-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Nh3ZpyX8eaNt781kq9WlwD0gnSy9rc8HQj/VkAD9qSED5GROUfkSp7WavEZO8LVn 0zg6MdQCmIZJLwbjU8XYJQ== 0000004281-97-000010.txt : 19971030 0000004281-97-000010.hdr.sgml : 19971030 ACCESSION NUMBER: 0000004281-97-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971029 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALUMINUM CO OF AMERICA CENTRAL INDEX KEY: 0000004281 STANDARD INDUSTRIAL CLASSIFICATION: PRIMARY PRODUCTION OF ALUMINUM [3334] IRS NUMBER: 250317820 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03610 FILM NUMBER: 97702550 BUSINESS ADDRESS: STREET 1: 425 SIXTH AVENUE STREET 2: ALCOA BUILDING CITY: PITTSBURGH STATE: PA ZIP: 15219-1850 BUSINESS PHONE: 412-553-3042 MAIL ADDRESS: STREET 1: 425 SIXTH AVENUE STREET 2: ALCOA BUILDING CITY: PITTSBURGH STATE: PA ZIP: 15219-1850 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 30, 1997 Commission File Number 1-3610 ALUMINUM COMPANY OF AMERICA (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-0317820 (State of incorporation) (I.R.S. Employer Identification No.) 425 Sixth Avenue - Alcoa Building, Pittsburgh, Pennsylvania 15219-1850 (Address of principal executive offices) (Zip Code) Office of Investor Relations 412-553-3042 Office of the Secretary 412-553-4707 (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of October 28, 1997, 172,471,001 shares of common stock, par value $1.00, of the Registrant were outstanding. A07-15818 -1- PART I - FINANCIAL INFORMATION
Alcoa and subsidiaries Condensed Consolidated Balance Sheet (in millions) (unaudited) September 30, December 31, 1997 1996 ------------- -------------- ASSETS Current assets: Cash and cash equivalents (includes cash of $131.7 in 1997 and $93.4 in 1996) $ 1,069.8 $ 598.1 Short-term investments 81.2 18.5 Accounts receivable from customers, less allowances: 1997-$44.4; 1996-$48.4 1,813.6 1,674.7 Other receivables 122.1 154.2 Inventories (b) 1,297.1 1,461.4 Deferred income taxes 159.1 159.9 Prepaid expenses and other current assets 239.9 214.4 --------- --------- Total current assets 4,782.8 4,281.2 --------- --------- Properties, plants and equipment, at cost 15,542.2 15,729.9 Less, accumulated depreciation, depletion and amortization 8,731.7 8,652.4 --------- --------- Net properties, plants and equipment 6,810.5 7,077.5 --------- --------- Other assets 2,010.8 2,091.2 --------- --------- Total assets $13,604.1 $13,449.9 ========= ========= LIABILITIES Current liabilities: Short-term borrowings $ 370.8 $ 206.5 Accounts payable, trade 838.4 799.2 Accrued compensation and retirement costs 419.5 404.3 Taxes, including taxes on income 475.1 407.9 Other current liabilities 346.4 377.0 Long-term debt due within one year 175.8 178.5 --------- --------- Total current liabilities 2,626.0 2,373.4 --------- --------- Long-term debt, less amount due within one year 1,549.9 1,689.8 Accrued postretirement benefits 1,769.1 1,791.2 Other noncurrent liabilities and deferred credits 1,307.8 1,205.5 Deferred income taxes 295.3 317.1 --------- --------- Total liabilities 7,548.1 7,377.0 --------- --------- MINORITY INTERESTS 1,459.4 1,610.5 --------- --------- SHAREHOLDERS' EQUITY Preferred stock 55.8 55.8 Common stock 178.9 178.9 Additional capital 578.8 591.9 Translation adjustment (265.1) (93.1) Retained earnings 4,506.5 4,082.6 Net unrealized gains - securities available for sale - 23.4 Unfunded pension obligation (7.2) (5.8) Treasury stock, at cost (451.1) (371.3) --------- --------- Total shareholders' equity 4,596.6 4,462.4 --------- --------- Total liabilities and shareholders' equity $13,604.1 $13,449.9 ========= =========
The accompanying notes are an integral part of the financial statements. -2-
Alcoa and subsidiaries Condensed Statement of Consolidated Income (unaudited) (in millions, except per share amounts) Third quarter Nine months ended ended September 30 September 30 ------------- ------------ 1997 1996 1997 1996 ---- ---- ---- ---- REVENUES Sales and operating revenues $3,357.5 $3,240.6 $10,020.6 $9,803.3 Other income 46.9 18.0 125.9 36.6 ------- ------- -------- ------- 3,404.4 3,258.6 10,146.5 9,839.9 ------- ------- -------- ------- COSTS AND EXPENSES Cost of goods sold and operating expenses 2,533.8 2,517.4 7,624.9 7,440.2 Selling, general administrative and other expenses 161.4 181.6 480.9 533.0 Research and development expenses 33.8 36.0 104.1 113.9 Provision for depreciation, depletion and amortization 185.8 181.1 549.5 554.9 Interest expense 35.5 37.4 106.2 103.1 Taxes other than payroll and severance taxes 30.9 31.7 98.6 98.3 Special items (income)/loss (c) (18.0) 115.1 (22.6) 180.5 ------- ------- -------- ------- 2,963.2 3,100.3 8,941.6 9,023.9 ------- ------- -------- ------- EARNINGS Income before taxes on income 441.2 158.3 1,204.9 816.0 Provision for taxes on income (d) 154.8 53.6 421.7 277.4 ------- ------- -------- ------- Income from operations 286.4 104.7 783.2 538.6 Less: Minority interests' share (58.3) (36.3) (188.4) (159.8) ------- ------- -------- ------- NET INCOME $ 228.1 $ 68.4 $ 594.8 $ 378.8 ======= ======= ======== ======= Earnings per common share (e) $ 1.32 $ .39 $ 3.43 $ 2.16 Dividends paid per common share $ .25 $ .3325 $ .725 $ .9975 ======= ======= ======== =======
