment were up 36% in 1999, generating
a 20% increase in revenues. In 1998, third-party shipments rose 65% over 1997,
resulting in a 50% increase in revenues. Acquisitions and higher shipments of
forged wheels, partly offset by the 1998 sale of Alcotec, a wire fabricator,
were responsible for the increase in shipments. Average realized prices for
Engineered Products for the 1999 period fell 12%, to $1.71
32
per pound, primarily due to the addition of the Alumax extrusion businesses in
the 1998 third quarter. These businesses produce primarily soft alloy
extrusions, which have a lower value-added, resulting in a reduction in average
realized prices.
Extruded product sales were up 26% from 1998 as shipments rose 43%. In
1998, sales rose 65% on a 91% increase in shipments. The Alumax acquisition was
a significant factor in the increase in shipments. Partially offsetting higher
shipments were lower soft alloy prices and a 23% drop in shipments of hard alloy
products. Forged wheel sales increased 33% and 32% in 1999 and 1998,
respectively, from the prior year. Continued strong demand for forged wheels
used in sport utility vehicles and light trucks was a major factor in the higher
shipment levels.
Engineered Products 1999 ATOI fell 2% from 1998 to $180. The 1998 sale of
Alcotec resulted in an $18 decrease in 1999 segment ATOI relative to 1998.
Additionally, declines in the extrusion business in Latin America and in the
architectural extrusion business in the U.S. were nearly offset by improved
results in Europe and from forged products. The decline in Latin America was due
to lower volumes and prices, while the drop in returns from the architectural
extrusion business was due to lower volumes and higher production costs. Europe
benefited from acquisitions, increased market share and productivity
improvements. Forged products ATOI rose 39%, as higher prices and continued
growth in the wheel market offset a shift to a lower value- added mix.
ATOI in 1998 for this segment rose 84% over the comparable 1997 period. The
increase was due to acquired companies, the above-mentioned gain on the sale of
Alcoa's interest in Alcotec and improved operating results from European
extrusion facilities. Also contributing to the increase were higher shipments of
forged wheels.
V. OTHER
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Third-party aluminum
shipments (mt) 65 66 106
Third-party sales $3,393 $3,362 $3,457
- ------------------------------------------------------------------------------
After-tax operating income $ 186 $ 165 $ 177
- ------------------------------------------------------------------------------
</TABLE>
This category includes Alcoa Fujikura Ltd. (AFL), which produces electrical
components for the automotive industry along with telecommunications products.
In addition, Alcoa's aluminum and plastic closures operations, residential
building products operations and aluminum automotive engineering and parts
businesses are included in this group. Third- party sales from this group were
up 1% from 1998, as higher sales of automotive electrical components, the
acquisition of the remaining 50% of A-CMI in the 1999 third quarter and
increased sales from closures were nearly offset by declines from packaging
operations in Brazil. This segment's third-party sales in 1998 were down 3% from
1997, as higher sales of automotive electrical components were more than offset
by the loss of revenues from the sale of Alcoa Aluminio's cable business in late
1997.
Third-party sales at AFL increased 5% in 1999 and 7% in 1998, relative to
the prior year, as higher volumes were partly offset by declining prices.
Closures revenue for 1999 rose 7% from 1998, as higher volumes were somewhat
offset by lower prices. In 1998, closures revenues fell 1% compared with 1997.
This group incurred a special item gain of $71 in 1997. The gain was the
result of the sale of various businesses, a majority interest in Alcoa's
Brazilian cable business and land in Japan.
ATOI for this group rose 13% from 1998, as improvements in closures and
aluminum automotive parts were partly offset by a decline from packaging
operations in Brazil. The improvement in closures ATOI was a result of higher
volumes and $6 of cost improvements, offset in part by lower prices. Aluminum
automotive parts benefited from higher volumes and selling prices, lower
administrative costs and $12 of improved productivity. Cost improvements of $22
somewhat offset the impact of a 23% decline in revenues from packaging
operations in Brazil. In 1998, ATOI fell 7% from 1997, as improved results at
AFL, along with a gain from the sale of Alcoa's Australian gold operations, were
more than offset by special item gains in 1997 versus no special items in 1998.
RECONCILIATION OF ATOI TO CONSOLIDATED NET INCOME
The following reconciles segment ATOI to Alcoa's consolidated net income and
explains each line item in the reconciliation:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Total after-tax operating
income $ 1,489 $ 1,344 $ 1,247
Elimination of
intersegment (profit)
loss (24) (16) 12
Unallocated amounts (net
of tax):
Interest income 26 64 67
Interest expense (126) (129) (92)
Minority interest (242) (238) (268)
Corporate expense (171) (197) (172)
Other 102 25 11
- ------------------------------------------------------------------------------
Consolidated net income $ 1,054 $ 853 $ 805
- ------------------------------------------------------------------------------
</TABLE>
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 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
nonoperating items such as foreign exchange.
The variance in Other from 1999 to 1998 was due to LIFO adjustments that
occurred in 1999 and adjustments to deferred taxes that resulted from a change
in the Australian corporate income tax rate.
SPECIAL ITEMS
There were no special items recorded in 1999 or 1998. Special items in 1997
resulted in a net gain of $96 ($44 after tax and minority interests, or 13 cents
per basic share). The fourth quarter sale of a majority interest in Alcoa's
Brazilian cable business and land in Japan generated gains of $86. In addition,
the sale of equity securities resulted in a gain of $38, while the divestiture
of noncore businesses provided $25. These gains were partially offset by charges
of $53, related to environmental and impairment matters.
33
COSTS AND OTHER
COSTS OF GOODS SOLD -- Cost of goods sold (COGS) totaled $12,536 for 1999, up 5%
from 1998. The increase was due to higher volumes that generated additional
costs of $1,100. The higher volumes relate primarily to acquired companies.
Offsetting a portion of the acquisition- driven increases were cost and
operating improvements of approximately $500. The $1,658 increase in 1998
relative to 1997 was due to higher volumes of $1,800, which also were related
primarily to acquisitions, partly offset by cost improvements of $200. COGS as a
percentage of sales fell 1% to 76.8% in 1999, as higher shipments, good cost
control and a LIFO liquidation more than offset the negative impact of lower
overall aluminum prices on revenues. In 1998, COGS as a percentage of sales was
.7 percentage points higher than the 77.1% recorded in 1997, as higher shipments
and a higher value-added product mix more than offset the impact of cost
improvements.
SELLING AND GENERAL ADMINISTRATIVE EXPENSES -- S&GA expenses increased 9%, or
$68, to $851 in 1999. The higher level of these costs in 1999 was due to
acquisitions; Alcoa owned Alumax for 12 months in 1999 versus six months in
1998. In addition, higher personnel costs related to pay for performance had a
negative impact on S&GA in 1999. As a percentage of sales revenue, S&GA was 5.2%
in 1999. S&GA for 1998 rose $101 from 1997 to $783, or 5.1% of sales revenues.
The higher 1998 S&GA total results from acquisitions, partially offset by cost
reductions.
RESEARCH AND DEVELOPMENT EXPENSES -- R&D expenses of $128 in 1999 were
essentially unchanged from 1998, as a reduction in corporate spending was offset
by increases in the primary metals and flat-rolled products areas. R&D costs for
1998 were down 10% from 1997. A reduction in R&D personnel was primarily
responsible for lower spending on research in the metals, castings, closures and
alumina businesses.
INTEREST EXPENSE -- Interest expense of $195 in 1999 was down $3 from 1998.
Total interest costs, including capitalized interest, were up 2% to $216 in
1999. The increase in total interest costs was due to a higher level of
capitalized interest along with higher interest rates partly offset by lower
debt levels and the repayment of some higher cost debt. The increase in
capitalized interest relates to the expansion of the Wagerup alumina refinery in
Australia. Interest expense in 1998 totaled $198, up $57 from 1997. The increase
was the result of 1998 borrowings of over $1,850, the proceeds of which were
used primarily to fund acquisitions.
INCOME TAXES -- Alcoa's effective tax rate in 1999 was 29.9%, 5.1 percentage
points below the statutory rate of 35%. The lower rate is primarily due to lower
taxes on foreign income and a reduction in the Australian corporate income tax
rate. In the 1999 fourth quarter, Australia reduced its corporate income tax
rate from 36% to 34% for 2000 and to 30% for 2001.
Alcoa's effective tax rate in 1998 was 32%, three percentage points below
the statutory rate of 35%. The lower rate is primarily due to lower taxes on
foreign income.
The 1997 effective tax rate was 33%, two percentage points below the
statutory rate of 35%. The lower rate is primarily due to the favorable tax
effect of certain special items.
34
OTHER INCOME/FOREIGN CURRENCY -- Other income totaled $124 in 1999, down $25
from 1998. The decline was due to a $57 decline in interest income, a negative
swing in foreign exchange and lower gains from asset sales. Offsetting a portion
of these negative factors were gains from marking to market certain aluminum
commodity contracts versus losses in 1998. In 1998 from 1997, other income fell
9% to $149. The majority of the change was due to increased losses from marking
to market aluminum commodity contracts and lower interest income. Offsetting a
portion of these negative factors were increased gains related to asset sales,
higher equity income and a positive swing in foreign exchange.
Exchange gains (losses) included in other income were $(18.7) in 1999, $
(3.7) in 1998 and $(9.8) in 1997. The total impact on net income, after taxes
and minority interests, was $(8.3) in 1999, $(8.0) in 1998 and $6.9 in 1997.
In July 1999, the Brazilian real became the functional currency for
translating the financial statements of Alcoa's 59%-owned Brazilian subsidiary,
Alcoa Aluminio (Aluminio). Economic factors and circumstances related to
Aluminio's operations had changed significantly since the devaluation of the
real in the 1999 first quarter. Under SFAS 52, "Foreign Currency Translation,"
the change in these facts and circumstances required a change to Aluminio's
functional currency. As a result, at July 1, 1999, Alcoa's shareholders' equity
(cumulative translation adjustment) and minority interests were reduced by $156
and $108, respectively. These amounts were driven principally by a reduction in
fixed assets. This reduction resulted in a $15 decrease in Aluminio's
depreciation expense for 1999.
MINORITY INTERESTS -- Minority interests' share of income from operations rose
2% from 1998 to $242. The increase was due to higher earnings at Alcoa of
Australia (AofA) and AFL, partly offset by lower earnings from Alcoa World
Alumina L.L.C. For 1998, minority interest fell 11% to $238, as lower earnings
at Aluminio and AofA were partly offset by improvements at AFL.
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.
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 the U.S., Alcoa is net metal short and is subject to the risk of higher
aluminum prices for the anticipated metal purchases required to fulfill the
long-term customer contracts noted above. 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 December 31, 1999 and 1998, these contracts
totaled approximately 465,000 mt and 933,000 mt, respectively. These contracts
act to fix the purchase price for these metal purchase requirements, thereby
reducing Alcoa's risk to rising metal prices.
A hypothetical 10% change from the 1999 year-end, three-month LME aluminum
ingot price of $1,650 per mt would result in a pretax gain or loss to future
earnings of $77 related to all of the futures and options contracts noted above.
However, it should be noted that any change in the value of these contracts,
real or hypothetical, would be significantly offset by an inverse change in the
value of the underlying metal purchase transactions.
Earnings were selected as the measure of sensitivity due to the historical
relationship between aluminum ingot prices and Alcoa's earnings. The
hypothetical change of 10% was calculated using a parallel shift in the existing
December 31, 1999 forward price curve for aluminum ingot. The price curve takes
into account the time value of money, as well as future expectations regarding
the price of aluminum ingot.
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 the options and the delivery dates of the futures
contracts noted above 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 options 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 if metal prices fall below the price of contracts
being rolled forward.
Alcoa also had 21,000 mt and 29,000 mt of futures and options contracts
outstanding at year-end 1999 and 1998, 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 gains of $12 in 1999 and charges of $45 in 1998 and $13 in
1997. A hypothetical 10% change in aluminum ingot prices from the year-end 1999
level of $1,650 per mt would result in a pretax gain or loss of $3 related to
these positions. The hypothetical gain or loss was calculated using the same
model and assumptions noted earlier.
