Markets Customers Solutions Alcoa
Alcoa 2002
Markets
Customers
Financial and Operating Highlights
Alcoa at a Glance
2002
2001
$20,263
$22,497
(10)
Income from continuing operations
498
907
(45)
Net income
420
908
(54)
Total assets
29,810
28,355
5
Capital expenditures from continuing operations
1,263
1,170
8
Cash flow from continuing operations
1,914
2,387
(20)
Basic – Income from continuing operations
.59
1.06
(44)
Basic – Net income
.50
1.06
(53)
Diluted – Income from continuing operations
.58
1.05
(45)
Diluted – Net income
.49
1.05
(53)
Dividends paid
.60
.60
—
11.69
12.46
(6)
4.1%
8.3%
(51)
Number of shareholders
273,000
266,800
2
Average common shares outstanding (000)
845,439
857,990
(1)
Number of employees
127,000
129,000
(2)
dollars in millions, except per-share amounts
Sales
% change
Per common share data:
Book value
Return on average shareholders’ equity
2001 data has been reclassified to reflect assets held for sale and discontinued operations.
• Alcoa is the world’s leading
producer of primary aluminum,
fabricated aluminum, and
alumina and is active in all
major aspects of the industry.
• Alcoa serves the aerospace,
automotive, packaging,
building and construction,
commercial transportation, and
industrial markets, bringing
design, engineering, production,
and other capabilities of
Alcoa’s businesses as a single
solution to customers.
• In addition to aluminum
products and components,
Alcoa also markets consumer
brands including Reynolds
Wrap® aluminum foil, Alcoa®
wheels, and Baco® household
wraps. Among its other
businesses are vinyl siding,
closures, precision castings,
and electrical distribution
systems for cars and trucks.
• The company has 127,000
employees in 39 countries.
For more information, go to
www.alcoa.com
Contents
2002 Revenues: $20.3 Billion
By Segment
By Geographic Area
billions
percent
$5.0 Engineered Products
63% United States
$4.6 Flat-Rolled Products
21% Europe
$2.8 Other
8% Pacific
$3.2 Primary Metals
8% Other Americas
$2.9 Packaging and Consumer
1
4
6
18
25
66
67
68
IBC
Letter to Shareowners
ABS – The Alcoa Business System
Markets, Customers, Solutions
News 2002
Financial and Corporate Data
Directors
Officers
Shareholder Information
Vision and Values
$1.8 Alumina and Chemicals
8%
$ 1.8
$ 5.0
$ 2.9
8%
21%
$ 3.2
$ 4.6
$ 2.8
63%
On the cover:
We deliver not just products but
solutions to our customers –
engineered by talented employees
like Dr. Hasso Weiland,
Diana K. Denzer, and
Dr. Dhruba J. Chakrabarti
(Alcoa Technical Center).
Fellow Shareowners:
At Alcoa, we have a steady focus on the
bottom line and always measure ourselves against the
best. That is why I can only describe our financial
performance in 2002 as disappointing. We did make
strides to strengthen the company for the future, solidify
relationships with customers, and lay a path for profitable
growth. However, the extended weakness in the general
manufacturing environment and specific markets –
particularly aerospace, telecommunications, and industrial
gas turbines – overshadowed some outstanding work and
reinforced the need to increase the scope of our cost
savings and restructuring initiatives.
Driven by the downturn, our sales fell 10% for the year.
Excluding one-time charges, income from continuing
operations was $779 million, or $.92 per share. Including
charges, net income for 2002 was $420 million, or $.49
per diluted share. In addition to weak economic conditions, our results from last year were hurt by significantly
lower realized prices for primary aluminum and alumina.
Moving Forward
The culture at Alcoa is not to make excuses, but rather
to accept challenges and do our best at managing what
we can…what is within our control. That is how we are
moving forward: by reducing costs and capital expenditures, restructuring operations, and divesting others…all
with financial discipline, so we can pursue growth in our
core businesses. Our actions, both recent and planned,
are based on two precepts: we must make short-term
improvements in the business – correcting the issues of
2002 – while positioning the company to be successful
for many years to come.
In 2003, we will remain focused on our financial
goals: driving to join the first quintile of S&P Industrials
in return on capital (ROC) performance (more than onethird of our company already is performing at this level,
but there is still much improvement to be made); and
achieving our cost savings goal of $1.0 billion by the end
of 2003. With our continued application of the Alcoa
Business System, we will exceed our cost savings target.
We are executing plans to strengthen our position
during this downturn and prepare the company for the
Alain Belda Chairman and Chief Executive Officer
upturn when it comes. Five years from now, we will be
able to look back and see how these steps helped improve
both short-term and long-term profitability…and laid
the foundation for future growth. Beyond cost savings
opportunities, this plan includes:
• Implementing a portfolio review;
• Strengthening our asset base and improving
its productivity;
• Extending our global reach and repositioning our
primary business lower on the cost curve;
• Solidifying the connection to our customers; and
• Taking the transformation of our businesses – from
making products to selling customer solutions – to a
new level. That is where our assets, proprietary technologies and the brainpower of our employees bring the
most value to our customers and, in turn, to Alcoa.
Portfolio Review
In 2002, we conducted a portfolio review of our businesses and the markets they serve. As part of the review,
we established ongoing criteria for aluminum and nonaluminum businesses, including:
• The ability to grow in excess of GDP; or
• The ability to deliver superior returns in sectors where
Alcoa has a sustainable competitive advantage.