The accompanying notes are an integral part of the financial statements. -3-
Alcoa and subsidiaries Condensed Statement of Consolidated Cash Flows (unaudited) (in millions) Nine months ended September 30 ------------- 1997 1996 ---- ---- CASH FROM OPERATIONS Net income $ 594.8 $ 378.8 Adjustments to reconcile net income to cash from operations: Depreciation, depletion and amortization 561.5 566.8 Change in deferred income taxes 15.6 95.2 Equity (income) losses before additional taxes, net of dividends (26.6) 1.6 Provision for special items (22.6) 180.5 Book value of asset disposals 28.8 30.6 Minority interests 188.4 159.8 Other (12.1) (23.3) (Increase) reduction in receivables (156.1) 47.4 Reduction in inventories 99.4 3.5 Increase in prepaid expenses and other current assets (34.2) (15.1) Reduction in accounts payable and accrued expenses (3.9) (304.5) Increase in taxes, including taxes on income 95.2 15.1 Cash received on long-term alumina supply contract 240.0 - Reduction in deferred hedging gains (126.8) (165.9) Net change in noncurrent assets and liabilities (70.1) (98.4) ------- ------- CASH FROM OPERATIONS 1,371.3 872.1 ------- ------- FINANCING ACTIVITIES Net changes in short-term borrowings 164.8 34.6 Common stock issued and treasury stock sold 199.7 36.7 Repurchase of common stock (292.5) (257.7) Dividends paid to shareholders (127.2) (178.0) Dividends paid and return of capital to minority interests (290.5) (145.2) Additions to long-term debt 435.9 456.1 Payments on long-term debt (555.9) (489.5) ------- ------- CASH USED FOR FINANCING ACTIVITIES (465.7) (543.0) ------- ------- INVESTING ACTIVITIES Capital expenditures (618.6) (631.1) Acquisition of subsidiaries, net of cash acquired - (171.5) Proceeds from the sale of assets 193.2 82.8 Additions to investments (.7) (58.1) Sale of investments 60.2 - Net change in short-term investments (62.9) (31.1) Changes in minority interests 14.0 (25.3) Loan repayment from WMC - 121.8 Other - payments (8.6) (9.2) ------- ------- CASH USED FOR INVESTING ACTIVITIES (423.4) (721.7) ------- ------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (10.5) 6.0 ------- ------- CHANGES IN CASH Net change in cash and cash equivalents 471.7 (386.6) Cash and cash equivalents at beginning of year 598.1 1,055.6 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,069.8 $ 669.0 ======= =======
The accompanying notes are an integral part of the financial statements. -4- Notes to Consolidated Financial Statements (in millions, except share amounts) Notes: (a) Summarized consolidated financial data for Alcoa Aluminio S.A. (Aluminio) and Alcoa of Australia Limited (AofA) begin on page 17. (b) Inventories consisted of:
September 30 December 31 1997 1996 ------------ ----------- Finished goods $ 358.2 $ 403.1 Work in process 388.8 421.1 Bauxite and alumina 247.4 283.1 Purchased raw materials 199.4 235.5 Operating supplies 103.3 118.6 ------- ------- $1,297.1 $1,461.4 ======= =======
Approximately 56% of total inventories at September 30, 1997 were valued on a LIFO basis. If valued on an average cost basis, total inventories would have been $787.1 and $753.7 higher at September 30, 1997 and December 31, 1996, respectively. (c) The 1997 third quarter included a gain of $18.0 ($12.3 after- tax) related to special items. The sale of equity securities generated a gain of $38.0 ($24.7 after-tax) which was partially offset by a $20.0 ($12.4 after-tax) charge to increase environmental reserves. Special items in the 1997 nine-month period include an additional $4.6 (a $1.1 loss after-tax) related to asset sales, increases to environmental reserves and impairments. The 1996 third quarter special charge of $115.1 ($65.5 after-tax) was related primarily to incentives paid to employees who voluntarily left the company and for permanent layoff costs. In the 1996 second quarter, an additional $65.4 ($40.0 after-tax) was recorded for the closing of Alcoa Electronic Packaging (AEP). Most of this charge was related to asset writedowns. (d) The income tax provision for the period is based on the effective tax rate expected to be applicable for the full year. Lower taxes on foreign income were offset by higher taxes on asset sales, resulting in a 35% effective tax rate for 1997. -5- (e) The following formula is used to compute primary earnings per common share (EPS): EPS = Net income - preferred dividend requirements -------------------------------------------------- Weighted average number of common shares outstanding for the period The average number of shares used to compute primary earnings per common share was 173,123,905 in 1997 and 174,737,995 in 1996. Fully diluted earnings per common share are not stated since the dilution is not material. (f) On July 29, 1997, Alcoa and SEPI, the Spanish State Entity for Industrial Participation, jointly announced that they had signed an agreement under which Alcoa will acquire the main sectors of the aluminum business of Inespal, S.A. of Madrid. Alcoa will pay approximately $410 for substantially all of