Alcoa sells products to various third parties at prices that are influenced
by changes in LME aluminum prices. From time to time, the company may elect to
hedge a portion of these exposures to reduce the risk of fluctuating market
prices on these sales. Towards this end, Alcoa may enter into short positions
using futures and options contracts. At December 31, 1999, these contracts
totaled 244,000 mt. These contracts act to fix a portion of the sales price
related to these sales contracts. A hypothetical 10% change in aluminum ingot
prices from the year-end 1999 level of $1,650 per mt would result in a pretax
gain or loss of $29 related to these positions. The hypothetical gain or loss
was calculated using the same model and assumptions noted earlier.
Alcoa also purchases certain other commodities, such as fuel oil, natural
gas and copper, for its operations and enters into futures and options contracts
to eliminate volatility in the prices of such products.
35
None of these contracts are material. For additional information on financial
instruments, see Notes A and T to the financial statements.
FOREIGN EXCHANGE RISKS -- 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. A hypothetical 10% change in
applicable 1999 year-end forward rates would result in a pretax gain or loss of
approximately $169 related to these positions. However, it should be noted that
any change in the value of these contracts, real or hypothetical, would be
significantly offset by an inverse change in the value of the underlying hedged
item. The model assumes a parallel shift in the forward curve for the applicable
currencies and includes the foreign currency impacts of Alcoa's cross-currency
interest rate swaps. See Notes A and T for information related to the accounting
policies and fair market values of Alcoa's foreign exchange contracts at
December 31, 1999 and 1998.
INTEREST RATE RISKS -- Alcoa attempts to maintain a reasonable balance between
fixed- and floating-rate debt and uses interest rate swaps and caps to keep
financing costs as low as possible. At December 31, 1999 and 1998, Alcoa had
$3,067 and $3,489 of debt outstanding at effective interest rates of 5.8% and
6.1%, respectively, after the impact of interest rate swaps and caps is taken
into account. A hypothetical change of 10% in Alcoa's effective interest rate
from year-end 1999 levels would increase or decrease interest expense by $20.
The interest rate effect of Alcoa's cross-currency interest rate swaps has been
included in this analysis. For more information related to Alcoa's use of
interest rate instruments, see Notes A and T.
RISK MANAGEMENT -- All of the aluminum and other commodity contracts, as well as
the various types of financial instruments, are straightforward and are held for
purposes other than trading. They are used primarily to mitigate uncertainty and
volatility, and principally cover underlying exposures.
Alcoa's commodity and derivative activities are subject to the management,
direction and control of the Strategic Risk Management Committee (SRMC). SRMC is
composed of the chief executive officer, the chief financial officer and other
officers and employees that the chief executive officer 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.
MATERIAL LIMITATIONS -- The disclosures, with respect to aluminum prices and
foreign exchange risk, do not take into account the underlying anticipated
purchase obligations and the underlying transactional foreign exchange
exposures. If the underlying items were included in the analysis, the gains or
losses on the futures and options contracts may be offset. Actual results will
be determined by a number of factors that are not under Alcoa's control and
could vary significantly from those disclosed.
ENVIRONMENTAL MATTERS
Alcoa continues to participate in environmental assessments and cleanups at a
number of locations. These include approximately 10 owned or operating
facilities and adjoining
36
properties, approximately 10 previously owned or operated facilities and
adjoining properties and approximately 65 Superfund and other waste sites. A
liability is recorded for environmental remediation costs or damages when a
cleanup program becomes probable and the costs or damages can be reasonably
estimated. For additional information, see Notes A and U to the financial
statements.
As assessments and cleanups proceed, the liability is adjusted based on
progress in determining the extent of remedial actions and related costs and
damages. The liability can change substantially due to factors such as the
nature and extent of contamination, changes in remedial requirements and
technological changes. Therefore, it is not possible to determine the outcomes
or to estimate with any degree of accuracy the potential costs for certain of
these matters. For example, there are issues related to Alcoa's Massena, New
York, and Pt. Comfort, Texas plant sites that allege natural resource damage or
off-site contaminated sediments, where investigations are ongoing. Based on
these facts, it is possible that Alcoa's results of operations, in a particular
period, could be materially affected by matters relating to these two sites.
However, based on facts currently available, management believes that the
disposition of these matters will not have a materially adverse effect on the
financial position or liquidity of the company.
Alcoa's remediation reserve balance at the end of 1999 was $174, of which
$63 was classified as a current liability, and reflects the most probable costs
to remediate identified environmental conditions for which costs can be
reasonably estimated. About 22% of this balance relates to Alcoa's Massena, New
York plant site and 11% relates to Alcoa's Pt. Comfort, Texas plant site.
Remediation expenses charged to the reserve were $47 in 1999, $63 in 1998 and
$64 in 1997. These include expenditures currently mandated, as well as those not
required by any regulatory authority or third party. In 1999, the reserve
balance was increased by $4 to cover anticipated future environmental
expenditures.
Included in annual operating expenses are the recurring costs of managing
hazardous substances and environmental programs. These costs are estimated to be
about 2% of cost of goods sold.
LIQUIDITY AND CAPITAL RESOURCES
(dollars in millions, except share amounts)
CASH FROM OPERATIONS
Cash from operations increased 2% to $2,236 in 1999, after rising 16% in 1998 to
$2,197, versus $1,888 in 1997. The 1999 increase was primarily the result of
higher earnings, partly offset by higher working capital requirements. The
increase in cash from operations in 1998 relative to 1997 was due to higher
earnings, a reduction in deferred hedging gains and lower working capital
requirements.
Higher working capital requirements for 1999 were a result of higher
receivables, a reduction in taxes and payables, partly offset by lower
inventories. In 1998, lower working capital requirements were essentially due to
lower levels of receivables and inventories, partially offset by a decrease in
accounts payable and accrued expenses.
FINANCING ACTIVITIES
Financing activities used $1,166 of cash in 1999, versus $280 in the 1998
period. The primary reason for the increase in 1999 was a decrease in
borrowings. This decrease was partly offset by an
37
increase in common stock issued in connection with employee stock option plans.
Specifically, in 1999 Alcoa used $838 of cash to repurchase 15,605,522 shares of
the company's common stock at an average price of $53.70 per share. In 1998,
Alcoa used $365 to repurchase 9,774,600 shares of common stock. Stock purchases
in 1999 and 1998 were partially offset by $609 and $87, respectively, of stock
issued for employee stock option plans.
Net payments on long-term debt in 1999 totaled $428, versus $561 of net
additions in 1998. In 1998, Alcoa issued $1,100 of commercial paper, $250 of
term debt due in 2018, $200 of term debt due in 2005 and $300 of thirty-year
bonds due in 2028. Partially offsetting these borrowings were net payments of
$350 on commercial paper and the repayment of $950 of Alumax debt. In the 1998
third quarter, Alcoa entered into a new $2,000 revolving-credit facility. The
facility is comprised of a 364-day $1,000 facility and a five-year $1,000
facility. The revolving-credit facilities are used to support the Alcoa and AofA
commercial paper programs.
Dividends paid to shareholders were $298 in 1999, an increase of $33 from
1998. The difference was due to a higher total dividend in 1999, with a total
payout of 80.5 cents per share versus 75 cents per share in 1998. In 1998,
dividends to shareholders rose $94 from 1997 to $265, as the total payout of 75
cents per share was significantly above the 1997 payout of 48.8 cents per share.
In early January 2000, Alcoa's board of directors increased the base dividend by
33%, to $1.00 per share, and increased the threshold for payment of the variable
dividend to $3.00 per share. This will result in a quarterly dividend of 25
cents per share for 2000, a 24% increase from the 1999 quarterly dividend of
20.125 cents per share. Alcoa's variable dividend program provides for the
distribution, in the following year, of 30% of Alcoa's annual earnings in excess
of $3.00 per basic share.
Dividends paid and return of capital to minority interests totaled $122 in
1999, a decline of $100 from the prior year. The decline was due to a lack of
dividends paid at Aluminio and at entities comprising Alcoa World Alumina and
Chemicals (AWAC). In 1998, dividends paid and return of capital to minority
interests fell $120 from 1997 to $222. The decrease is a result of AWAC and AofA
returning funds to their investors in 1997. Of the $342 cash outflow in 1997,
$206 relates to payments made by AofA, while a payment of $96 was made by AWAC.
Debt as a percentage of invested capital was 28.3% at the end of 1999,
compared with 31.7% for 1998 and 25.0% for 1997.
INVESTING ACTIVITIES
Cash used for investing activities in 1999 totaled $1,167, down $1,210 from
1998. Capital expenditures totaled $920, compared with $932 in 1998 and $913 in
1997. Of the total expenditures in 1999, 27% related to capacity expansion,
including alumina production in Australia and automotive sheet production in the
U.S. Also included are costs of new and expanded facilities for environmental
control in ongoing operations totaling $91 in 1999, $105 in 1998 and $94 in
1997.
Alcoa used $1,463 in 1998 for acquisitions, notably the Alumax and Inespal
transactions. During the 1999 period, Alcoa spent $122 to acquire a number of
businesses, including the bright products business of Pechiney's Rhenalu rolling
plant located near Toulouse, France and Reynolds' aluminum extrusion plant in
Irurzun, Spain. In 1999, Alcoa also acquired the remaining 50% interest in its
A-CMI partnership from Hayes Lemmerz. A-CMI was a joint venture between Alcoa
and CMI International formed to produce cast aluminum products for the
automotive industry. In the 1999 fourth quarter, Alcoa acquired Golden
Aluminum's closed rolling facility in San Antonio, Texas.
Alcoa added $96 and $126 to its investments in 1999 and 1998, respectively,
primarily to acquire a stake in the Norwegian metals producer, Elkem. In 1998,
Alcoa received $55 from the sale of its specialty chemical, Alcotec wire, Vernon
cast plate and Australian gold operations. Asset sales in 1997 generated $265
and included the Caradco, Arctek, Alcoa Composites, Norcold, Dayton Technologies
and Richmond, Indiana facilities. Also included was the sale of a majority
interest in Alcoa's Brazilian cable business.
YEAR 2000 ISSUE
Alcoa, like other businesses, made substantial preparations for the Year 2000
issue. The Year 2000 issue arose from the past practice of using two digits (as
opposed to four) to represent the year in some computer programs and software.
If uncorrected, this could have resulted in computational errors as dates are
compared across the century boundary. The vast majority of the products produced
and sold by Alcoa are unaffected by Year 2000 issues in use or operation since
they contain no microprocessors.
Based on information available to date, Alcoa has not experienced any
significant events attributable to Year 2000 issues. The company will continue
to monitor for potential issues at Alcoa, its customers and suppliers, in order
to permit a rapid response should any issues arise. Alcoa believes that if any
Year 2000 issues were to arise, they would not have a significant impact on its
operations and would most likely be isolated, short- term events.
Alcoa's Year 2000 program provided a focused effort across all of the
company's locations that:
> identified, assessed, remediated and tested 26,232 Alcoa systems and
components;
> formally assessed 3,399 critical and important suppliers;
> conducted 202 formal on-site program verification reviews;
> provided Year 2000 readiness information to 2,802 separate customers; and
> updated and completed 1,890 contingency plans.
In 1999 and 1998, Alcoa incurred $38 each year of direct costs in
connection with its Year 2000 program. These costs include external consulting
costs and the cost of hardware and software replaced as a result of Year 2000
issues. Alcoa does not expect to incur significant direct costs related to the
Year 2000 issue during the current year.
SUBSEQUENT EVENT
On February 11, 2000, the shareholders of Reynolds Metals Company, by majority
vote, approved the proposed merger transaction between Alcoa and Reynolds. The
merger transaction remains subject to the approval of various governmental
authorities.
38
MANAGEMENT'S REPORT TO ALCOA SHAREHOLDERS
The accompanying financial statements of Alcoa and consolidated subsidiaries
were prepared by management, which is responsible for their integrity and
objectivity. The statements were prepared in accordance with generally accepted
accounting principles and include amounts that are based on management's best
judgments and estimates. The other financial information included in this annual
report is consistent with that in the financial statements.
The company maintains a system of internal controls, including accounting
controls, and a strong program of internal auditing. The system of controls
provides for appropriate procedures that are consistent with high standards of
accounting and administration. The company believes that its system of internal
controls provides reasonable assurance that assets are safeguarded against
losses from unauthorized use or disposition and that financial records are
reliable for use in preparing financial statements.
Management also recognizes its responsibility for conducting the company's
affairs according to the highest standards of personal and corporate conduct.