As a result of this review, we are in the process of
divesting businesses that do not meet these criteria. Those
1
businesses range from specialty chemicals and specialty
packaging equipment to architectural products in North
America and commodity automotive fasteners. Many of
these are good, solid operations with strong management,
customer focus, and excellent workforces; they just do
not meet our ongoing criteria.
The businesses being divested generated approximately
$1.3 billion in total revenues in 2002, and proceeds from
the sales are expected to be as much as $1 billion. Those
proceeds will be deployed primarily to reduce debt,
increasing the company’s flexibility for future growth
opportunities in core businesses.
Integrating New Businesses
We also added businesses to our portfolio – that met our financial discipline measures – in key markets during the year.
In aerospace, we strengthened our position with the
acquisition of Fairchild Fasteners. Fairchild’s product line
complements the fastening products from Huck, which
we supply to aircraft manufacturers, and gives Alcoa the
broadest product line in this part of the aerospace industry.
The new Alcoa Fastening Systems, combining Huck
and Fairchild, will be the premier supplier in this niche.
And we added to our already strong position in the
packaging market with the acquisition of Ivex Packaging,
which has broadened our food and foodservice packaging
offerings. Our packaging businesses – ranging from
closures to Reynolds consumer products to the design,
prepress, and imaging business of Southern Graphic
Systems – continued their stellar performance this year,
and with the combination of Ivex this should continue.
Our Vision – to be the world’s best supplier, employer,
neighbor, and investment choice...the best Company in
the world – remains unchanged by the events of the year.
The discipline we bring to the current business situation
adds focus and energy to this Vision.
Building Upon Strengths in
Upstream Businesses
As a Company, we strengthened areas where we excel,
and we continued to drive down costs in primary aluminum operations worldwide. We wrapped up a productive negotiation process with the government of Iceland
and Iceland’s national power company to build a hydropowered $1.1 billion smelter project there. That project,
slated to go on line in 2007, will be our first all-new
smelter capacity in 20 years, and we expect it to set new
standards in both efficiency and sustainability.
2
Our relationship with Chalco, the Aluminum
Company of China, Ltd., deepened this year. Our joint
venture with Chalco at Pingguo, one of the most efficient
alumina and aluminum production facilities in China,
should be formalized in 2003.
We announced a $1 billion (Canadian) upgrade and
expansion to our hydropowered operations in BaieComeau, Quebec, dramatically improving its cost structure. And we reached agreements with the governments
of Jamaica and Suriname that provide a foundation to
expand our low-cost alumina operations in those countries.
In Brazil, we have continued to move toward selfsufficiency in power generation, having achieved 17% of
our present needs – with another 26% under construction
now and more than 50% under concession.
These and other similar efforts will accelerate Alcoa
down the cost curve in primary, replacing older, less competitive capacity with newer, more efficient operations.
We continue to build on the successful foundation of the
upstream businesses. Taking action now will lock in our
competitive position for years to come.
Strengthening Customer Relationships:
From Products to Solutions
As you’ll see throughout this report, the Alcoa Business
System (ABS) begins with the customer. Our Market
Sector Lead Team strategy is an extension of ABS. These
teams work with Alcoa’s business units to improve our
response to customer needs that span across our organization and migrate our value proposition from materials
and components to high-value, customer-centric
engineered solutions.
This effort, requiring major organizational and
cultural change, saw real life this year with market customers. By “real life” I mean that customers dealt with
Alcoa as a more comprehensive horizontal supplier of
solutions; i.e., the application of technologies that enable
a customer to meet specific end-user requirements for
speed, convenience, economy, safety, etc. Solutions are
the opposite of commodities. For both Alcoa and our
customers, they have value far beyond the nuts and bolts
and materials that comprise them. This strategy gained
momentum in 2002 and will continue that path through
2003 and beyond.
Safety and Community Milestones
Other positive achievements for 2002, I am proud to say,
include continued progress in safety and a major milestone
in our relationships with Alcoa communities worldwide.
When we first set our sights at being the safest company
in the world, many thought it was unrealistic. But we
continue to deliver consistent improvement. Our lost
workday rate in 2002, including acquired Reynolds and
Cordant facilities, was 0.15 per 200,000 hours worked –
a 44% improvement over the full-year rate of 0.27 for
all facilities in 2001. This shows that we are able to close
the safety gap quickly with new acquisitions – thanks to
integration into the Alcoa Business System and the adoption of Alcoa Values. Approximately 80% of our locations
Lost Workday Incident Rate
injuries per 200,000 work hours
.99
.81
44% improvement from 2001
.77
.75
.46
.49
208 less
incidents
.46
.36
.23
91
92
93
94
95
96
97
98
99
.28
.27
.18
.16
00
01
.15
02
Alcoa (as reported)
With Reynolds, Howmet/Huck
operated through 2002 without a single lost workday
incident – and 44% of them did not have a single recordable incident. We remain committed to achieving the
ultimate goal – zero incidents.
I’m proud of our employees’ performance. It shows that
Alcoa is capable of tremendous achievement when focused
on an issue. We are applying the same level of focus to
improving the business performance of the company.