Inespal's businesses. Inespal is an integrated aluminum producer with 1996 revenues of $1.1 billion. The acquisition includes an alumina refinery, three aluminum smelters, three aluminum rolling facilities, two extrusion plants, an administrative center and related sales offices in Europe. The acquisition, subject to government approval, is expected to be completed by late 1997 or in early 1998. (g) On April 21, 1997, Alcoa announced that it had signed a Letter of Intent with Reynolds Metals Company to acquire Reynolds' rolling mill in Muscle Shoals, Alabama, two nearby can reclamation plants and a coil coating facility in Sheffield, Alabama. The transaction is subject to regulatory approval and other closing conditions, and is expected to be completed in late 1997 or in early 1998. Upon closing, the companies expect to enter a long-term agreement under which Alcoa would become a major supplier of can sheet to Reynolds or its successor if Reynolds Can Division is sold, leased or transferred. -6- In the opinion of the company, the financial statements and summarized financial data in this Form 10-Q report include all adjustments, including those of a normal recurring nature, necessary to fairly state the results for the periods. This Form 10-Q report should be read in conjunction with the company's annual report on Form 10-K for the year ended December 31, 1996. The financial data required in this Form 10-Q by Rule 10-01 of Regulation S-X has been reviewed by Coopers & Lybrand L.L.P., the company's independent accountants, as described in their report on page 8. -7- Independent Accountant's Review Report To the Shareholders and Board of Directors Aluminum Company of America (Alcoa) We have reviewed the unaudited condensed consolidated balance sheet of Alcoa and subsidiaries as of September 30, 1997, the unaudited condensed statements of consolidated income for the three- month and nine-month periods ended September 30, 1997 and 1996, and condensed consolidated cash flows for the nine-month periods ended September 30, 1997 and 1996, which are included in Alcoa's Form 10-Q for the period ended September 30, 1997. These financial statements are the responsibility of Alcoa's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Alcoa and subsidiaries as of December 31, 1996, and the related statements of consolidated income, shareholders' equity, and consolidated cash flows for the year then ended (not presented herein). In our report dated January 8, 1997, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1996 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ COOPERS & LYBRAND L.L.P. COOPERS & LYBRAND L.L.P. Pittsburgh, Pennsylvania October 6, 1997 -8- Management's Discussion and Analysis of the Results of Operations and Financial Condition (dollars in millions, except share amounts)
Results of Operations Principal income and operating data follow. Third quarter ended Nine months ended September 30 September 30 ------------ ------------ 1997 1996 1997 1996 ---- ---- ---- ---- Sales and operating revenues $3,357.5 $3,240.6 $10,020.6 $9,803.3 Net income 228.1 68.4 594.8 378.8 Earnings per common share 1.32 .39 3.43 2.16 Shipments of aluminum products (1) 742 717 2,222 2,094 Shipments of alumina (1) 1,866 1,575 5,415 4,736 (1) in thousands of metric tons (mt)
Overview Alcoa earned $228.1, or $1.32 per share, for the third quarter of 1997, compared with $68.4, or 39 cents per share in the 1996 quarter. The 1997 three-month period included a special net after-tax gain of $12.3 ($18.0 pre-tax) related to the sale of equity securities which was partially offset by charges to increase environmental reserves. The 1996 third quarter was negatively affected by a special after-tax charge of $65.5 ($115.1 pre-tax) related to layoff provisions and equipment writedowns. Earnings for the 1997 nine-month period totaled $594.8 or $3.43 per share, compared with $378.8, or $2.16 per share, in the 1996 year-to-date period. Special items for the 1997 nine-month period, in addition to the third quarter items mentioned above, included a charge of $1.1 (a $4.6 gain pre-tax) related to asset sales, increases to environmental reserves and impairments that was recorded in the 1997 first quarter. Year-to-date 1996 special items include an additional charge of $40.0 ($65.4 pre- tax) taken in the 1996 second quarter related to the shutdown of Alcoa's ceramic packaging operations. Alcoa of Australia Limited's (AofA) pre-tax income from operations for the 1997 third quarter increased 3.5% from the year-ago quarter; year-to-date, AofA's pre-tax income was unchanged relative to 1996. Results for 1997 have been driven by an increase in alumina volumes that has been offset by lower alumina, chemicals and ingot prices. In Brazil, Alcoa Aluminio's (Aluminio) third quarter 1997 pre-tax profit from operations was $20.3, an increase of $38.7 from the 1996 third quarter. Year-to-date, pre-tax profit reached $65.4, compared with $20.2 in the 1996 period. Revenues in both 1997 periods increased slightly when compared with the 1996 third quarter and nine-month periods. The increases in pre-tax earnings are primarily due to higher volumes and lower costs related to packaging operations, along with higher ingot prices. The functional currency used at Aluminio is the U.S. dollar, the determination of which is based on the appropriate economic and management indicators and is not dependent on Brazil's status as a hyper-inflationary economy. -9- Alcoa's operations, divided into three segments, follow: 1. Alumina and Chemicals Segment