This responsibility is characterized and reflected in key policy statements
issued from time to time regarding, among other things, conduct of its business
activities within the laws of the host countries in which the company operates
and potentially conflicting outside business interests of its employees. The
company maintains a systematic program to assess compliance with these policies.
/s/ A. Belda
Alain J.P. Belda President and Chief Executive Officer
/s/ Richard B. Kelson
Richard B. Kelson Executive Vice President and Chief Financial Officer
AUDIT COMMITTEE REPORT
The Audit Committee of the Board of Directors, which is composed of five
independent directors, met four times in 1999. In addition, the chairman of this
committee met with management and the independent accountants prior to the
announcement of quarterly earnings in April, July and October.
The Audit Committee oversees Alcoa's financial reporting process on behalf
of the Board of Directors. In fulfilling its responsibility, the committee
recommended to the Board the reappointment of PricewaterhouseCoopers LLP as the
company's independent public accountants. The Audit Committee reviewed with the
Vice President-Environment, Health and Safety, Audit and Compliance and the
independent accountants the overall scope and specific plans for their
respective audits. The committee reviewed with management Alcoa's annual and
quarterly reporting process, and the adequacy of the company's internal
controls. Without management present, the committee met separately with the Vice
President- Environment, Health and Safety, Audit and Compliance and the
independent accountants to review the results of their examinations, their
evaluations of the company's internal controls, and the overall quality of
Alcoa's financial reporting.
/s/ Henry Schacht
Henry B. Schacht Chairman, Audit Committee
INDEPENDENT ACCOUNTANT'S REPORT
To the Shareholders and Board of Directors
Alcoa Inc. (Alcoa)
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income and shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Alcoa at
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of Alcoa's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
600 Grant St., Pittsburgh, Pa. January 10, 2000, except for Note V, for which
the date is February 11, 2000.
39
STATEMENT OF CONSOLIDATED INCOME Alcoa and subsidiaries
(in millions, except per-share amounts)
<TABLE>
<CAPTION>
For the year ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Sales (O) $16,323 $15,340 $13,319
Other income 124 149 163
- ------------------------------------------------------------------------------
16,447 15,489 13,482
- ------------------------------------------------------------------------------
Costs and Expenses
Cost of goods sold 12,536 11,933 10,275
Selling, general
administrative and other
expenses 851 783 682
Research and development
expenses 128 128 143
Provision for depreciation,
depletion and amortization 888 842 735
Special items (D) -- -- (96)
Interest expense (S) 195 198 141
- ------------------------------------------------------------------------------
14,598 13,884 11,880
- ------------------------------------------------------------------------------
Earnings
Income before taxes on
income 1,849 1,605 1,602
Provision for taxes on income
(P) 553 514 529
- ------------------------------------------------------------------------------
Income from operations 1,296 1,091 1,073
Minority interests (242) (238) (268)
- ------------------------------------------------------------------------------
Net Income $ 1,054 $ 853 $ 805
- ------------------------------------------------------------------------------
Earnings per Share (B and M)
Basic $ 2.87 $ 2.44 $ 2.33
Diluted $ 2.82 $ 2.42 $ 2.31
- ------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
40
CONSOLIDATED BALANCE SHEET Alcoa and subsidiaries
(in millions)
<TABLE>
<CAPTION>
December 31 1999 1998
- ---------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents (T) $ 237 $ 342
Short-term investments (T) 77 39
Receivables from customers, less
allowances: 1999-$58; 1998-$61 2,199 2,163
Other receivables 165 171
Inventories (E) 1,618 1,881
Deferred income taxes (P) 233 198
Prepaid expenses and other current
assets 271 231
- ------------------------------------------------------------------------------
Total current assets 4,800 5,025
Properties, plants and equipment (F) 9,133 9,134
Goodwill, net of accumulated amortization
of $221 in 1999 and $179 in 1998 (C) 1,328 1,414
Other assets (H and T) 1,805 1,890
- ------------------------------------------------------------------------------
Total Assets $17,066 $17,463
- ------------------------------------------------------------------------------
Liabilities
Current liabilities:
Short-term borrowings (weighted average
rate of 5.1% in 1999 and 4.8% in
1998) (T) $ 343 $ 431
Accounts payable, trade 1,219 1,044
Accrued compensation and retirement
costs 582 553
Taxes, including taxes on income 368 431
Other current liabilities 424 628
Long-term debt due within one year (G
and T) 67 181
- ------------------------------------------------------------------------------
Total current liabilities 3,003 3,268
Long-term debt, less amount due within
one year (G and T) 2,657 2,877
Accrued postretirement benefits (Q) 1,720 1,840
Other noncurrent liabilities and deferred
credits (I) 1,473 1,588
Deferred income taxes (P) 437 358
- ------------------------------------------------------------------------------
Total liabilities 9,290 9,931
- ------------------------------------------------------------------------------
Minority Interests (A and J) 1,458 1,476
- ------------------------------------------------------------------------------
Contingent liabilities (L) -- --
Shareholders' Equity
Preferred stock (N) 56 56
Common stock (N) 395 395
Additional capital 1,704 1,676
Retained earnings 6,061 5,305
Treasury stock, at cost (1,260) (1,029)
Accumulated other comprehensive loss (638) (347)
- ------------------------------------------------------------------------------
Total shareholders' equity 6,318 6,056
- ------------------------------------------------------------------------------
Total Liabilities and Equity $17,066 $17,463
- ------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
41
STATEMENT OF CONSOLIDATED CASH FLOWS Alcoa and subsidiaries
(in millions)
<TABLE>
<CAPTION>
For the year ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash from Operations
Net income $ 1,054 $ 853 $ 805
Adjustments to reconcile net income to
cash from operations:
Depreciation, depletion and
amortization 901 856 754
Change in deferred income taxes 54 110 83
Equity earnings before additional
taxes, net of dividends (10) (3) (31)
Noncash special items -- -- (96)
Gains from investing activities--
sale of assets (12) (32) --
Minority interests 242 238 268
Other 31 (23) (5)
Changes in assets and liabilities,
excluding effects of acquisitions
and divestitures:
(Increase) reduction in
receivables (56) 145 12
Reduction in inventories 253 100 53
(Increase) reduction in prepaid
expenses and other current
assets (36) 23 (26)
Increase (reduction) in accounts
payable and accrued expenses (79) (68) 82
Increase (reduction) in taxes,
including taxes on income 26 69 (27)
Cash received on long-term alumina
supply contract -- -- 240
Change in deferred hedging gains/
losses (63) (51) (113)
Net change in noncurrent assets
and liabilities (69) (20) (111)
- ------------------------------------------------------------------------------
Cash from operations 2,236 2,197 1,888
- ------------------------------------------------------------------------------
Financing Activities
Net additions (reduction) to short-
term borrowings (89) (76) 143
Common stock issued and treasury stock
sold 609 87 203
Repurchase of common stock (838) (365) (604)
Dividends paid to shareholders (298) (265) (171)
Dividends paid and return of capital
to minority interests (122) (222) (342)
Net change in commercial paper -- 776 (79)
Additions to long-term debt 572 881 188
Payments on long-term debt (1,000) (1,096) (327)
- ------------------------------------------------------------------------------
Cash used for financing
activities (1,166) (280) (989)
- ------------------------------------------------------------------------------
Investing Activities
Capital expenditures (920) (932) (913)
Acquisitions, net of cash acquired (K) (122) (1,463) --
Proceeds from the sale of assets 45 55 265
Sale of (additions to) investments (96) (126) 52
Changes in minority interests -- 33 14
Changes in short-term investments (37) 66 (87)
Other (37) (10) (10)
- ------------------------------------------------------------------------------
Cash used for investing
activities (1,167) (2,377) (679)
- ------------------------------------------------------------------------------
Effect of exchange rate changes
on cash (8) 1 (17)
- ------------------------------------------------------------------------------
Net change in cash and cash
equivalents (105) (459) 203
Cash and cash equivalents at beginning
of year 342 801 598
- ------------------------------------------------------------------------------
Cash and cash equivalents at end
of year $ 237 $ 342 $ 801
- ------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
42
STATEMENT OF SHAREHOLDERS' EQUITY Alcoa and subsidiaries
(in millions, except share amounts)
<TABLE>
<CAPTION>
Accumulated
other Total
Comprehensive Preferred Common Additional Retained Treasury comprehensive shareholders'
December 31 income stock stock capital earnings stock income (loss) equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of 1996 $ 56 $ 179 $ 592 $ 4,083 $ (371) $ (76) $ 4,463
Comprehensive income--
1997:
Net income--1997 $ 805 805 805
Other comprehensive
income (loss):
Minimum pension
liability, net of
$2 tax benefit (4)
Unrealized
translation
adjustments (250)
Unrealized gains on
securities, net of
$1 tax expense 1
Gains on securities
included in net
income, net of $13
tax benefit (24) (277) (277)
-----------
Comprehensive income $ 528
-----------
Cash dividends:
Preferred @ $3.75 per
share (2) (2)
Common @ $.488 per share (169) (169)
Treasury shares
purchased (604) (604)
Stock issued:
compensation plans (14) 217 203
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at end of 1997 56 179 578 4,717 (758) (353) 4,419
Comprehensive income--
1998:
Net income--1998 $ 853 853 853
Other comprehensive
income (loss):
Minimum pension
liability, net of
$3 tax benefit (5)
Unrealized
translation
adjustments 11 6 6
-----------
Comprehensive income $ 859
-----------
Cash dividends:
Preferred @ $3.75 per
share (2) (2)
Common @ $.75 per share (263) (263)
Treasury shares
purchased (365) (365)
Stock issued: Alumax
acquisition 19 1,302 1,321
Stock issued:
compensation plans (7) 94 87
Stock issued: two-for-
one split 197 (197) --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at end of 1998 56 395 1,676 5,305 (1,029) (347) 6,056
Comprehensive income--
1999:
Net income--1999 $ 1,054 1,054 1,054
Other comprehensive
loss:
Unrealized
translation
adjustments (A) (291) (291) (291)
-----------
Comprehensive income $ 763
-----------
Cash dividends:
Preferred @ $3.75 per
share (2) (2)
Common @ $.805 per share (296) (296)
Treasury shares
purchased (838) (838)
Stock issued:
compensation plans 28 607 635
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of 1999 $ 56 $ 395 $ 1,704 $ 6,061 $ (1,260) $ (638)* $ 6,318
- -----------------------------------------------------------------------------------------------------------------------------------
<FN>
*Comprised of unrealized translation adjustments of $(623) and minimum pension
liability of $(15)
</TABLE>
SHARE ACTIVITY
(number of shares)
<TABLE>
<CAPTION>
Common stock
-----------------------------------------------------------------------
Preferred stock Issued Treasury Net outstanding
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at end of 1996 557,649 357,845,166 (12,825,888) 345,019,278
Treasury shares purchased (16,154,534) (16,154,534)
Stock issued: compensation plans 7,686,508 7,686,508
- ------------------------------------------------------------------------------------------------------------------------
Balance at end of 1997 557,649 357,845,166 (21,293,914) 336,551,252
Treasury shares purchased (9,774,600) (9,774,600)
Stock issued: Alumax acquisition 36,850,760 36,850,760
Stock issued: compensation plans 3,181,666 3,181,666
- ------------------------------------------------------------------------------------------------------------------------
Balance at end of 1998 557,649 394,695,926 (27,886,848) 366,809,078
Treasury shares purchased (15,605,522) (15,605,522)
Stock issued: compensation plans 16,545,442 16,545,442
- ------------------------------------------------------------------------------------------------------------------------
Balance at end of 1999 557,649 394,695,926 (26,946,928) 367,748,998
- ------------------------------------------------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in millions, except per-share amounts)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION. The
consolidated financial statements include the accounts of Alcoa and companies
more than 50% owned. Investments in other entities are accounted for principally
on an equity basis.
The consolidated financial statements are prepared in conformity with
generally accepted accounting principles and require management to make certain
estimates and assumptions. These may affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements. They may also affect the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates upon subsequent resolution of identified matters.
INVENTORY VALUATION. Inventories are carried at the lower of cost or
market, with cost for a substantial portion of U.S. and Canadian inventories
determined under the last-in, first-out (LIFO) method. The cost of other
inventories is principally determined under the average-cost method. See Note E
for additional detail.