Performance in our communities was also stellar in
2002, in which we kicked off the 50th anniversary of
Alcoa Foundation, marking a half century of sharing
Alcoa Values beyond the workplace. We celebrated
around the world, with employees in more than 100 communities. We also began work on a unique international
Social Venture Initiative designed to improve the effectiveness and sustainability of nonprofits by applying business
and entrepreneurial models in their organizations.
Alcoa Values and Corporate Governance
Our Values proved their worth in other ways in 2002, a
time of significant corporate governance issues in the
world. We support initiatives underway to provide more
transparency, more disclosure, better and stronger control
of the accounting industry, and better governance. Our
review of the Sarbanes-Oxley Act shows that we have no
significant changes to make. Still, there is no amount of
laws or regulations that will force a company to behave
with integrity. The best line of defense is for integrity to be
a part of the living Values of each individual member of
the team. For years, Integrity has sat atop our Values. Yet,
as with everything we do, we are taking steps to further
improve standards, controls, and accountabilities to
ensure we are beyond reproach.
Alcoa’s Great Opportunity
Together, we embrace the challenge of improving our
performance and achieving our goals within the current
market environment. We cannot maintain the status quo
and hope for an economic recovery. We will not let a
weak economy have the same impact on Alcoa in 2003
that it did in 2002. We have made some of the difficult
decisions that needed to be made and that will position
us well for the years ahead.
We will strengthen the company, improve our agility,
and pursue profitable growth opportunities with our
customers, like the solutions in the pages that follow.
They represent a small portion of opportunities that lay
in front of us. Alcoans are committed to not only improve
our performance, but build a legacy of action that we can
be proud of for years to come.
Alain J. P. Belda
Chairman and Chief Executive Officer
February 20, 2003
3
Inside
ABS
The Alcoa Business System
The Alcoa Business System, or ABS, is
an integrated set of principles and tools
used to manage Alcoa businesses. The
three overarching principles of ABS are:
This principle is based on customer
usage, as opposed to making to
inventory.
• Make to Use,
Eliminate Waste
The Eliminate Waste principle is our
drive toward the ideal of exposing and
solving problems, when and where
they occur, to continuously improve
the cost, quality and speed of all our
manufacturing and business processes.
• Eliminate Waste,
• People Linchpin the System.
ABS: Much Achieved…
But Only Just Begun
350+ Operating Facilities
Next-generation
value based on
new benchmarks
is significant
166
110
62
11
13
New
Major
Significant
Benchmarks Improvement
Gains
Early Gains
Initiating
Make to Use
The Make to Use principle begins
with Alcoa customers and is based on
the ideal of:
• Single-piece production
• On demand
• Defect free
• At the lowest possible cost
• Made safely
4
People Linchpin the System
This third principle is the drive to create
the people environment, engaging all
our associates in identifying and solving
the problems linked to our transition
from “make to inventory” to “make to
use” and the continuous improvements
in costs, quality, and speed.
While ABS is about improvements,
it has also led to significant cost
savings. At the end of 2002, Alcoa
had achieved $600 million in annualized cost savings toward its threeyear $1.0 billion 2001 to 2003 goal –
which comes on top of the company’s
ABS – Extending the Business System
What we make
• Products
• Services
• Time
• Quality
• Price
Initially operations-based on our
existing value propositions
ABS
Now we’re redefining value propositions
based on new operational capabilities,
products, and technologies
1998 to 2000 cost challenge that
achieved $1.1 billion in savings. The
run rate at the end of the fourth quarter
2002 was $150 million, and with the
cost savings initiatives announced during the fourth quarter, the company is
on track to exceed the goal of a run rate
of $250 million by the end of 2003.
While ABS has helped deliver substantial savings, there are significant
opportunities ahead in both savings
and in extending the entire business
system of the company:
On Track to Exceed
$1 Billion Cost Savings Goal
Millions of dollars
250
31
278
63
87
87
107
123
140
150
Make to use
• Single-piece production
• On demand
• Defect free
• At the lowest possible cost
• Made safely
• Of the more than 350 operating
locations of the company, approximately 100 have realized significant
gains, major improvements, or
are on to setting new benchmark
performance. At our other approximately 270 operating locations,
we are either initiating ABS or are
realizing the early gains that can
be achieved.
• We are using our years of experience
applying ABS to systemically capture
improvements faster and transfer
knowledge across the organization
more quickly.
• Where we were initially operationsbased, we are now redefining our
value propositions and evolving into
a market-driven company based
on new operational capabilities,
products, and technologies.
278
2000 1Q 01 2Q 01 3Q 01 4Q 01 1Q 02 2Q 02 3Q 02 4Q 02 2003
Goal
Goal
5
Markets
Customers
Solutions
Our first aerospace customers
were the Wright Brothers who needed
some aluminum for a new invention.
A hundred years later, we’re still putting customers at the leading edge.
Today we serve customers in all
segments of the aerospace market with
solutions ranging from materials, manufacturing, fastening, and propulsion
to components for wings, fuselage,
landing gear, wheels, and aero engines.
We’re moving from being the best
aluminum provider to the best metallic
solutions partner, showing product and
technology breadth that’s unrivaled.
Tomorrow’s planes demand next-
Aerospace
John Liu, alloy technology
division manager, inspects a
jet engine diffuser (top left).
We’re offering aerospace
customers a more complete
fastener solution by integrating new acquisition Fairchild
Fasteners with our Huck
Fasteners business to form
Alcoa Fastening Systems
(top center).