Third quarter ended Nine months ended September 30 September 30 ------------ ------------ 1997 1996 1997 1996 ---- ---- ---- ---- Alumina and chemicals revenues $ 487 $ 488 $ 1,481 $ 1,454 Alumina shipments (000 mt) 1,866 1,575 5,415 4,736
Total revenues for the Alumina and Chemicals segment were $487 in the 1997 third quarter, nearly even with those from the comparable 1996 quarter. Year-to-date, revenues were $1,481, up 2% from the 1996 period. Alumina shipments for the 1997 third quarter were up 18% compared with the 1996 period while prices fell 7%, resulting in an increase in revenues. In the year-to-date period, revenues were up 5% on the strength of a 14% increase in shipments. Chemicals revenues fell 4% from the 1996 year-to-date period primarily due to a decline in price. The entities jointly owned by Alcoa and WMC Limited of Australia (WMC), known as Alcoa World Alumina and Chemicals (AWAC), produced 2,663 mt of alumina during the 1997 third quarter, an increase of 164 mt from the comparable 1996 period. Of the 1997 third quarter amount, 1,866 mt was shipped to third-party customers. On October 20, 1997, AWAC announced that it had begun preparations to restart its St. Croix alumina refinery. The refinery has a rated operating capacity of 600,000 mt and startup is expected to take ten to fifteen weeks. 2. Aluminum Processing Segment
Third quarter ended Nine months ended September 30 September 30 ------------ ------------ Product classes 1997 1996 1997 1996 --------------- ---- ---- ---- ---- Revenues Flat-rolled products $ 1,035 $ 936 $ 2,983 $ 2,953 Engineered products 619 569 1,863 1,707 Aluminum ingot 367 374 1,126 1,078 Other aluminum products 71 83 220 245 ------ ------ ------ ------ Total $ 2,092 $ 1,962 $ 6,192 $ 5,983 Shipments (000 mt) Flat-rolled products 360 324 1,058 1,009 Engineered products 140 134 426 368 Aluminum ingot 221 240 678 664 Other aluminum products 21 19 60 53 ------ ------ ------ ------ Total 742 717 2,222 2,094
-10- Flat-rolled products - The majority of revenues and shipments for flat-rolled products are derived from rigid container sheet (RCS), which is used to produce aluminum beverage can bodies and can ends. Shipments of RCS in the 1997 third quarter were up 15% from the 1996 quarter, resulting in a 12% increase in revenues. However, year-to-date, RCS revenues fell 4% as prices were 5% below 1997 levels and volume was flat. RCS volumes for the 1997 nine-month period were negatively affected by the 1996 sale of AofA's Rolled Product Division, which resulted in a 29,500 mt loss in shipments when comparing 1997 results with the 1996 nine- month period. Domestic sheet and plate shipments continued to climb in the 1997 third quarter, increasing 14% from the 1996 quarter and 13% over the 1996 year-to-date period. Revenues grew by 19% and 14%, respectively, for the quarter and year-to-date periods. Prices increased 4% over those in the 1996 third quarter, but were stable when comparing the year-to-date periods. Engineered products - These products include extrusions used in the transportation and construction markets, forged aluminum wheels and wire, rod and bar. Year-to-date, revenues from the sale of engineered products increased 9% from 1996 levels. Higher shipments of extrusions, particularly in Europe, along with higher shipments of forged wheels were the primary factors behind the increase. Revenues for extruded products were higher by 5% and 13% from the 1996 third quarter and nine-month periods. Prices fell 3% and 9% over the same periods, while shipments were up 9% and 24%, respectively. Soft alloy extruded product results were negatively affected by weak European pricing and maintenance shutdowns in the U.S. during the 1997 third quarter. Revenues from the sale of forged wheels increased 35% and 17%, respectively, from the 1996 quarter and nine-month periods. Shipments drove the increases, rising 37% and 19% over the same periods, while prices were slightly lower. Aluminum ingot - Revenues for this product were down 2% when compared with the 1996 third quarter as a 7% increase in prices was offset by an 8% decline in shipments. Year-to-date, revenues increased 5% as prices rose 2%. Alcoa's average realized ingot price for the 1997 nine-month period was 75.38 cents per pound. Ingot pricing continues to be relatively flat in 1997 as evidenced by the London Metal Exchange (LME) three-month price which, as of the end of the third quarter, was comparable to its average level for the first nine months of 1997. Other aluminum products - Revenues from sales of other aluminum products for the 1997 quarter and year-to-date periods were 14% and 10% lower than those in the respective 1996 periods. The declines were