PROPERTIES, PLANTS AND EQUIPMENT. Properties, plants and equipment are
recorded at cost. Depreciation is recorded principally on the straight-line
method at rates based on the estimated useful lives of the assets, averaging 33
years for structures and between five and 25 years for machinery and equipment.
Profits or losses from the sale of assets are included in other income. Repairs
and maintenance are charged to expense as incurred. Interest related to the
construction of qualifying assets is capitalized as part of the construction
costs.
Depletion is taken over the periods during which the estimated mineral
reserves are extracted. See Notes F and S for additional detail.
AMORTIZATION OF INTANGIBLES. The excess purchase price over the net
tangible assets of businesses acquired is reported as goodwill in the
consolidated balance sheet. Goodwill and other intangibles are amortized on a
straight- line basis over not more than 40 years. The carrying value of goodwill
and other intangibles is evaluated periodically in relation to the operating
performance and future undiscounted cash flows of the underlying businesses.
Adjustments are made if the sum of expected future net cash flows is less than
book value. See Note H for additional information.
REVENUE RECOGNITION. Alcoa recognizes revenue when title passes to the
customer.
ENVIRONMENTAL EXPENDITURES. Expenditures for current operations are
expensed or capitalized, as appropriate. Expenditures relating to existing
conditions caused by past operations, and which do not contribute to future
revenues, are expensed. Liabilities are recorded when remedial efforts are
probable and the costs can be reasonably estimated. The liability may include
costs such as site investigations, consultant fees, feasibility studies, outside
contractor and monitoring expenses. Estimates are not discounted or reduced by
potential claims for recovery. Claims for recovery are recognized when received.
The estimates also include costs related to other potentially responsible
parties to the extent that Alcoa has reason to believe such parties will not
fully pay their proportionate share. The liability is periodically reviewed and
adjusted to reflect current remediation progress, prospective estimates of
required activity and other factors that may be relevant, including changes in
technology or regulations. See Note U for additional information.
STOCK-BASED COMPENSATION. Alcoa accounts for stock-based compensation in
accordance with the provisions of APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Accordingly, compensation
cost is not required to be recognized on options granted. Disclosures required
with respect to alternative fair value measurement and recognition methods
prescribed by Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," are presented in Note N.
FINANCIAL INSTRUMENTS AND COMMODITY CONTRACTS. Alcoa enters into long-term
contracts to supply fabricated products to a number of its customers. To hedge
the market risk of changing prices for purchases or sales of metal, Alcoa uses
commodity futures and options contracts.
Gains and losses related to transactions that qualify for hedge accounting,
including closed futures contracts, are deferred and reflected in cost of goods
sold when the underlying physical transaction takes place. The deferred gains or
losses are reflected on the balance sheet in other current and noncurrent
liabilities or assets. If future purchased metal needs are revised lower than
initially anticipated, the futures contracts associated with the reduction no
longer qualify for deferral and are marked to market. Mark-to-market gains and
losses are recorded in other income in the current period.
The effectiveness of the hedge is measured by a historical and probable
future high correlation of changes in the fair value of the hedging instruments
with changes in value of the hedged item. If correlation ceases to exist, hedge
accounting will be terminated and gains or losses recorded in other income. To
date, high correlation has always been achieved.
Alcoa also enters into futures and options contracts that cover long-term,
fixed-price commitments to supply customers with metal from internal sources.
These contracts are marked to market, and the gains and losses from changes in
market value of the contracts are recorded in other income in the current
period. This resulted in after-tax gains of $12 in 1999 and losses of $45 in
1998 and $13 in 1997.
44
From time to time, Alcoa may elect to sell forward a portion of its
production. Gains and losses related to transactions that qualify for hedge
accounting are deferred and reflected in revenues when the underlying physical
transaction takes place. The deferred gains or losses are reflected on the
balance sheet in other current and noncurrent liabilities or assets. If the
above contracts no longer qualify for deferral, the contracts are marked to
market to other income in the current period.
Alcoa also purchases certain other commodities such as fuel oil, 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.
Alcoa attempts to maintain a reasonable balance between fixed- and
floating-rate debt, using interest rate swaps and caps, to keep financing costs
as low as possible. If the requirements for hedge accounting are met, amounts
paid or received under these agreements are recognized over the life of the
agreements as adjustments to interest expense. Otherwise, the instruments are
marked to market, and the gains and losses from changes in the market value of
the contracts are recorded in other income in the current period.
Upon early termination of an interest rate swap or cap, gains or losses are
deferred and amortized as adjustments to interest expense of the related debt
over the remaining period covered by the terminated swap or cap.
Alcoa is subject to exposure from fluctuations in foreign currencies. To
manage this exposure, Alcoa uses foreign exchange forward and option contracts.
Gains and losses on contracts that meet the requirements for hedge accounting
are deferred and included in the basis of the underlying transactions. Contracts
that do not meet these requirements are marked to market in other income each
period.
Cash flows from financial instruments are recognized in the statement of
cash flows in a manner consistent with the underlying transactions. See Note T
for additional detail.
FOREIGN CURRENCY. The local currency is the functional currency for Alcoa's
significant operations outside the U.S., except in Canada, where the U.S. dollar
is used as the functional currency. The determination of the functional currency
for Alcoa's Canadian operations is made based on the appropriate economic and
management indicators.
Effective July 1, 1999, the Brazilian real became the functional currency
for translating the financial statements of Alcoa's 59%-owned Brazilian
subsidiary, Alcoa Aluminio S.A. (Aluminio). Economic factors and circumstances
related to Aluminio's operations have changed significantly since the
devaluation of the real in the 1999 first quarter. Under SFAS No. 52, "Foreign
Currency Translation," the change in these facts and circumstances required a
change to Aluminio's functional currency.
As a result of the change, at July 1, 1999, Alcoa's shareholders' equity
(Cumulative Translation Adjustment) and minority interests accounts were reduced
by $156 and $108, respectively. These amounts were driven principally by a
reduction in fixed assets. This reduction resulted in a $15 decrease in
Aluminio's depreciation expense for 1999.
One of the factors affecting the change in Aluminio's functional currency
was Alcoa's purchase of approximately $185 of Aluminio's 7.5% secured export
notes. The repurchase of these notes is consistent with Alcoa's recent policy
change regarding the manner in which large subsidiaries are capitalized and will
result in lower overall financing costs to the company.
RECENTLY ADOPTED ACCOUNTING STANDARDS. A Statement of Position (SOP) was
issued by the American Institute of CPAs in April 1998. The SOP, "Reporting on
the Costs of Start-up Activities," requires that costs incurred to open a new
facility, introduce a new product, commence a new operation or other similar
activities be expensed as incurred. This SOP, which was adopted in 1999, did not
have a material impact on Alcoa's financial statements.
RECENTLY ISSUED ACCOUNTING STANDARDS. In June 1998, the Financial
Accounting Standards Board issued SFAS No. 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. The company believes that the adoption of
the 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. Management is currently assessing the details of the standard and is
preparing a plan of implementation.
RECLASSIFICATION. Certain amounts in previously issued financial statements
were reclassified to conform to 1999 presentations.
B. COMMON STOCK SPLIT
On January 10, 2000, the board of directors declared a two-for-one common stock
split. The stock split is subject to the approval of Alcoa shareholders, who
must approve an amendment to Alcoa's Articles of Incorporation to increase the
authorized shares of Alcoa common stock at the company's annual meeting on May
12, 2000. If approved, shareholders of record on May 26, 2000, will receive an
additional common share for each share held. The additional shares will be
distributed on June 9, 2000. Per-share amounts and number of shares outstanding
in this report have not been adjusted for the stock split since it is subject to
shareholder approval. If the stock split is approved by shareholders, earnings
per share will be restated to the following:
<TABLE>
<CAPTION>
(Unaudited) 1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS $ 1.43 $ 1.22 $ 1.17
Diluted EPS 1.41 1.21 1.15
- ------------------------------------------------------------------------------
</TABLE>
45
C. ACQUISITIONS
In August 1999, Alcoa and Reynolds Metals Company (Reynolds) announced they had
reached a definitive agreement to merge. Under the agreement, Alcoa will acquire
all of the outstanding shares of Reynolds at an exchange rate of 1.06 shares of
Alcoa common stock for each share of Reynolds. The value of the transaction is
approximately $4,800. The combined company will have annual revenues of $21,000,
approximately 127,000 employees and will operate over 300 locations in 37
countries around the world. The acquisition is subject to the expiration of
antitrust waiting periods and other customary conditions. The acquisition of
Reynolds will be accounted for using the purchase method.
In July 1998, Alcoa acquired Alumax Inc. (Alumax) for approximately $3,800,
consisting of cash of approximately $1,500, stock of approximately $1,300 and
assumed debt of approximately $1,000. Alumax operated over 70 plants and other
manufacturing facilities in 22 states, Canada, Western Europe and Mexico.
The following unaudited pro forma information for the years ended December
31, 1998 and 1997 assumes that the acquisition of Alumax had occurred at the
beginning of each respective year. Adjustments that have been made to arrive at
the pro forma totals include those related to acquisition financing, the
amortization of goodwill, the elimination of transactions between Alcoa and
Alumax and additional depreciation related to the increase in basis that
resulted from the transaction. Tax effects from the pro forma adjustments noted
above have been included at the 35% U.S. statutory rate.
<TABLE>
<CAPTION>
(Unaudited) 1998 1997
- ------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 16,766 $ 16,160
Net income 876 770
- --------------------------------------------------------------------------
Earnings per share:
Basic 2.36 2.02
Diluted 2.35 2.00
- --------------------------------------------------------------------------
</TABLE>
The pro forma results are not necessarily indicative of what actually would have
occurred if the transaction had been in effect for the periods presented, are
not intended to be a projection of future results and do not reflect any cost
savings that might be achieved from the combined operations.
In February 1998, Alcoa completed its acquisition of Inespal, S.A. of
Madrid, Spain. Alcoa paid approximately $150 in cash and assumed $260 of debt
and liabilities in exchange for substantially all of Inespal's businesses. The
acquisition included an alumina refinery, three aluminum smelters, three
aluminum rolling facilities, two extrusion plants and an administrative center.
Alcoa completed a number of other acquisitions in 1999, 1998 and 1997. None
of these transactions had a material impact on Alcoa's financial statements.
Alcoa's acquisitions have been accounted for using the purchase method. The
purchase price has been allocated to the assets acquired and liabilities assumed
based on their estimated fair market values. Any excess purchase price over the
fair market value of the net assets acquired has been recorded as goodwill. In
the case of the Alumax acquisition, the allocation of the purchase price
resulted in goodwill of approximately $910, which is being amortized over a
forty-year period. Operating results have been included in the statement of
consolidated income since the dates of the acquisitions. Had the Inespal
acquisition occurred at the beginning of 1998, net income for that year would
not have been materially different.
D. SPECIAL ITEMS
Special items in 1997 resulted in a gain of $96 ($44, or 13 cents per basic
share, after tax and minority interests). The fourth quarter sales of a majority
interest in Alcoa's Brazilian cable business and land in Japan generated gains
of $86. In addition, the sale of equity securities resulted in a gain of $38,
while the divestiture of noncore businesses provided $25. These gains were
partially offset by charges of $53, related primarily to environmental and
impairment matters. As of the end of 1998, the impairment liability had been
substantially extinguished. The actual costs incurred related to the impairments
were not significantly different than the original estimates.
E. INVENTORIES
<TABLE>
<CAPTION>
December 31 1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
Finished goods $ 363 $ 418
Work in process 550 592
Bauxite and alumina 286 347
Purchased raw materials 267 361
Operating supplies 152 163
- --------------------------------------------------------------------------
$ 1,618 $ 1,881
- --------------------------------------------------------------------------
</TABLE>
Approximately 57% of total inventories at December 31, 1999 were valued on a
LIFO basis. If valued on an average- cost basis, total inventories would have
been $645 and $703 higher at the end of 1999 and 1998, respectively. During
1999, LIFO inventory quantities were reduced, which resulted in a partial
liquidation of the LIFO bases. The impact of this liquidation increased net
income by $31 or eight cents per share.