Product application strategist
Bob Evert and senior staff
scientist Joanne Murray with
a model winglet (above).
6
Under a new contract with
Bombardier Aerospace
(above), Alcoa will use ABS
principles to pinpoint delivery of regional and business
jet components and skins
to meet customer needs.
generation solutions delivering new
levels of performance, reliability, safety,
fuel efficiency, and environmental
friendliness. Alcoa is bringing its worldleading know-how in materials,
structural design, engineering, quality,
and delivery performance to customers,
helping them meet their ever-increasing
requirements. As we do this, we also
bring a commitment – and the ability –
to reduce weights of metallic structures
by 20% in addition to reducing costs
by 20%. This is how we will help our
customers move their businesses –
and ours – up the value curve in commercial aircraft, defense, and aerospace.
Alcoa’s Contribution
to the A380
Wing Box
Fasteners
Wing Ribs (Plate)
Vertical Stabilizer
Fasteners
Fuselage Stringers
Floor Beams
Fuel Connectors
Wing Gear Rib and Support Fittings
Fuselage Skins
Wing Spars (Plate)
Seat Tracks
Bay Landing and
Support Forgings
Customer Success
Airbus
The future of advanced
metallic solutions is here,
and the evidence is in
Alcoa’s work to meet the
unique challenges required
on the Airbus A380 super
jumbo airliner. Alcoa will provide nearly the entire wing
Upper Wing Skins
Lower Wing Skins
Engine Pylon Fasteners
Fuselage to Wing Connection
Wing Flap Fasteners
Wing Spars (Forgings)
Engine Pylon Support Structure
structure, a large portion of
the fuselage skins, the main
wing spar forgings, and other
major applications throughout the plane. Alcoa also
will provide the fastening
systems for the A380.
The A380 will be the
world’s only twin-deck, fouraisle airliner – or a tripledecker in the freighter
configuration. It will seat
555 passengers in a typical
three-class interior layout.
The first customer deliveries are expected in 2006.
There have been 103 orders
and commitments for the
new Airbus plane booked
thus far. Alcoa is literally all
over this aircraft.
7
We get as excited as everyone
else about aluminum’s role in technological marvels such as the Cadillac
Sixteen. But what excites us even
more is how Alcoa solutions add performance, safety, fuel efficiency, and
environment-enhancing capabilities
to what’s on the road right now.
More than 90% of our automotive
revenue comes from vehicles like the
ones you drive every day: everything
from Chevrolet sedans to Ford trucks,
Mercury minivans, and Volvo wagons.
Alcoa solutions make hoods and trunk
lids easier to handle, suspension more
dependable, handling more nimble,
wheels more stylish, drivetrains and
chassis components lighter and more
responsive. Our ability to supply all
of the above and more puts Alcoa in a
unique position as an automotive supplier: decades of design and engineering
experience to help automakers worldwide design and build vehicles that
consumers want to buy.
Automotive
The Audi A8 (top) and the
Chevy Monte Carlo: two
examples of how automakers add performance and
good looks through Alcoa
materials, components, and
solutions. We’re also a leading source of automotive
wiring and electronics (right).
8
Engineer Matt Garratt
with the rear upper control
arm for the Mercedes-Benz
M-class automobile.
Our Diverse Automotive Products
Steering Yokes
Wiring Harness
Suspension Subframes
Instrument Panel Structures
Airbag Canisters
Exterior Closure
Panels/Interior
Reinforcing Panels
Structures and Subassemblies
Electrical Components
The Cadillac Sixteen
concept’s unique 16-cylinder,
1000-hp engine is set in a
sculpted compartment of
Alcoa aluminum.
Wheels
Engine Components
Spaceframes and
Components
Bumper Beams
Seat Frames
Heat Exchanger
Components/Radiators
Driveshafts and Yokes
Transmission Brackets
Air Compressor Pistons
Brake Pistons and Calipers
Engine Subframe
Crash Management Systems
Chassis and Suspension
Components
Customer Success
General Motors
To enhance the entire Cadillac
brand and return General
Motors to preeminence as
the world standard in producing luxury automobiles, GM
approached Alcoa to collaborate on the design and engineering of the new Cadillac
Sixteen concept car, the
ultimate aspirational sedan.
Working with GM presented Alcoa the opportunity to
demonstrate more than two
decades of structural design
and engineering expertise.
The Sixteen’s aluminum auto
structure is unique in its
capacity to meet significant
performance, occupant
comfort, and safety require-
unparalleled passenger view;
a compartment highlighting the
V-16 engine, the jewel of the
concept vehicle; and assurance
the car will be easily recyclable.
With Alcoa’s work completed
in just eight months, the
Sixteen was easily the highlight
of the 2003 North American
International Auto Show.
ments while accommodating
its aesthetic needs.
The Cadillac Sixteen has
become a demonstrator of
leading-edge automotive
aluminum engineering, with
Alcoa integrating its latest
technologies,including:
energy-absorbing bumpers;
an upper body design supporting GM’s desire for an
9
No matter if it is the food
you eat, the beverages you drink, the
medicines you take, or the electronic
products that help make our lives
more efficient, chances are good
that Alcoa packaging has helped
make it better.
For manufacturers, we provide
closure and capping systems, bottles,
containers, packaging materials, films,
and wraps. For foodservice outlets,
we provide solutions ranging from
foil, film, containers, lids, wraps, and
bags to baking cups and hot dog trays.