primarily due to the sale of Alcoa's Richmond, Indiana aluminum closure facility in the 1997 second quarter and the continued decline of aluminum closure prices. -11- 3. Non-aluminum Segment Revenues for the non-aluminum segment were $779 in the 1997 third quarter, unchanged on a percentage basis when compared with the 1996 quarter. Year-to-date, this segment had revenues of $2,348, compared with $2,366 in 1996. The flat performance of this segment is due to higher revenues at Alcoa Fujikura Ltd. (AFL), where sales have increased 19% on a year-to-date basis, offset by the dispositions of under-performing businesses in the 1997 first and second quarters. Cost of Goods Sold Cost of goods sold increased $16, or 1%, from the 1996 third quarter. Year-to-date, the increase was $185, or 2%. The increases reflect higher volumes in aluminum, alumina and at AFL. These increases were nearly offset by improved cost performance, as was the case in the 1997 second quarter. Cost of goods sold as a percentage of revenues was 76.1%, compared with 75.9% in the 1996 year-to-date period. The slightly higher ratio is due to lower prices offset by higher volumes and improved performance. Other Income & Expenses Other income totaled $47 in the 1997 third quarter, an increase of $29 from the 1996 period. Year-to-date, other income increased by $89 to $126. The increases are primarily due to recording gains in both 1997 periods related to marking-to-market aluminum commodity contracts versus losses in both 1996 periods. Partially offsetting these gains were increased losses related to foreign exchange. Selling, general and administrative expenses decreased $20 and $52 from the year-ago quarter and nine-month periods. Lower spending and the sale of under-performing businesses were the primary drivers of the decreases. Interest expense was up $3 from the 1996 nine-month period, primarily due to higher borrowings by Aluminio, AofA and Alcoa Italia. The income tax provision for the period is based on the effective tax rate expected to be applicable for the full year. Lower taxes on foreign income were offset by higher taxes on asset sales, resulting in a 35% effective tax rate for 1997. Minority interests' share of income from operations for the 1997 nine-month period rose to $188 from $160 in the comparable 1996 period. The increase is due to higher earnings at Aluminio and AFL. Commodity Risks Alcoa is a leading global producer of aluminum ingot and aluminum fabricated products. Aluminum ingot is an internationally priced, sourced and traded commodity. The principal trading market for ingot is the LME. Alcoa participates in this market by buying and selling forward portions of its aluminum requirements and output. In the normal course of business, Alcoa enters into long-term contracts with a number of its customers. At December 31, 1996, such contracts totaled approximately 2,369,000 mt. Alcoa may enter into similar arrangements in the future. -12- As a hedge against the risk of higher prices for anticipated metal purchases to fulfill long-term customer contracts, Alcoa entered into long positions, principally using futures and options. At September 30, 1997 and December 31, 1996, these contracts totaled approximately 935,000 mt and 872,000 mt, respectively. Alcoa follows a fairly stable pattern of purchasing metal; therefore, it is highly likely that the anticipated metal requirements will be met. The futures and options contracts limit the unfavorable effect of price increases on metal purchases and likewise limit the favorable effect from price declines. The contracts are with creditworthy counterparties and are further supported by cash, treasury bills or irrevocable letters of credit issued by carefully chosen banks. For financial accounting purposes, the gains and losses on the hedging contracts are reflected in earnings concurrent with the hedged costs. The cash flows from these contracts are classified in a manner consistent with the underlying nature of the transactions. Alcoa intends to close out the hedging positions at the time it purchases the metal from third parties, thus creating the right economic match both in time and price. The deferred gains on the hedging contracts of $128 at September 30, 1997 are expected to offset the increase in the price of the purchased metal. The expiration dates of the call options and the delivery dates of the futures contracts do not always coincide exactly with the dates on which Alcoa is required to purchase metal to meet its contractual commitments with customers. Accordingly, some of the futures and 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, as was the case in 1996, if metal prices fall below the price of contracts being rolled forward. In addition, Alcoa had 168,000 mt and 205,000 mt of LME contracts outstanding at September 30, 1997 and December 31, 1996, respectively, that cover long-term, fixed-price commitments to supply customers with metal from internal sources. Accounting convention requires that these contracts be marked-to-market, which resulted in an after-tax gain of $2.6 for the quarter ended September 30, 1997 and