F. PROPERTIES, PLANTS AND EQUIPMENT, AT COST
<TABLE>
<CAPTION>
December 31 1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
Land and land rights, including
mines $ 270 $ 284
Structures 4,491 4,561
Machinery and equipment 13,090 12,649
- --------------------------------------------------------------------------
17,851 17,494
Less: accumulated depreciation
and depletion 9,303 9,091
- --------------------------------------------------------------------------
8,548 8,403
Construction work in progress 585 731
- --------------------------------------------------------------------------
$ 9,133 $ 9,134
- --------------------------------------------------------------------------
</TABLE>
46
G. LONG-TERM DEBT
<TABLE>
<CAPTION>
December 31 1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
Commercial paper, variable rate,
(5.8% and 5.4% average rates) $ 980 $ 745
5.75% Notes payable, due 2001 250 250
6.125% Bonds, due 2005 200 200
6.50% Bonds, due 2018 250 250
6.75% Bonds, due 2028 300 300
Bank loans, 7.5 billion yen, due
1999, (4.4% fixed rate) -- 78
Tax-exempt revenue bonds ranging
from 3.3% to 5.9%, due 2000-2033 166 153
Alcoa Fujikura Ltd.
Variable-rate term loan, due
1999-2002 (5.5% average rate) 210 230
Alcoa Aluminio 7.5% Notes, due
2008 194 388
Variable-rate notes, due 1999-
2001 (7.6% and 6.6% average
rates) 8 40
Alcoa of Australia
Euro-commercial paper, variable
rate, (5.4% average rate) 20 250
Other 146 174
- --------------------------------------------------------------------------
2,724 3,058
Less: amount due within one year 67 181
- --------------------------------------------------------------------------
$ 2,657 $ 2,877
- --------------------------------------------------------------------------
</TABLE>
The amount of long-term debt maturing in each of the next five years is $67 in
2000, $366 in 2001, $209 in 2002, $1,010 in 2003 and $27 in 2004.
In 1998, Alcoa issued $300 of thirty-year bonds due in 2028, $250 of term
debt due in 2018, $200 of term debt due in 2005 and $1,100 of commercial paper.
The proceeds from these borrowings were used to fund acquisitions and for
general corporate purposes.
In 1998, Alcoa entered into a new $2 billion revolving- credit facility,
which expires in equal amounts in August 2000 and August 2003. Under this
agreement, certain levels of consolidated net worth must be maintained while
commercial paper balances are outstanding.
In 1997, Alcoa Fujikura issued a $250 term loan and entered into a
five-year, $250 revolving-credit agreement. The proceeds of the term loan were
used to repay existing debt. These agreements require Alcoa Fujikura to maintain
certain financial ratios.
In 1996, Alcoa Aluminio issued $400 of export notes, of which $185 were
repurchased by Alcoa in 1999. The export note agreement requires Aluminio to
maintain certain financial ratios.
A portion of the commercial paper issued by Alcoa and all of the
Euro-commercial paper issued by Alcoa of Australia (AofA) are classified as
long-term debt because they are backed by the revolving-credit facility noted
above.
H. OTHER ASSETS
<TABLE>
<CAPTION>
December 31 1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
Investments, principally equity
investments $ 630 $ 586
Intangibles, net of accumulated
amortization of $177 in 1999 and
$139 in 1998 117 127
Noncurrent receivables 43 67
Deferred income taxes 424 505
Deferred charges and other 591 605
- --------------------------------------------------------------------------
$1,805 $1,890
- --------------------------------------------------------------------------
</TABLE>
I. OTHER NONCURRENT LIABILITIES AND DEFERRED CREDITS
<TABLE>
<CAPTION>
December 31 1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
Deferred hedging gains -- $ 55
Deferred alumina sales revenue $ 220 228
Environmental remediation 111 124
Deferred credits 283 336
Other noncurrent liabilities 859 845
- --------------------------------------------------------------------------
$ 1,473 $ 1,588
- --------------------------------------------------------------------------
</TABLE>
The deferred hedging gains are associated with metal contracts and will be
reflected in future earnings concurrent with the hedged revenues or costs.
J. MINORITY INTERESTS
The following table summarizes the minority shareholders' interests in the
equity of consolidated subsidiaries.
<TABLE>
<CAPTION>
December 31 1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
Alcoa of Australia $ 439 $ 376
Alcoa Aluminio 253 366
Alcoa World Alumina 290 290
Alcoa Fujikura 260 233
Other majority-owned companies 216 211
- --------------------------------------------------------------------------
$ 1,458 $ 1,476
- --------------------------------------------------------------------------
</TABLE>
K. CASH FLOW INFORMATION
Cash payments for interest and income taxes follow.
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest $ 225 $ 199 $ 146
Income taxes 394 371 343
- ------------------------------------------------------------------------------
</TABLE>
The details of cash payments related to acquisitions follow.
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Fair value of assets $ 282 $ 5,511 --
Liabilities (159) (2,554) --
Stock issued -- (1,321) --
- ------------------------------------------------------------------------------
Cash paid 123 1,636 --
Less: cash acquired 1 173 --
- ------------------------------------------------------------------------------
Net cash paid for acquisitions $ 122 $ 1,463 --
- ------------------------------------------------------------------------------
</TABLE>
47
L. CONTINGENT LIABILITIES
Various lawsuits, claims and proceedings have been or may be instituted or
asserted against Alcoa, including those pertaining to environmental, product
liability and safety and health matters. While the amounts claimed may be
substantial, the ultimate liability cannot now be determined because of the
considerable uncertainties that exist. Therefore, it is possible that results of
operations or liquidity in a particular period could be materially affected by
certain contingencies. However, based on facts currently available, management
believes that the disposition of matters that are pending or asserted will not
have a materially adverse effect on the financial position of the company.
Aluminio is 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
fufill their financial responsibilities, Aluminio may be liable for its pro rata
share of the deficiency.
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 total $190 in 2000, $182 in 2001, $179 in 2002, $176 in 2003, $176 in
2004 and $2,222 thereafter. Expenditures under these contracts totaled $179 in
1999, $171 in 1998 and $219 in 1997.
M. EARNINGS PER SHARE
Basic earnings per common share (EPS) amounts are computed by dividing earnings
after the deduction of preferred stock dividends by the average number of common
shares outstanding. Diluted EPS amounts assume the issuance of common stock for
all potentially dilutive securities outstanding. See Note N for additional
information.
The details of basic and diluted earnings per common share follow.
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 1,054 $ 853 $ 805
Less: preferred stock dividends 2 2 2
- ------------------------------------------------------------------------------
Income available to common
stockholders $ 1,052 $ 851 $ 803
Average shares outstanding--
basic 366.9 349.1 344.5
Effect of dilutive securities:
Shares issuable upon exercise
of dilutive outstanding stock
options 6.7 2.5 3.3
- ------------------------------------------------------------------------------
Average shares outstanding--
diluted 373.6 351.6 347.8
Basic EPS $ 2.87 $ 2.44 $ 2.33
Diluted EPS 2.82 2.42 2.31
- ------------------------------------------------------------------------------
</TABLE>
N. PREFERRED AND COMMON STOCK
PREFERRED STOCK. Alcoa has two classes of preferred stock. Serial preferred
stock has 557,740 shares authorized, with a par value of $100 per share and an
annual $3.75 cumulative dividend preference per share. Class B serial preferred
stock has 10 million shares authorized (none issued) and a par value of $1 per
share.
COMMON STOCK. There are 600 million shares authorized at a par value of $1 per
share. As of December 31, 1999, 40,833,662 shares of common stock were reserved
for issuance under the long-term stock incentive plan.
Stock options under the company's stock incentive plan have been and may be
granted, generally at not less than market prices on the dates of grant, except
for the 25 cents per-share options issued as a payout of earned performance
share awards. The stock option program includes a reload or stock continuation
ownership feature. Stock options granted have a maximum term of 10 years.
Vesting periods are one year from the date of grant and six months for options
granted under the reload feature.
Alcoa's net income and earnings per share would have been reduced to the
pro forma amounts shown below if compensation cost had been determined based on
the fair value at the grant dates.
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $ 1,054 $ 853 $ 805
Pro forma 912 815 756
- ------------------------------------------------------------------------------
Basic earnings per share:
As reported 2.87 2.44 2.33
Pro forma 2.48 2.33 2.19
- ------------------------------------------------------------------------------
Diluted earnings per share:
As reported 2.82 2.42 2.31
Pro forma 2.44 2.31 2.17
- ------------------------------------------------------------------------------
</TABLE>
The weighted average fair value of options granted was $10.69 per share in 1999,
$5.73 per share in 1998 and $5.90 per share in 1997.
The fair value of each option is estimated on the date of grant or
subsequent reload using the Black-Scholes pricing model with the following
assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Average risk-free interest rate 5.0% 5.2% 6.1%
Expected dividend yield 1.4 2.1 1.3
Expected volatility 37.0 25.0 25.0
Expected life (years):
New option grants 2.5 2.5 2.5
Reload option grants 1.5 1.5 1.0
- ------------------------------------------------------------------------------
</TABLE>
48
The transactions for shares under options were:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding, beginning of
year:
Number of options 26.6 21.1 20.1
Weighted average exercise
price $33.00 $31.67 $25.87
Granted:
Number of options 21.8 11.8 12.8
Weighted average exercise
price $48.93 $34.37 $36.07
Exercised:
Number of options (21.6) (6.0) (11.5)
Weighted average exercise
price $34.44 $30.13 $26.40
Expired or forfeited:
Number of options (.3) (.3) (.3)
Weighted average exercise
price $37.17 $36.49 $31.70
- ------------------------------------------------------------------------------
Outstanding, end of year:
Number of options 26.5 26.6 21.1
Weighted average exercise
price $44.29 $33.00 $31.67
- ------------------------------------------------------------------------------
Exercisable, end of year:
Number of options 13.2 13.8 10.4
Weighted average exercise
price $38.41 $30.47 $26.73
- ------------------------------------------------------------------------------
Shares reserved for future
options 14.3 11.4 17.8
- ------------------------------------------------------------------------------
</TABLE>
The following tables summarize certain stock option information at December 31,
1999:
Options Outstanding
<TABLE>
<CAPTION>
Range of Weighted average Weighted average
exercise price Number remaining life exercise price
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 0.25 .3 employment career $ 0.25
$13.93-$27.57 1.9 4.20 22.13
$27.58-$41.21 5.6 5.60 35.12
$41.22-$54.85 12.3 8.21 43.00
$54.86-$68.49 5.9 6.04 62.24
$68.50-$82.13 .5 6.05 73.07
- ------------------------------------------------------------------------------
Total 26.5 6.74 44.29
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
Range of Weighted average
exercise price Number exercisable price
- -----------------------------------------------------------------------
<S> <C> <C>
$ 0.25 .3 $ 0.25
$13.93-$27.57 1.9 22.13
$27.58-$41.21 5.6 35.12
$41.22-$54.85 3.9 44.91
$54.86-$68.49 1.5 62.35
$68.50-$82.13 -- --
- -----------------------------------------------------------------------
Total 13.2 $38.41
- -----------------------------------------------------------------------
</TABLE>
O. SEGMENT AND GEOGRAPHIC AREA INFORMATION
Alcoa is primarily a producer of aluminum products. Its segments are organized
by product on a worldwide basis. Alcoa's management reporting system evaluates
performance based on a number of factors; however, the primary measure of
performance is the after-tax operating profit of each segment. Nonoperating
items such as interest income, interest expense, foreign exchange gains/losses,
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. Segment assets exclude cash, cash
equivalents, short-term investments and all deferred taxes. Segment assets also
exclude items such as corporate fixed assets, LIFO reserves, goodwill allocated
to corporate and other amounts. In 1999, 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 1998 and 1997 have been restated to
reflect this change.
The accounting policies of the segments are the same as those described in
the Summary of Significant Accounting Policies (Note A). Transactions between
segments are established based on negotiation between the parties. Differences
between segment totals and Alcoa's consolidated totals for line items not
reconciled are primarily due to corporate allocations.
Alcoa's products are used primarily by packaging, transportation (including
aerospace, automotive, rail and shipping), building and construction, and
industrial customers worldwide. Total exports from the U.S. were $1,309 in 1999,
compared with $1,283 in 1998 and $1,207 in 1997. Alcoa's reportable segments
follow.
ALUMINA AND CHEMICALS. 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.
The alumina operations of Alcoa World Alumina and Chemicals (AWAC) comprise the
majority of this segment.
PRIMARY METALS. This group's 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.
49
FLAT-ROLLED PRODUCTS. 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), which is used to produce aluminum beverage cans,
and mill products used in the transportation and distributor markets.