And for consumers, we’re top-of-mind
with brands like Reynolds Wrap®
With new Reynolds Wrap®
Release® Non-Stick
Aluminum Foil (below),
you can cook, cover, freeze,
and store foods like lasagna
without sticking.
Alcoa customer focus helps
retailers like Wal-Mart put
high-quality Alcoa consumer
products in the right place
at the right price (bottom
and right).
Aluminum Foil, new Reynolds Wrap®
Release® Non-Stick Aluminum Foil,
Reynolds Plastic Wrap™, and
BacoFoil® in the U.K. This business is
over and above the sheet we make for
100,000,000,000 (that’s 100 billion!)
aluminum beverage cans every year.
And with Ivex plastic film, sheet,
and food container products joining
the Alcoa line in 2002, we’re now
even better able to collaborate with
customers to create new packaging
solutions.
Packaging and Consumer
Customer Success
Wal-Mart
“Supplier of the Year,” an
honor reserved for only a
few selected suppliers that
Wal-Mart singles out as the
best of the best.
Through listening and
understanding what Wal-Mart
wants, when it wants it, and
in what quantity, Alcoa
Consumer Products was
Alcoa Consumer Products
takes to heart the Company
strategy of “to grow the business, grow the customer.”
Nowhere is that more prevalent than in its partnership
with Wal-Mart Stores, Inc.
where it was named a
10
able to: grow retail sales at
Wal-Mart by 44% from 2000;
increase retail profit 2.5 percentage points; increase
in-stock levels to 99.1%;
reduce order lead time to
half a week; and increase
turns 21% to 23 times a year.
This philosophy is also
being used with all of Alcoa
Consumer Products’
customers worldwide and
is part of the reason its new
Reynolds Wrap® Release®
Non-Stick Aluminum Foil
innovation is such a huge
market success.
Packaging and Consumer Revenue
The fridge-friendly multipack,
an innovative packaging idea
developed to boost sales for
the beverage industry, makes
better use of refrigerator
space so consumers can chill
and dispense more cans.
32% Consumer Products
12% Flexible Packaging
18%
billions
+13%
Reynolds
Acquisition
00
Ivex
Acquisition
01
6% Southern Graphic Systems
6% Kama
Revenue Growth
+33%
18% Food Packaging
32%
3%
3%
3.0
2.5
2.0
1.5
1.0
0.5
0.0
20% Closure Systems International
20%
02
6%
6%
3% Protective Packaging
12%
3% Packaging Equipment
Alcoa packaging and
closures are everywhere,
keeping food, beverages,
and other products fresh,
safe, convenient, and
vibrant. We work closely
with customers in these
competitive markets to
develop new ideas that
attract sales and satisfy
consumer needs.
11
Next time you see a semi on
the highway decked out with gleaming
Alcoa wheels, remember – it’s highlighting the total value Alcoa brings to
this market. In the tough business of
commercial transportation every
penny counts. Any savings in weight,
wear and tear, fuel consumption,
or cargo space goes right to the bottom
line. Those shiny aluminum wheels
also extend tire and brake life and
require less maintenance than steel
wheels. That’s why you see so many
of them on the road.
Wheels are only the most visible
part of our commercial transportation
Dan Serafin, Alcoa
Technical Center,
with a truck wiring
harness (below).
business. Today’s truck and trailer
manufacturers use Alcoa electrical
systems, materials, and fasteners for
truck and trailer bodies, and complete
components such as cab doors, trailer
landing gear, engine parts, refrigeration systems, and finished body panels.
Our end-to-end strategy for supplying this market has enabled us to work
more closely with original equipment
manufacturers (OEMs), fleets, and
owner-operators to build integrated
solutions that they need to compete –
not just in trucking, but in marine, rail,
and almost anything else that moves.
Commercial Transportation
A New Genuine Motor
Accessory from HarleyDavidson® is now available:
Detonator™ three-spoke
aluminum wheels (top).
Their rounded “liquid metal”
look is forged by Alcoa.
12
Senior technical specialist
Andrew Hinkle, Sr. and
engineered finishes manager
Luis Fanor Vega (above)
examine the surface of a
trailer interior.
Alcoa Components for
Commercial Transportation
Cab Structure
Roof Sheet
Cab Fasteners
Body Trim
Extrusions
for Skeleton,
Side Posts
Cab Doors
Side Sheet
Chassis Fasteners
Floor, Scuff Plate,
Tread Plate
Wiring Harness
Wheels
Fuel Tanks
Customer Success
Steelcase
SC Transport is the transport
arm of office furniture company Steelcase. Together
they are in the business of
creating great-looking furniture for high-performance
work environments and want
everything to reflect that
image, including their trucks.
Fasteners
Cross Members
Frame Rails
Steelcase, which has been
specifying Alcoa forged aluminum wheels for its fleet
since 1992, turned to Alcoa,
who showed them how Alcoa
wheels can give them the
brightness of chromed wheels
plus other advantages such
as strength, durability, and
truer run for longer tire and
brake life. Alcoa also showed
Wheels
and ensure that Steelcase’s
fleet looks great...and they
require a lot less work to keep
that great appearance. Now
Steelcase, like thousands of
industry professionals across
the U.S. and Europe, says,
“With Alcoa Dura-Bright
wheels there’s absolutely no
polishing. The wheels look
bright and stay that way.”
how its wheels saved weight,
allowing room for more payloads, especially on backhauls.