an after-tax loss of $16.0 for the quarter ended September 30, 1996. Alcoa also purchases certain other commodities, such as gas and copper, for its operations and enters into futures contracts to eliminate volatility in the prices of such products. None of these contracts are material. Financial Risk Alcoa is subject to significant exposure from fluctuations in foreign currencies. As a matter of company policy, foreign currency exchange contracts, including forwards and options, are used to manage transactional exposure to changes in currency exchange rates. The forward contracts principally cover firm commitments. Options are generally used to hedge anticipated transactions. -13- Alcoa also attempts to maintain a reasonable balance between fixed and floating rate debt and uses interest rate swaps and caps to keep financing costs as low as possible. Risk Management All of the aluminum and other commodity contracts, as well as the various types of financial instruments, are straightforward. They are used primarily to mitigate uncertainty and volatility, and principally cover underlying exposures. Alcoa's commodity and derivative activities are subject to the management, direction and control of the Strategic Risk Management Committee (SRMC). It is composed of the chief executive officer, the president, the chief financial officer and other officers and employees as the chief executive officer may select from time to time. The SRMC reports to the Board of Directors at each of its scheduled meetings on the scope of its derivatives activities. Environmental Matters Alcoa continues to participate in environmental assessments and cleanups at a number of locations, including operating facilities and their adjoining property; at previously owned or operated facilities; and at Superfund and other waste sites. Alcoa records a liability for environmental remediation costs and/or damages when a cleanup program or liability becomes probable and the costs/damages can be reasonably estimated. As assessments and cleanups proceed, these liabilities are adjusted based on progress in determining the extent of remedial actions and the related costs and damages. The liability can change substantially due to factors such as the nature or extent of contamination, changes in remedial requirements and technological improvements. For example, there are certain matters, including several related to alleged natural resource damage or alleged off- site contaminated sediments, where investigations are ongoing. It is not possible to determine the outcomes or to estimate with any degree of certainty the ranges of potential costs for these matters. Alcoa's remediation reserve balance at the end of the 1997 third quarter was $262 and reflects the most probable costs to remediate identified environmental conditions for which costs can be reasonably estimated. Approximately half of the reserve relates to Alcoa's Massena, New York and Pt. Comfort, Texas plant sites. Remediation expenditures charged to the reserve during the 1997 third quarter were $17. They include expenditures currently mandated as well as those not required by any regulatory authority or third party. Included in ongoing operating expenses are the recurring costs of managing hazardous substances and pollution. Alcoa estimates that these costs will be about 2% of cost of goods sold in 1997. -14- Liquidity and Capital Resources Cash from Operations Cash from operations during the 1997 nine-month period was $1,371, $499 higher than in the 1996 period. A $240 cash receipt on a long-term alumina supply contract, lower working capital requirements and higher earnings in the 1997 period generated the increase. Financing Activities Financing activities used $466 of cash during the first nine months of 1997. This included $293 to repurchase 3,851,135 shares of the company's common stock. Stock purchases were offset by $200 of treasury stock issued primarily for employee benefit plans. Dividends paid to shareholders were $127 in the 1997 nine-month period, a decrease of $51 over the 1996 period. The decrease was due to Alcoa's bonus dividend program, which paid out 10.75 cents in addition to the base dividend in each quarter of 1996. In March 1997 Alcoa raised its quarterly base dividend from 22.5 to 25 cents per share, an 11% increase. Dividends paid and return of capital to minority interests totaled $291 as AWAC and AofA returned funds to their investors during the 1997 second quarter. Payments on long-term debt during the first nine months of 1997 exceeded additions by $120. Debt as a percentage of invested capital was 20.4% at the end of the 1997 third quarter, a 1.4 percentage point decrease over the 21.8% recorded at year-end 1996. Investing Activities Investing activities used $423 during the 1997 nine-month period, compared with $722 in the 1996 period. Capital expenditures totaled $619, while $193 was received from the sale of Alcoa's Caradco, Arctek, Alcoa Composites, Norcold, Dayton Technologies and Richmond, Indiana facilities. In the 1996 period, Alcoa used $171.5 to purchase the operating assets of Alumix in Italy and also