ENGINEERED PRODUCTS. This segment includes the aggregation of hard and soft
alloy extrusions, aluminum forgings, rod and bar. These products serve primarily
the transportation, construction and distributor markets.
OTHER. This category includes Alcoa Fujikura Ltd., which produces electrical
components for the automotive industry along with telecommunication products. In
addition, Alcoa's aluminum and plastic closure operations and Alcoa's
residential building products operations are included in this group.
<TABLE>
<CAPTION>
Alumina and Primary Flat-rolled Engineered
Segment information chemicals metals products products Other Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999
Sales:
Third-party sales $ 1,842 $ 2,241 $ 5,113 $ 3,728 $ 3,393 $ 16,317
Intersegment sales 925 2,793 51 26 -- 3,795
- -----------------------------------------------------------------------------------------------------------------------------------
Total sales $ 2,767 $ 5,034 $ 5,164 $ 3,754 $ 3,393 $ 20,112
- -----------------------------------------------------------------------------------------------------------------------------------
Profit and loss:
Equity income (loss) -- $ 42 $ (9) -- $ 10 $ 43
Depreciation, depletion and
amortization $ 161 216 184 $ 116 149 826
Special items -- -- -- -- -- --
Income tax 159 214 131 88 103 695
After-tax operating income 307 535 281 180 186 1,489
- -----------------------------------------------------------------------------------------------------------------------------------
Assets:
Capital expenditures $ 183 $ 207 $ 166 $ 144 $ 158 $ 858
Equity investment 54 153 66 -- 287 560
Total assets 3,250 5,098 3,395 2,387 2,409 16,539
- -----------------------------------------------------------------------------------------------------------------------------------
1998
Sales:
Third-party sales $ 1,847 $ 2,105 $ 4,900 $ 3,110 $ 3,362 $ 15,324
Intersegment sales 832 2,509 59 11 -- 3,411
- -----------------------------------------------------------------------------------------------------------------------------------
Total sales $ 2,679 $ 4,614 $ 4,959 $ 3,121 $ 3,362 $ 18,735
- -----------------------------------------------------------------------------------------------------------------------------------
Profit and loss:
Equity income (loss) $ 1 $ 27 $ 8 $ (1) $ 10 $ 45
Depreciation, depletion and
amortization 159 176 190 88 155 768
Special items -- -- -- -- -- --
Income tax 174 196 126 85 107 688
After-tax operating income 318 372 306 183 165 1,344
- -----------------------------------------------------------------------------------------------------------------------------------
Assets:
Capital expenditures $ 275 $ 164 $ 152 $ 105 $ 143 $ 839
Equity investment 50 150 69 -- 146 415
Total assets 3,082 5,341 3,513 2,427 2,246 16,609
- -----------------------------------------------------------------------------------------------------------------------------------
1997
Sales:
Third-party sales $ 1,978 $ 1,600 $ 4,188 $ 2,077 $ 3,457 $ 13,300
Intersegment sales 634 1,883 53 9 -- 2,579
- -----------------------------------------------------------------------------------------------------------------------------------
Total sales $ 2,612 $ 3,483 $ 4,241 $ 2,086 $ 3,457 $ 15,879
- -----------------------------------------------------------------------------------------------------------------------------------
Profit and loss:
Equity income -- $ 23 $ 7 -- $ 12 $ 42
Depreciation, depletion and
amortization $ 175 129 173 $ 66 156 699
Special items loss (gain) 4 (3) (1) (2) (71) (73)
Income tax 168 214 123 48 104 657
After-tax operating income 302 399 269 100 177 1,247
- -----------------------------------------------------------------------------------------------------------------------------------
Assets:
Capital expenditures $ 201 $ 137 $ 159 $ 149 $ 128 $ 774
Equity investment 51 140 61 1 124 377
Total assets 3,027 2,334 2,786 1,469 2,284 11,900
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
50
The following reconciles segment information to consolidated totals.
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales:
Total sales $ 20,112 $ 18,735 $ 15,879
Elimination of intersegment
sales (3,795) (3,411) (2,579)
Other revenues 6 16 19
- ------------------------------------------------------------------------------
Consolidated sales $ 16,323 $ 15,340 $ 13,319
- ------------------------------------------------------------------------------
Net income:
Total after-tax operating
income $ 1,489 $ 1,344 $ 1,247
Elimination of intersegment
(profit) loss (24) (16) 12
Unallocated amounts (net of
tax):
Interest income 26 64 67
Interest expense (126) (129) (92)
Minority interest (242) (238) (268)
Corporate expense (171) (197) (172)
Other 102 25 11
- ------------------------------------------------------------------------------
Consolidated net income $ 1,054 $ 853 $ 805
- ------------------------------------------------------------------------------
Assets:
Total assets $ 16,539 $ 16,609 $ 11,900
Elimination of intersegment
receivables (362) (378) (286)
Unallocated amounts:
Cash, cash equivalents and
short-term investments 314 381 906
Deferred tax assets 657 703 560
Corporate goodwill 422 480 --
Corporate fixed assets 317 315 326
LIFO reserve (645) (703) (770)
Other (176) 56 435
- ------------------------------------------------------------------------------
Consolidated assets $ 17,066 $ 17,463 $ 13,071
- ------------------------------------------------------------------------------
</TABLE>
Geographic information for revenues, based on country of origin, and long-lived
assets follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
U.S. $ 10,392 $ 9,212 $ 7,593
Australia 1,398 1,470 1,875
Spain 1,059 965 44
Brazil 730 934 1,161
Germany 521 554 580
Other 2,223 2,205 2,066
- ------------------------------------------------------------------------------
$ 16,323 $ 15,340 $ 13,319
- ------------------------------------------------------------------------------
Long-lived assets:
U.S. $ 6,650 $ 6,726 $ 4,133
Australia 1,585 1,441 1,453
Brazil 712 967 1,047
Canada 948 890 2
Germany 165 213 201
Other 1,122 1,023 853
- ------------------------------------------------------------------------------
$ 11,182 $ 11,260 $ 7,689
- ------------------------------------------------------------------------------
</TABLE>
P. INCOME TAXES
The components of income before taxes on income were:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. $ 631 $ 595 $ 708
Foreign 1,218 1,010 894
- ------------------------------------------------------------------------------
$ 1,849 $ 1,605 $ 1,602
- ------------------------------------------------------------------------------
</TABLE>
The provision for taxes on income consisted of:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
U.S. federal* $ 175 $ 159 $ 172
Foreign 306 219 274
State and local 18 26 --
- ------------------------------------------------------------------------------
499 404 446
- ------------------------------------------------------------------------------
Deferred:
U.S. federal* 74 81 82
Foreign (25) 25 (4)
State and local 5 4 5
- ------------------------------------------------------------------------------
54 110 83
- ------------------------------------------------------------------------------
Total $ 553 $ 514 $ 529
- ------------------------------------------------------------------------------
<FN>
*Includes U.S. taxes related to foreign income
</TABLE>
In the 1999 fourth quarter, Australia reduced its corporate income tax rate from
36% to 34% for 2000 and 30% for 2001.
In 1999, the exercise of employee stock options generated a tax benefit of
$145. This amount was credited to additional capital and reduced current taxes
payable.
Reconciliation of the U.S. federal statutory rate to Alcoa's effective tax
rate follows.
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. federal statutory rate 35.0% 35.0% 35.0%
Taxes on foreign income (2.4) (4.1) (.2)
State taxes net of federal
benefit .5 .7 (.2)
Tax rate changes (2.4) -- --
Other (.8) .4 (1.6)
- ------------------------------------------------------------------------------
Effective tax rate 29.9% 32.0% 33.0%
- ------------------------------------------------------------------------------
</TABLE>
The components of net deferred tax assets and liabilities follow.
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------------
Deferred Deferred Deferred Deferred
tax tax tax tax
December 31 assets liabilities assets liabilities
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Depreciation -- $ 951 -- $ 881
Employee benefits $ 872 -- $ 869 --
Loss provisions 214 -- 208 --
Deferred income/expense 91 138 124 103
Tax loss carryforwards 185 -- 192 --
Tax credit carryforwards 2 -- 5 --
Other 111 64 68 46
- ------------------------------------------------------------------------------
1,475 1,153 1,466 1,030
Valuation allowance (134) -- (135) --
- ------------------------------------------------------------------------------
$ 1,341 $ 1,153 $ 1,331 $ 1,030
- ------------------------------------------------------------------------------
</TABLE>
Of the total deferred tax assets associated with the tax loss carryforwards, $31
expires over the next 10 years, $10 over the next 20 years and $144 is
unlimited. A substantial portion of the valuation allowance relates to these
carryforwards because the ability to generate sufficient foreign taxable income
in future years is uncertain.
The cumulative amount of Alcoa's share of undistributed earnings for which
no deferred taxes have been provided was $1,838 at December 31, 1999. Management
has no plans to distribute such earnings in the foreseeable future. It is not
practical to determine the deferred tax liability on these earnings.
51
Q. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Alcoa maintains pension plans covering most U.S. employees and certain other
employees. Pension benefits generally depend on length of service, job grade and
remuneration. Substantially all benefits are paid through pension trusts that
are sufficiently funded to ensure that all plans can pay benefits to retirees as
they become due.
Alcoa maintains health care and life insurance benefit plans covering most
eligible U.S. retired employees and certain other retirees. Generally, the
medical plans pay a stated percentage of medical expenses, reduced by
deductibles and other coverages. These plans are generally unfunded, except for
certain benefits funded through a trust. Life benefits are generally provided by
insurance contracts. Alcoa retains the right, subject to existing agreements, to
change or eliminate these benefits.
The table below reflects the status of Alcoa's pension and postretirement
benefit plans.
<TABLE>
<CAPTION>
Pension benefits Postretirement benefits
---------------------- -------------------------
December 31 1999 1998 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit
obligation
Benefit obligation at
beginning of year $ 5,394 $ 4,700 $ 1,862 $ 1,675
Service cost 141 119 19 18
Interest cost 342 318 109 112
Amendments 5 8 1 1
Actuarial (gains) losses (143) 165 (173) 31
Alumax acquisition -- 473 -- 148
Divestitures -- (46) -- (5)
Benefits paid (387) (333) (130) (117)
Exchange rate 14 (10) (1) (1)
- ------------------------------------------------------------------------------
Benefit obligation at end
of year $ 5,366 $ 5,394 $ 1,687 $ 1,862
- ------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets
at beginning of year $ 5,758 $ 5,101 $ 100 $ 88
Actual return on plan
assets 666 601 12 12
Alumax acquisition -- 429 -- --
Divestiture -- (50) -- --
Employer contributions 16 47 -- --
Participants
contributions 22 11 -- --
Benefits paid (362) (351) -- --
Administrative expenses (15) (17) -- --
Exchange rate 18 (13) -- --
- ------------------------------------------------------------------------------
Fair value of plan assets
at end of year $ 6,103 $ 5,758 $ 112 $ 100
- ------------------------------------------------------------------------------
Funded status $ 737 $ 364 $ (1,575) $ (1,762)
Unrecognized net
actuarial gain (1,189) (789) (221) (48)
Unrecognized net prior
service cost (credit) 69 90 (116) (151)
Unrecognized transition
obligation 1 2 -- --
- ------------------------------------------------------------------------------
Net amount recognized $ (382) $ (333) $ (1,912) $ (1,961)
- ------------------------------------------------------------------------------
Amount recognized in the
balance sheet consists of:
Prepaid benefit $ 61 $ 59 -- --
Accrued benefit liability (471) (425) $ (1,912) $ (1,961)
Intangible asset 4 9 -- --
Accumulated other
comprehensive income 24 24 -- --
- ------------------------------------------------------------------------------
Net amount recognized $ (382) $ (333) $ (1,912) $ (1,961)
- ------------------------------------------------------------------------------
</TABLE>
The components of net periodic benefit costs are reflected below.