Now, through continuing
use of technologies to develop
customer solutions, Alcoa
has introduced Dura-Bright®
wheels to Steelcase. They
save labor costs and downtime; protect the wheels from
oxidation and corrosion;
13
Whether it’s the coziness of
a cottage, the sturdiness of a home,
or the soaring sculpture of a modern
office tower, industry professionals
understand their reputations ride
on every project they complete.
That’s why they count on Alcoa
building solutions to add protection,
strength, beauty, and endurance to
every environment.
We support homeowners, contractors, and architects with recognized
Alcoa and Mastic® brand
home exterior products
(below) get to contractors
and homeowners when and
where they’re needed thanks
to Alcoa’s close relationship
with wholesale distributors
like Ted Lansing
Corporation (right).
brands like Alcoa®, Alumax®, Mastic®,
Reynobond®, Reynolux®, and others.
Our solutions encompass a variety
of materials – aluminum, vinyl, and
state-of-the-art composites. They
include everything from siding to trim
to curtain walls for office buildings.
Whatever the project, customers
count on Alcoa’s history of innovation
and expertise at fit and finish when
they’re using architecture to make a
statement, make a sale, or just make
people feel at home.
Ted Lansing Corporation
Building and Construction
Customer Success
Ted Lansing
Corporation
In 2002, Alcoa Home
Exteriors, Inc. (formerly Alcoa
Building Products) began to
transform its supply chain
through its “Connect The
Customer” program. More
14
than 160 customers, including Ted Lansing Corporation,
the nation’s leading independent wholesale distributor
of exterior building products,
with 47 warehouses in 15
states, literally have been
connected to Alcoa Home
Exteriors where they tap into
company-based market
support and explore flexible
shipping options, ensuring
we make what customers
want, in the quantity they
need…all for the best value.
Typical results for customers have been an increase
in sales volume, inventory
turn increases from 6 to at
least 12 within the first six
Our products add longlasting, low-maintenance
beauty to homes like this
one on Sanibel Island, Florida
(below), finished in Mastic®
Premium Siding by Alcoa.
Alcoa engineered the
curtain wall of Amsterdam’s
Oval Tower office building
(left) for fast installation
and easy glazing, even in
bad weather.
months, and a wider breadth
of product offerings. For
companies like Ted Lansing
Corporation, this connection
to Alcoa strengthens their
relationship throughout
the entire channel – from
distributor to contractor to
homeowner.
The five-star Lowry Hotel
in Salford, U.K. (above)
features Alcoa’s new 1600
Curtain Wall ™ – a prefab
system that installs quickly
and offers superior thermal
performance.
15
Though Alcoa’s breadth of
mining, refining, and smelting assets
are unrivaled anywhere in the world,
the company continues to improve
its position on the global cost curve
and ensure it moves toward its
top-quintile performance goal on
return on capital.
Our smelting operations are doing
this by closing high-cost capacity,
improving the performance of existing
capacity via the Alcoa Business System,
and by adding new, lower-cost capacity
– either through greenfield or brownfield projects or via acquisition.
Clarendon, Jamaica: plant
supervisor James Williams
(below) surveys bauxite
operations.
In 2002, we reduced smelting
capacity at high-cost facilities in the
U.S.; finalized plans to build the
322,000-metric-ton-per-year (mtpy)
Fjar∂aál aluminum facility in Eastern
Iceland (Fjar∂aál means aluminum of
the fjords), which is being designed as
the most environmentally friendly
aluminum production facility in the
world. We also announced major
investments in our Canadian BaieComeau facility that will dramatically
reduce costs, and we made significant
Aluminum and Alumina
Bunbury, Australia: another
vessel loaded with alumina
about to head for the world
market (above right).
Alcoa Worldwide:
9 Refineries
28 Smelters
Refinery
Smelter
Stand-alone
bauxite mine
16
progress with the Aluminum
Corporation of China Ltd., or
Chalco, in forming a 50/50 joint
venture at Chalco’s facility at
Pingguo. This facility is one of the
most efficient alumina and aluminum
production facilities in China, the
fastest-growing aluminum market
in the world.
The company also took steps to
strengthen its mining and refining
operations. At Jamalco, our Jamaican
refining joint venture, capacity will
be expanded by 25%, which, teamed
Deschambault, Quebec,
Canada: smelter operator
Simon Perron (top).
with the government removal of a
28-year-old levy on bauxite, will
reduce costs by approximately 30%.
And in Suriname, an agreement with
the government and our local partner
will allow for an increase in bauxite
refining capacity, studies for new
mining and refinery operations, and
possible hydroelectric and smelting
opportunities in the future.
Iceland: conceptual drawing
of Fjar∂aál (aluminum of
the fjords), Alcoa’s first new
smelter in 20 years. This
ultraclean, hydropowered
facility will be completed in
2007 (bottom left).
Alcoa, Tennessee: aluminum
ingots (above) ready to be
rolled into can sheet.
17
News 2002
Acquisitions
Divestitures
• Alcoa acquired Chicago-based Ivex
Packaging Corp., allowing it to enter
the thermoformed plastics and plastic
extrusions markets.