received $121.8 from WMC which was originally loaned in January 1995. Accounting Rule Change Two new accounting rules, FAS 130 - Reporting Comprehensive Income and FAS 131 - Disclosures about Segments of an Enterprise and Related Information, were issued in June 1997. The implementation of FAS 130 will require that the components of comprehensive income be reported in the financial statements. The implementation of FAS 131 will require the disclosure of segment information utilizing the approach that the company uses to manage its internal organization. The company is currently assessing the impact that the new standards will have on its financial statements. Implementation of both of these new standards is required for calendar year 1998. -15- A new accounting rule, FAS 128 - Earnings per Share (EPS), was issued in February 1997. The implementation will require the disclosure of basic (currently referred to as primary) and diluted (currently referred to as fully diluted) EPS. The calculation of basic EPS under the new rule will not change from the current calculation of primary EPS. The calculation of diluted EPS under the new rule will not be materially different from the current calculation of fully diluted EPS, which is available in Exhibit-11 of this document. Implementation of this new standard will begin as of December 31, 1997. -16- Alcoa and subsidiaries
Summarized unaudited consolidated financial data for Aluminio, a Brazilian subsidiary effectively owned 59% by Alcoa, follow. September 30 December 31 1997 1996 ---- ---- Cash and short-term investments $ 261.7 $ 269.1 Other current assets 420.4 441.2 Properties, plants and equipment, net 873.6 897.5 Other assets 205.6 235.0 ------- ------- Total assets 1,761.3 1,842.8 ------- ------- Current liabilities 349.5 404.0 Long-term debt 409.3 492.5 Other liabilities 65.1 62.1 ------- ------- Total liabilities 823.9 958.6 ------- ------- Net assets $ 937.4 $ 884.2 ======= =======
Third quarter ended Nine months ended September 30 September 30 ------------ ------------ 1997 1996 1997 1996 ---- ---- ---- ---- Revenues (1) $ 306.8 $ 302.4 $ 911.3 $ 893.4 Costs and expenses (286.1) (321.1) (845.4) (874.2) Translation and exchange adjustments (0.4) 0.3 (0.5) 1.0 Income tax (expense)/benefit (4.1) 6.9 (13.1) 5.7 ------ ------ ------ ------ Net income/(loss) $ 16.2 $ (11.5) $ 52.3 $ 25.9 ====== ====== ====== ====== Alcoa's share of net income/loss $ 9.6 $ (6.8) $ 30.9 $ 15.3 ====== ====== ====== ====== (1) Revenues from Alcoa and its subsidiaries, the terms of which were established by negotiations between the parties, follow. Third quarter ended September 30: 1997 - $ 9.2, 1996 - $ 6.1 Nine months ended September 30: 1997 - $14.1, 1996 - $12.4
-17- Alcoa and subsidiaries
Summarized unaudited consolidated financial data for AofA, an Australian subsidiary, 60% owned by Alcoa, follow. September 30 December 31 1997 1996 ---- ---- Cash and short-term investments $ 18.8 $ 13.9 Other current assets 454.6 522.4 Properties, plants and equipment, net 1,511.2 1,695.4 Other assets 95.7 108.6 ------- ------- Total assets 2,080.3 2,340.3 ------- ------- Current liabilities 298.2 341.9 Long-term debt 294.5 131.0 Other liabilities 399.9 435.7 ------- ------- Total liabilities 992.6 908.6 ------- ------- Net assets $ 1,087.7 $ 1,431.7 ======= =======
Third quarter ended Nine months ended September 30 September 30 ------------ ------------ 1997 1996 1997 1996 ---- ---- ---- ---- Revenues (1) $ 495.7 $ 469.6 $1,491.9 $1,479.1 Costs and expenses (383.2) (360.9) (1,130.9) (1,121.7) Income tax expense (40.6) (40.4) (130.2) (127.5) ------- ------- ------- ------- Net income $ 71.9 $ 68.3 $ 230.8 $ 229.9 ======= ======= ======= ======= Alcoa's share of net income $ 43.1 $ 41.0 $ 138.5 $ 137.9 ======= ======= ======= ======= (1) Revenues from Alcoa and its subsidiaries, the terms of which were established by negotiations between the parties, follow. Third quarter ended September 30: 1997 - $22.7, 1996 - $ 9.7 Nine months ended September 30: 1997 - $50.3, 1996 - $41.2
-18- PART II - OTHER INFORMATION Item 1. Legal Proceedings As previously reported, on December 20, 1996 JMB Realty Corporation (JMB) filed a complaint for declaratory relief and damages against Alcoa and two subsidiaries, Alcoa Properties, Inc. and Alcoa Securities Corporation, in the Circuit Court of Cook County, Illinois. JMB claims that it is entitled to a rebate of approximately $71 million, plus annual interest, beginning December 1996 arising from a 1986 stock transaction in which a subsidiary of JMB purchased the outstanding stock of substantially all of the real estate holding subsidiaries of Alcoa Properties, Inc. JMB also is seeking an order canceling three promissory notes that it made and delivered to Alcoa Securities Corporation. JMB owes Alcoa Securities Corporation approximately $53 million on the notes, which matured on December 31, 1996. The Illinois case is in discovery. In January 1997, Alcoa Securities Corporation filed suit against JMB in the Superior Court of Chittenden County, Vermont seeking to collect the approximately $53 million that JMB owes Alcoa Securities