<TABLE>
<CAPTION>
Pension benefits Postretirement benefits
----------------------------------------------- -----------------------------------------------
December 31 1999 1998 1997 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic
benefit costs
Service cost $ 141 $ 119 $ 95 $ 19 $ 18 $ 18
Interest cost 341 318 305 109 112 105
Expected return on plan
assets (427) (391) (346) (9) (8) (7)
Amortization of prior service
cost (benefit) 40 48 37 (34) (34) (34)
Recognized actuarial (gain)
loss (4) (7) 1 (4) (5) (4)
Amortization of transition
obligation 2 2 1 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit costs $ 93 $ 89 $ 93 $ 81 $ 83 $ 78
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
52
The aggregate benefit obligation and fair value of plan assets for the pension
plans with benefit obligations in excess of plan assets were $1,022 and $696,
respectively, as of December 31, 1999, and $754 and $445, respectively, as of
December 31, 1998. The aggregate pension accumulated benefit obligation and fair
value of plan assets with accumulated benefit obligations in excess of plan
assets were $337 and $119, respectively, as of December 31, 1999, and $501 and
$287, respectively, at December 31, 1998.
Weighted average assumptions used to determine plan liabilities and expense
follow.
<TABLE>
<CAPTION>
December 31 1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.00% 6.50% 6.75%
Expected long-term return on
plan assets 9.00 9.00 9.00
Rate of compensation increase 5.00 5.00 5.00
- ------------------------------------------------------------------------------
</TABLE>
For measurement purposes, a 6.5% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 2000. The rate was assumed to
decrease gradually to 5.25% in 2004 and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one percentage point change in
these assumed rates would have the following effects:
<TABLE>
<CAPTION>
1% 1%
increase decrease
- ----------------------------------------------------------------------
<S> <C> <C>
Effect on total of service and
interest cost components $ 11 $ (8)
Effect on postretirement benefit
obligations 120 (102)
- ------------------------------------------------------------------------
</TABLE>
Alcoa also sponsors a number of defined contribution pension plans. Expenses
were $64 in 1999, $57 in 1998 and $47 in 1997.
R. LEASE EXPENSE
Certain equipment, warehousing and office space and oceangoing vessels are under
operating lease agreements. Total expense for all leases was $145 in 1999, $130
in 1998 and $111 in 1997. Under long-term operating leases, minimum annual
rentals are $78 in 2000, $56 in 2001, $40 in 2002, $21 in 2003, $12 in 2004 and
a total of $33 for 2005 and thereafter.
S. INTEREST COST COMPONENTS
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Amount charged to expense $ 195 $ 198 $ 141
Amount capitalized 21 13 9
- ------------------------------------------------------------------------------
$ 216 $ 211 $ 150
- ------------------------------------------------------------------------------
</TABLE>
T. FINANCIAL INSTRUMENTS
The carrying values and fair values of Alcoa's financial instruments at December
31 follow.
<TABLE>
<CAPTION>
1999 1998
---------------------- ------------------------
Carrying Fair Carrying Fair
value value value value
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 237 $ 237 $ 342 $ 342
Short-term investments 77 77 39 39
Noncurrent receivables 43 43 67 67
Short-term debt 410 410 612 612
Long-term debt 2,657 2,526 2,877 2,902
- ------------------------------------------------------------------------------
</TABLE>
The methods used to estimate the fair values of certain financial instruments
follow.
CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS AND SHORT-TERM DEBT. The
carrying amounts approximate fair value because of the short maturity of the
instruments. All investments purchased with a maturity of three months or less
are considered cash equivalents.
NONCURRENT RECEIVABLES. The fair value of noncurrent receivables is based on
anticipated cash flows and approximates carrying value.
LONG-TERM DEBT. The fair value is based on interest rates that are currently
available to Alcoa for issuance of debt with similar terms and remaining
maturities.
Alcoa holds or purchases derivative financial instruments for purposes other
than trading. Details of the significant instruments follow.
FOREIGN EXCHANGE CONTRACTS. The company enters into foreign exchange contracts
to hedge its significant firm and anticipated purchase and sale commitments
denominated in foreign currencies. These contracts cover periods commensurate
with known or expected exposures, generally within 36 months, and are
principally unsecured foreign exchange contracts with carefully selected banks.
The market risk exposure is essentially limited to risk related to currency rate
movements. Unrealized gains (losses) on these contracts at December 31, 1999 and
1998 were $57 and $(36), respectively.
The table below reflects the various types of foreign exchange contracts
Alcoa uses to manage its foreign exchange risk.
<TABLE>
<CAPTION>
1999 1998
---------------------- -------------------------
Notional Market Notional Market
amount value amount value
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Forwards $ 1,499 $ 60 $ 2,845 $ (58)
Purchased options 28 3 52 1
Written options -- -- 27 --
- ------------------------------------------------------------------------------
</TABLE>
The notional values summarized above provide an indication of the extent of the
company's involvement in such instruments but do not represent its exposure to
market risk. Alcoa utilizes written options mainly to offset or close out
purchased options.
53
The following table summarizes by major currency the contractual amounts of
Alcoa's forward exchange and option contracts translated to U.S. dollars at
December 31 rates. The "buy" amounts represent the U.S. dollar equivalent of
commitments to purchase foreign currencies, and the "sell" amounts represent the
U.S. dollar equivalent of commitments to sell foreign currencies.
<TABLE>
<CAPTION>
1999 1998
------------------------ -----------------------
Buy Sell Buy Sell
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Australian dollar $ 1,447 $ 4 $ 1,751 $ 211
Canadian dollar 98 8 230 129
Dutch guilder -- -- 135 22
Japanese yen 6 -- 109 14
Deutsche mark 2 21 22 69
Pound sterling -- -- 30 70
Other -- -- 35 36
- ------------------------------------------------------------------------------
$ 1,553 $ 33 $ 2,312 $ 551
- ------------------------------------------------------------------------------
</TABLE>
INTEREST RATE SWAPS. Alcoa manages its debt portfolio by using interest rate
swaps and options to achieve an overall desired position of fixed and floating
rates. As of December 31, 1999, the company had the following interest rate swap
contracts outstanding:
> Four interest rate swap contracts relating to Alcoa's 5.75% notes that mature
in 2001. The swaps convert $175 notional amount from fixed rates to floating
rates and mature in 2001.
> Five interest rate swap contracts relating to Alcoa Fujikura's variable rate
loan. These agreements convert the variable rate to a fixed rate on a notional
amount of $198 and mature in 2002.
In addition to the above, Aluminio has a number of cross- currency interest
rate swap contracts, relating to deposit accounts, that primarily convert local
currency floating rates to dollar fixed rates, on a notional amount of $257.
Alcoa utilizes cross-currency rate swaps to take advantage of international
debt markets. At year-end 1999, Alcoa had in place $60 of cross-currency
interest rate swaps that effectively convert U.S. dollar-denominated debt into
liabilities in yen based on Japanese interest rates.
Based on current interest rates for similar transactions, the fair value of
all interest rate swap agreements is not material.
Credit and market risk exposures are limited to the net interest
differentials. The net payments or receipts from interest rate swaps are
recorded as part of interest expense and are not material. The effect of
interest rate swaps on Alcoa's composite interest rate on long-term debt was not
material at the end of 1999 or 1998.
Alcoa is exposed to credit loss in the event of nonperformance by
counterparties on the above instruments, but does not anticipate nonperformance
by any of the counterparties.
For further information on Alcoa's hedging and derivatives activities, see
Note A.
U. ENVIRONMENTAL MATTERS
Alcoa continues to participate in environmental assessments and cleanups at a
number of locations. These include approximately 10 owned or operating
facilities and adjoining properties, approximately 10 previously owned or
operated facilities and adjoining properties and approximately 65 Superfund and
other waste sites. A liability is recorded for environmental remediation costs
or damages when a cleanup program becomes probable and the costs or damages can
be reasonably estimated. See Note A for additional information.
As assessments and cleanups proceed, the liability is adjusted based on
progress in determining the extent of remedial actions and related costs and
damages. The liability can change substantially due to factors such as the
nature and extent of contamination, changes in remedial requirements and
technological changes. Therefore, it is not possible to determine the outcomes
or to estimate with any degree of accuracy the potential costs for certain of
these matters. For example, there are issues related to the Massena, New York,
and Pt. Comfort, Texas sites that allege natural resource damage or off-site
contaminated sediments, where investigations are ongoing. The following
discussion provides additional details regarding the current status of these two
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. Alcoa intends to seek EPA approval for the pilot tests in
the first half of 2000.
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. Alcoa is
also aware of a natural resource damage claim that may be asserted by certain
federal, state and tribal natural resource trustees at this location.
54
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 recently submitted a draft remedial investigation, a draft
feasibility study and a draft baseline risk assessment to EPA. In addition,
Alcoa recently commenced construction of the EPA-approved project to fortify an
offshore dredge disposal island. The probable and estimable costs of these
actions are fully reserved. Additional costs to complete a remedy currently
cannot be estimated since they will depend on the extent of remediation
required, if any, the remedial method chosen and the time frame to complete any
remediation activity. 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 complete by late 2000 or early 2001.
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 two
sites. However, based on facts currently available, management believes that the
disposition of these matters will not have a materially adverse effect on the
financial position or liquidity of the company.
Alcoa's remediation reserve balance at the end of 1999 and 1998 was $174
and $217 (of which $63 and $85 were classified as a current liability),
respectively, and reflects the most probable costs to remediate identified
environmental conditions for which costs can be reasonably estimated. About 22%
of the 1999 balance relates to the Massena plant site, and 11% of the 1999
balance relates to the Pt. Comfort plant site. Remediation expenses charged to
the reserve were $47 in 1999, $63 in 1998 and $64 in 1997. They include
expenditures currently mandated, as well as those not required by any regulatory
authority or third party. In 1999, the reserve balance was increased by $4
million to cover anticipated future environmental expenditures. In 1998, the
reserve balance was increased as a result of adding the Alumax environmental
reserve to Alcoa's existing reserve balance. Included in annual operating
expenses are the recurring costs of managing hazardous substances and
environmental programs. These costs are estimated to be about 2% of cost of
goods sold.
V. SUBSEQUENT EVENT
On February 11, 2000, the shareholders of Reynolds Metals Company, by majority
vote, approved the proposed merger transaction between Alcoa and Reynolds. The
merger transaction remains subject to the approval of various governmental
authorities.
SUPPLEMENTAL FINANCIAL INFORMATION
QUARTERLY DATA (UNAUDITED)
(dollars in millions, except per-share amounts)
<TABLE>
<CAPTION>
1999 First Second Third Fourth Year
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 3,985 $ 4,033 $ 4,052 $ 4,253 $ 16,323
Income from operations 247 294 313 442 1,296
Net income 221 240 259 334* 1,054
Earnings per share:
Basic .60 .65 .71 .91 2.87
Diluted .60 .64 .69 .89 2.82
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
*The 1999 fourth quarter included an after-tax credit of $49 related to changes
in the LIFO index and LIFO liquidations.
</TABLE>
<TABLE>
<CAPTION>
1999 First Second Third Fourth Year
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 3,445 $ 3,587 $ 4,109 $ 4,199 $ 15,340
Income from operations 280 269 266 276 1,091
Net income 210 207 218 218* 853
Earnings per share:
Basic .63 .62 .61 .59 2.44
Diluted .62 .62 .61 .59 2.42
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
*The 1998 fourth quarter included an after-tax credit of $32 related to changes
in the LIFO index.