• Alcoa completed the acquisition
of Fairchild Fasteners from The Fairchild Corp., combining it with Huck
Fasteners to form Alcoa Fastening
Systems. The combination of these
premier fastening system companies
further extends Alcoa’s technical
depth and product breadth in the
aerospace market.
• Alcoa’s Baton Rouge, LA 665,000mtpy petroleum coke calcining plant
was sold to Great Lakes Carbon
Corp.
• Alcoa World Alumina and
Chemicals, a global alliance between
Alcoa and Alumina Ltd. (successor to
WMC Ltd.), sold its idled St. Croix
alumina facility to the St. Croix
Renaissance Group LLC.
ABS
World-Class Quality
Mauricio Alvarado, Torrance, California, USA
• Alcoa completed its acquisition of
the aluminum extrusion assets of
Dooray Air Metal Co. Ltd. in Changwon, S. Korea – the only facility in
S. Korea able to produce aerospace
hard-alloy extrusion products.
• Alcoa raised its equity in Shibazaki
Seisakusho Ltd., a leader in the
Japanese closures market, from
50.5% to 95.9%.
• Alcoa Fujikura Ltd. (AFL) became
sole owner of Engineered Plastic
Components, Inc., a supplier of automotive precision-molded components
and assemblies, acquiring the 50%
equity stake previously held by
Plastics Management, Inc.
• Alcoa Home Exteriors, Inc. acquired
Richwood Building Products, Inc.
of Kentucky, a manufacturer of injection-molded functional siding accessories and designer accent products.
18
By applying ABS principles,
using select tapping and
a special metal flow, Alcoa’s
Poços de Caldas plant in
Brazil avoided new investment
while achieving higher quality
ingots. High-purity molten
metal now flows directly
from the crucible to the ingot
machine, lowering its exposure to contaminants and
reducing production time. To increase
sales of high-margin products and
use available capacity, the facility
also produced billets that achieve
international quality standards.
Lucineia Costa do Prado, Itajuba, Brazil
Vivek Khanna and Deborah Corbeil, Livonia,
Michigan, USA
Advancing on Two Fronts
Alcoa Consumer Products moved
ahead with ABS implementation
in manufacturing and other areas.
A new warehousing and delivery
model provides pull replenishment
from central distribution centers
to customer-centric warehouses,
reducing inventories at both sites by
one-third from the prior system. In
the display shipper area, the team
lowered production costs, simplified
shipping, and reduced forecasting
process time and order lead-time
requirements.
Record-Setting Ways
Alcoa’s Tennessee Operations
achieved record improvement
toward critical business objectives.
The Total Recordable Injury
Frequency Rate was reduced by
39%, while the quality incident rate
was reduced by 10.3%. Return on
capital improved 48% and delivery
performance stood at 99.4% at
year-end 2002. Manufacturing gains
included 74 million pounds of additional capacity in the ingot plant;
a 14% productivity improvement
at the hot mill; a 12% productivity
improvement at the continuous
cold mill; and an 83% productivity
improvement at the slitter. The technical organization enabled the operations to reduce the number of alloys
produced, while improving overall
product performance in customers’
plants. A majority of the workforce
actively participated in safety activities, generated $18 million in cost
savings ideas, and undertook 196
ABS improvement experiments.
Wheels
of Progress
Arkansas
Donations
In 2000, when
Alcoa donatAlcoa acquired
ed 1,080
the cast auto
acres of land
wheel plant in
for a new
Beloit, WI,
county airit had a defect
port to Saline
rate of more than
County, AR,
1100 parts per
and 51 acres
million (PPM),
and seven
Elvira Montiel Camacho, Acuña, Coahuila, Mexico
excess scrap, made
buildings to
less than 70% of deliveries on time,
Pulaski Technical College for its
and experienced very high employee
planned expansion in the county.
turnover. ABS achieved a remarkable
Total value of the gifts is $5.6 million.
transformation. At year-end 2002,
Community Investing
PPM was zero, scrap was improved
more than 60%, and productivity
Alcoa Foundation celebrated its
had increased more than 60%, with
50th anniversary with ceremonies
100% on-time delivery. The plant
in Pittsburgh and 135 events in Alcoa
environment improved significantly,
communities around the world.
both physically and in worker
Chairman and CEO Alain Belda
engagement. The facility reduced
honored employee community volunpeople turnover 80% and recently
teers, joining some of them in plantwas nominated by the Greater Beloit
ing trees as part
Chamber of Commerce for the
of Alcoa’s
Wisconsin Manufacturer of the
ongoing One
Year Award.
Million Trees
program. Foundation officials
also announced
Community News
a $1.1 million
Social Venture
Win-Win Program
Initiative to
Alcoa Consumer Products is benefithelp nonprofit
ing its Baker’s Choice® baking cup
organizations
business and sight-impaired people
in countries
through the Oak Hill Workshop
where the comprogram in Hartford, CT. Blind
pany operates
workers and others with disabilities
apply business
package cups produced on the secstrategies
ond shift at Alcoa’s Baker’s Choice
to become
Products plant. The Connecticut
financially
Institute for the Blind named the
sustainable.
plant Employer of the Year for 2002.
able development of the area, which
ultimately will benefit all Australians
by bringing the indigenous and
nonindigenous communities closer
together, promoting economic
development, and protecting and
restoring the internationally significant natural and historical features
at Lake Condah. Shorter term, it
aims at improving employment and
education for the indigenous community. Alcoa Foundation assisted
the project with a $25,000 grant.