Corporation. The Vermont case was dismissed at the trial court level, for lack of jurisdiction, on September 24, 1997. Alcoa Securities Corporation is reviewing its options for continuing collection efforts on the notes. The New York State Department of Environmental Conservation, in a letter dated October 10, 1997, notified the Company that the Company's Massena, New York facility allegedly is in violation of certain air pollution control requirements. The allegations include operation of certain emission sources without permits, non-compliance with permitting and control standards for sulfur dioxide, carbon monoxide and carbonyl sulfide and violation of requirements related to the deposition of fluoride on vegetation. The Company has commenced an investigation into the allegations. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 11. Computation of Earnings per Common Share 12. Computation of Ratio of Earnings to Fixed Charges 15. Independent Accountants' letter regarding unaudited financial information 27. Financial Data Schedule (b) No reports on Form 8-K were filed by Alcoa during the quarter covered by this report. -19- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALUMINUM COMPANY OF AMERICA October 29, 1997 By /s/ RICHARD B. KELSON Date Richard B. Kelson Executive Vice President and Chief Financial Officer (Principal Financial Officer) October 29, 1997 By /s/ EARNEST J. EDWARDS Date Earnest J. Edwards Senior Vice President and Controller (Chief Accounting Officer) -20- EXHIBITS Page 11. Computation of Earnings per Common Share 22 12. Computation of Ratio of Earnings to Fixed Charges 23 15. Independent Accountants' letter regarding unaudited 24 financial information 27. Financial Data Schedule -21- EX-11 2 EXHIBIT 11
Computation of Earnings per Common Share For the nine months ended September 30 (in millions, except share amounts) 1997 1996 ---- ---- 1. Income applicable to common stock* $593.2 $377.2 2. Weighted average number of common shares outstanding during the period 173,123,905 174,737,995 3. Primary earnings per common share (1 divided by 2) $3.43 $2.16 4. Fully diluted earnings (1) $593.2 $377.2 5. Shares issuable under compensation plans 32,668 37,664 6. Shares issuable upon exercise of dilutive outstanding stock options (treasury stock method) 2,315,611 1,229,336 7. Fully diluted shares (2 + 5 + 6) 175,472,184 176,004,995 8. Fully diluted earnings per common share (4 divided by 7) $3.38 $2.14 * After preferred dividend requirement
-22- EX-12 3 EXHIBIT 12
Computation of Ratio of Earnings to Fixed Charges For the nine months ended September 30, 1997 (in millions, except ratio) 1997 ---- Earnings: Income before taxes on income $ 1,204.9 Minority interests' share of earnings of majority- owned subsidiaries without fixed charges 2.7 Equity income (29.7) Fixed charges 136.1 Proportionate share of income (loss) of 50%-owned persons 25.3 Distributed income of less than 50%-owned persons - Amortization of capitalized interest 15.7 ------- Total earnings $ 1,355.0 Fixed Charges: Interest expense: Consolidated $ 106.2 Proportionate share of 50%-owned persons 2.7 ------- 108.9 ------- Amount representative of the interest factor in rents: Consolidated 26.9 Proportionate share of 50%-owned persons .3 ------- 27.2 ------- Fixed charges added to earnings 136.1 ------- Interest capitalized: Consolidated 5.7 Proportionate share of 50%-owned persons - ------- 5.7 ------- Preferred stock dividend requirements of majority-owned subsidiaries - ------- Total fixed charges $ 141.8 ======= Ratio of earnings to fixed charges 9.6 =======
-23- EX-15 4 EXHIBIT 15 October 6, 1997 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 RE: Aluminum Company of America 1. Form S-8 (Registration Nos.33-24846 and 333-00033) Alcoa Savings Plan for Salaried Employees; Alcoa Fujikura Ltd. Salaried 401(k) Savings Plan 2. Form S-8 (Registration Nos.33-22346, 33-49109, 33-60305 and 333-27903) Long Term Stock Incentive Plan 3. Form S-3 (Registration No. 33-49997) and Form S-3 (Registration No. 33-60045) and Form S-3 (Registration No. 33-64353) Debt Securities and Warrants to Purchase Debt Securities, Preferred Stock and Common Stock Ladies and gentlemen: We are aware that our report dated October 6, 1997, accompanying interim financial information of Aluminum Company of America (Alcoa) and subsidiaries for the three- month and nine-month periods ended September 30, 1997, is incorporated by reference in the registration statements referred to above. Pursuant to Rule 436 (c) under the Securities Act of 1933, this report should not be considered as part of a registration statement prepared or certified by us within the meaning of Sections 7 and 11 of that Act. Very truly yours, /s/ COOPERS & LYBRAND L.L.P. COOPERS & LYBRAND L.L.P. -24- EX-27 5
5 1,000 9-MOS DEC-31-1996 SEP-30-1997 1,069,800 81,200 1,813,600 44,400 1,297,100 4,782,800 15,542,200 8,731,700 13,604,100 2,626,000 1,725,700 0 55,800 178,900 4,361,900 13,604,100 10,020,600 10,146,500 7,624,900 7,624,900 549,500 0 106,200 1,204,900 421,700 594,800 0 0 0 594,800 3.43 3.38
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