</TABLE>
NUMBER OF EMPLOYEES (UNAUDITED)
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Other Americas 45,100 40,900 36,200
U.S. 38,400 38,900 27,200
Europe 18,800 18,200 11,900
Pacific 5,400 5,500 6,300
- ------------------------------------------------------------------------------
107,700 103,500 81,600
- ------------------------------------------------------------------------------
</TABLE>
55
GRAPHICS APPENDIX LIST
REVENUES BY MARKET - page 28
billions of dollars
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Alumina and Chemicals 1.7 1.9 2.0 1.8 1.8
Building and Construction 1.5 1.5 1.4 1.7 2.2
Aluminum Ingot 1.3 1.5 1.5 2.0 2.2
Distribution 2.0 2.2 2.1 2.8 2.9
Packaging 3.8 3.3 3.2 3.3 3.2
Transportation 2.2 2.7 3.1 3.7 4.0
---- ---- ---- ---- ----
Total 12.5 13.1 13.3 15.3 16.3
==== ==== ==== ==== ====
</TABLE>
Revenues by Geographic Area - page 28
billions of dollars
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Other Americas 1.2 1.3 1.4 1.2 1.0
Pacific 2.0 2.3 2.2 1.8 1.7
Europe 1.7 1.8 2.1 3.1 3.2
US 7.6 7.7 7.6 9.2 10.4
---- ---- ---- ---- ----
Total 12.5 13.1 13.3 15.3 16.3
==== ==== ==== ==== ====
</TABLE>
Net Income - page 29
millions of dollars
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
791 515 805 853 1,054
Percent Return on Shareholders' Equity - page 29
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
18.5 11.6 18.1 16.3 17.2
<TABLE>
<CAPTION>
Revenues by Segment - page 30
billions of dollars
1996 1997 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Alumina and Chemicals 2.0 2.0 1.8 1.9
Primary Metals 1.6 1.6 2.1 2.2
Engineered Products 1.9 2.1 3.1 3.7
Flat-rolled Products 4.1 4.2 4.9 5.1
Other 3.5 3.4 3.4 3.4
---- ---- ---- ----
Total 13.1 13.3 15.3 16.3
==== ==== ==== ====
</TABLE>
Alumina Production - page 30
thousands of metric tons
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
10,578 10,644 11,048 12,938 13,273
Aluminum Production - page 31
thousands of metric tons
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
1,056 1,708 1,725 2,471 2,851
<TABLE>
<CAPTION>
Aluminum Product Shipments - page 32
thousands of metric tons
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Third-Party Ingot 673 901 920 1,367 1,411
Fabicated Products 1,909 1,940 2,036 2,584 3,067
----- ----- ----- ----- -----
Total 2,582 2,841 2,956 3,951 4,478
===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Cost of Goods Sold - page 34
as a percent of sales
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue - 12.5 13.1 13.3 15.3 16.3
billions of dollars
Cost of goods sold 75.8 77.2 77.1 77.8 76.8
as a percent of sales
</TABLE>
<TABLE>
<CAPTION>
Selling and General Administrative Expenses - page 34
as a percent of sales
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue - 12.5 13.1 13.3 15.3 16.3
billions of dollars
Selling and general 5.7 5.5 5.1 5.1 5.2
administrative expenses
as a percent of sales
</TABLE>
Cash From Operations - page 36
millions of dollars
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
1,713 1,279 1,888 2,197 2,236
Debt as a Percent of Invested Capital - page 36
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
24.0 25.5 25.0 31.7 28.3
Free Cash Flow to Debt Coverage - page 37
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
1.12 0.79 1.13 0.63 0.80
<TABLE>
<CAPTION>
Capital Expenditures and Depreciation - page 37
millions of dollars
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Capital Expenditures 887 996 913 932 920
Depreciation 713 747 735 842 888
</TABLE>
Stock Listing - page 65
Common: New York Stock Exchange, The Electronical Stock Exchange in Switzerland
and exchanges in Brussels, Frankfurt and London.
Preferred: American Stock Exchange
Ticker Symbol: AA
<TABLE>
<CAPTION>
Quarterly Common Stock Information - page 65
1999 1998
------------------------------------ ----------------------------------
Quarter High Low Dividend High Low Dividend
---- --- -------- ---- --- --------
<S> <C> <C> <C> <C> <C> <C>
First $45-3/32 $35-15/16 $.20125 $39-1/16 $32-9/16 $.1875
Second 67-15/16 40-1/4 .20125 39-11/16 31-3/8 .1875
Third 70-7/8 58-1/2 .20125 37 29 .1875
Fourth 83-3/8 57-1/4 .20125 40-5/8 33-5/8 .1875
- --------------------------------------------------------------------------------------------
Year $83-3/8 $35-15/16 $.805 $40-5/8 $29 $.75
============================================================================================
</TABLE>
<TABLE>
<CAPTION>
Common Share Data - page 65
Estimated number Average shares
of shareholders* outstanding (000)
---------------- -----------------
<S> <C> <C>
1999 185,000 366,944
1998 119,000 349,114
1997 95,800 344,452
1996 88,300 348,667
1995 83,600 356,036
<FN>
*These estimates include shareholders who own stock registered in their own
names and those who own stock through banks and brokers.
</TABLE>
Exhibit 21
SUBSIDIARIES AND EQUITY ENTITIES OF THE REGISTRANT
(As of December 31, 1999)
State or
country of
Name organization
---- ------------
Alcoa Brazil Holdings Company Delaware
Alcoa Aluminio S.A. Brazil
Abalco S.A. Brazil
Alcoa Building Products, Inc.** Ohio
Alcoa Closure Systems International, Inc. Delaware
Alcoa CSI Espana, S.A. Spain
Alcoa International Holdings Company Delaware
Alcoa Closure Systems International (Tianjin) Co., Ltd. China
Alcoa Europe Holding B.V. Netherlands
Alcoa Automotive GmbH Germany
Alcoa Chemie GmbH Germany
Alcoa Deutschland GmbH Germany
Alcoa Extrusions Hannover GmbH & Co. KG Germany
Alcoa Chemie Nederland B.V. Netherlands
Alcoa Europe S.A. Switzerland
Alcoa Inespal, S.A. Spain
Alumina Espanola, S.A. Spain
Aluminio Espanola, S.A. Spain
Alcoa Italia S.p.A. Italy
Alcoa Moerdijk B.V. Netherlands
Alcoa Nederland B.V. Netherlands
Norsk Alcoa A/S Norway
Alcoa Inter-America, Inc. Delaware
Alcoa Japan Limited Japan
Alcoa-Kofem Kft Hungary
Alcoa of Australia Limited Australia
A.F.P. Pty. Limited Australia
Hedges Gold Pty. Ltd. Australia
Alcoa of Australia (Asia) Limited Hong Kong
Alcoa Russia, Inc. Delaware
KAAL Australia Pty. Limited Australia
KSL Alcoa Aluminum Company, Ltd. Japan
Kobe Alcoa Transportation Products, Ltd. Japan
Alcoa Laudel, Inc. Delaware
Alcoa Manufacturing (G.B.) Limited England
Alcoa Power Generating Inc.*** Tennessee
Alcoa Properties, Inc. Delaware
Alcoa South Carolina, Inc. Delaware
* Registered to do business in California, Florida, Georgia, Louisiana, North
Carolina, Pennsylvania and Texas under the name of Alcoa Industrial
Chemicals.
** Registered to do business in Ohio under the name of Mastic.
*** Registered to do business in Tennessee under the names Tapoco and APG
Trading, in Indiana under the name of AGC, in North Carolina under the
names of Yadkin and Tapoco, in New York under the name of Long Sault and in
Washington under the name of Colockum.
<PAGE>
State or
country of
Name organization
---- ------------
Alcoa Recycling Company, Inc. Delaware
Alcoa Securities Corporation Delaware
Alcoa Automotive Structures, Inc. Delaware
Alcoa Brite Products, Inc. Delaware
Alcoa CSI de Mexico en Saltillo, S.A. de C.V. Mexico
Alcoa Fujikura Ltd. Delaware
Stribel GmbH Germany
Michels GmbH Germany
Alcoa Kobe Transportation Products, Inc. Delaware
Alcoa Packaging Machinery, Inc. Delaware
ASC Alumina, Inc. Delaware
B & C Research, Inc. Ohio
Halethorpe Extrusions, Inc. Delaware
Northwest Alloys, Inc. Delaware
Pimalco, Inc. Arizona
Three Rivers Insurance Company Vermont
Tifton Aluminum Company, Inc. Delaware
Alcoa (Shanghai) Aluminum Products Company Limited China
Alcoa World Alumina LLC* Delaware
Alcoa ACC Industrial Chemicals Ltd. India
Alcoa Kasei Limited Japan
Alcoa Minerals of Jamaica, L.L.C. Delaware
Alcoa Steamship Company, Inc. New York
Halco (Mining) Inc. Delaware
Compagnie des Bauxites de Guinee Delaware
Lib-Ore Steamship Company, Inc. Liberia
Moralco Limited Japan
St. Croix Alumina, L.L.C. Delaware
Suriname Aluminum Company, L.L.C. Delaware
Alumax Inc. Delaware
Alcoa Extrusions, Inc. Pennsylvania
Alumax Becancour, Inc. Delaware
Alumax Europe N.V. Belgium
Alumax of South Carolina, Inc. Delaware
Mt. Holly Aluminum Company South Carolina
Alumax Foils, Inc. Delaware
Alumax Mill Products, Inc. Delaware
Alumax Quebec, Inc. Wyoming
Eastalco Aluminum Company Delaware
Intalco Aluminum Corporation Delaware
Kawneer Company, Inc. Delaware
Canalco, Inc. Delaware
Aluminerie Lauralco, Inc. Delaware
Gulf Closures W.L.L. Bahrain
Shibazaki Seisakusho Limited Japan
The names of certain subsidiaries and equity entities which, considered in the
aggregate, would not constitute a significant subsidiary, have been omitted from
the above list.
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Alcoa Inc. on Form S-8 (Registration Nos. 33-22346, 33-24846, 33-49109,
33-60305, 333-27903, 333-62663, 333-79575 and 333-91331), Form S-3 (Registration
Nos. 33-60045, 33-64353 and 333-59381) and Form S-4 (Registration Nos. 333-58227
and 333-93849) of our reports dated January 10, 2000, except for Note V, for
which the date is February 11, 2000, on our audits of the consolidated financial
statements and financial statement schedule of Alcoa Inc. and consolidated
subsidiaries as of December 31, 1999 and 1998 and for each of the three years in
the period ended December 31, 1999, which reports are incorporated by reference
or included in this Form 10-K.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
600 Grant Street
Pittsburgh, Pennsylvania
February 28, 2000
Exhibit 24
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned Directors of Alcoa
Inc. (the "Company") hereby constitute and appoint RICHARD B. KELSON, ROBERT G.
WENNEMER, TIMOTHY S. MOCK and DENIS A. DEMBLOWSKI, or any of them, their true
and lawful attorneys and agents to do any and all acts and things and execute
any and all instruments which said attorneys and agents, or any of them, may
deem necessary or advisable or may be required to enable the Company to comply
with the Securities Exchange Act of 1934, as amended, and any rules, regulations
or requirements of the Securities and Exchange Commission in respect thereof, in
connection with the registration under said Act of the Company's Annual Report
on Form 10-K for 1999, including specifically, but without limiting the
generality of the foregoing, power and authority to sign the name of the
undersigned to the Company's Annual Report on Form 10-K for 1999 to be filed
with the Securities and Exchange Commission and to any instruments or documents
filed as part of or in connection with any such Form 10-K, including any
amendments or supplements thereto; and the undersigned hereby ratify and confirm
all that said attorneys and agents, or any of them, shall do or cause to be done
by virtue hereof.
IN WITNESS WHEREOF, the undersigned have subscribed these presents on the
date set opposite their names below.
/s/ Kenneth W. Dam January 14, 2000
Kenneth W. Dam
/s/ Joseph T. Gorman January 14, 2000
Joseph T. Gorman
/s/ Judith M. Gueron January 14, 2000
Judith M. Gueron
/s/ Sir Ronald Hampel January 14, 2000
Sir Ronald Hampel
/s/ Hugh M. Morgan January 14, 2000
Hugh M. Morgan
/s/ John P. Mulroney January 14, 2000
John P. Mulroney
/s/ Paul H. O'Neill January 14, 2000
Paul H. O'Neill
/s/ Henry B. Schacht January 14, 2000
Henry B. Schacht
/s/ Franklin A. Thomas January 14, 2000
Franklin A. Thomas
/s/ Marina v.N. Whitman January 14, 2000
Marina v.N. Whitman
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 237,000
<SECURITIES> 77,000
<RECEIVABLES> 2,199,000
<ALLOWANCES> 58,000
<INVENTORY> 1,618,000
<CURRENT-ASSETS> 4,800,000
<PP&E> 18,436,000
<DEPRECIATION> 9,303,000
<TOTAL-ASSETS> 17,066,000
<CURRENT-LIABILITIES> 3,003,000
<BONDS> 2,724,000
0
56,000
<COMMON> 395,000
<OTHER-SE> 5,867,000
<TOTAL-LIABILITY-AND-EQUITY> 17,066,000
<SALES> 16,323,000
<TOTAL-REVENUES> 16,447,000
<CGS> 12,536,000
<TOTAL-COSTS> 12,536,000
<OTHER-EXPENSES> 888,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 195,000
<INCOME-PRETAX> 1,849,000
<INCOME-TAX> 553,000
<INCOME-CONTINUING> 1,296,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,054,000
<EPS-BASIC> 2.87
<EPS-DILUTED> 2.82
</TABLE>