Customer News
Customers Choose Howmet
Alcoa Howmet Castings entered the
armament market and also strengthened its position in the aircraft
industry. Pratt & Whitney selected
Howmet as the “Day One Source”
of single-crystal, investment-cast air-
Future Vision
Volunteers in China: To mark Alcoa Foundation’s
50th anniversary, Beijing Alcoans pitched in
one blustery day to clean up litter around the
Great Wall.
Alcoa World Alumina Australia
and the Winda-Mara Aboriginal
Corp. undertook a broad-based
effort to improve the welfare
of the Gunditjmara people of the
Lake Condah region in the state of
Victoria. The project seeks sustain-
foils for the F135 propulsion system
that powers the Lockheed Martin
F-35 Joint Strike Fighter. Similarly,
General Electric/Rolls-Royce chose
Howmet to supply airfoils for its
F136 propulsion system, the alternate
19
News 2002
engine for the F-35. Pratt & Whitney
also invited Howmet to participate
in joint engineering activity and produce turbine airfoils for the JSF System Development and Demonstration
program. The company has delivered
initial development castings.
Howmet signed a Memorandum
of Understanding with the Royal
Ordnance Defence Weapons Division
of BAE Systems, plc, of the U.K. to
supply structural titanium castings
for the XM777 Lightweight Towed
Howitzer, a joint program of the U.S.
Marine Corps and U.S. Army. BAE
Systems selected Howmet as the
preferred supplier for the initial phase
of the program. Howmet will begin
production in mid-2003, with
delivery to the Marine Corps scheduled for 2004. Full-rate production
is planned for 2006 to 2010.
Gary Bowman, Alcoa Center, Pennsylvania, USA
Solution Partnering
The Heavy Truck and Specialty
Products Group of AFL Automotive
received a Cost Management
Partnership Award from PACCAR,
Inc., the manufacturer of heavy-duty
Class 8 trucks, for its cost-reduction
ideas. Within the customer-supplier
relationship, AFL was able to
incorporate design changes, which
improved manufacturing to lower
material costs and reduce product
complexity. In addition, General
Motors named AFL its supplier
for power and signal distribution
systems for two new projects.
20
Construction
Brand Gains
Thanks to new developments in technologies
and products and a new
marketing campaign,
Alcoa’s Noblejas and
Arteixo facilities in Spain
are positioning Alcoa’s
Series Alfil® as a leading
brand in the domestic
building and construction
Founding Firefighter: Alcoa Australia’s Tania Conroy, through
market, with a record
Alcoa’s community grant program, helped found the Secret Harbour
25% sales increase over
Volunteer Fire & Rescue Service.
2001. Alfil was the first
Spanish window and
door brand to receive the
BMW continued its shift toward
N mark quality certification from
performance-enhancing
and weightAenor, the national organization govsaving
aluminum
suspension
compoerning quality standards. The Spanish
nents
by
choosing
Alcoa’s
cast
swing
hotel chain Melia selected Alfil for a
arms
for
its
2001
7-series
and
2003
new five-star hotel in Mexico.
5-series sedans. Critical elements
of the suspension system, these comUp and Away with Boeing
ponents must have great strength and
Whenever a new Boeing Delta IV
durability. Alcoa’s unique vacuumlaunch vehicle lifts off, Alcoa
riserless/pressure riserless casting
products are part of the show.
process produces thin-walled castings
Alcoa’s Market Sector Lead Team
with the necessary properties.
approach provided one-stop
The redesigned 2002 Nissan
shopping for all of Boeing’s aluAltima introduced better driving perminum and light alloy needs.
formance and more interior space
Using wide plate, available only
than previous models, thanks in part
from Alcoa, allowed Boeing to
to Alcoa automotive components.
design a single-piece rocket tank
These include an aluminum hood
dome, thus reducing the costs and
and trunk lid, as well as many of the
risks of a multi-piece dome. Boeing
components necessary to reinforce
currently is scheduled to provide
the attachment areas. Alcoa also
Delta IVs for 22 Air Force missions,
supplied the aluminum sheet for the
in addition to commercial launches in
rear suspension cradle. Nissan was
the next few years.
able to increase the car’s exterior by
six inches and its interior space by
Automotive Advances
10%, and add a 3.5L V6 engine
General Motors offers consumers the
option, without increasing weight.
chance to dress up their Hummer H2s
and enhance their performance. By
Bombardier Contract
selecting Alcoa’s forged and polished
Canadian aircraft manufacturer
wheels, buyers match the style and
Bombardier Aerospace and Alcoa
chrome-like appearance of aluminum
signed a multiyear contract covering
with the off-road strength and durastructural components and wing
bility that forged wheels provide for
and fuselage skins for all Bombardier
large aircraft.
regional and business jets. Alcoa
made initial deliveries to Bombardier’s Montreal and Belfast, U.K.
manufacturing locations in January
2003. Based on Alcoa Business
System principles, the agreement
established a new level of supply
chain management and services
between the companies, integrating
Bombardier’s needs with Alcoa’s
products.
Eric Berggren,
Exeter, UK
by Alcoa Aluminio in Brazil, has
invested about $20 million in such
issues in the past four years, achieving
one of the lowest accident rates
among Alcoa refineries and smelters.
Between 1999 and 2002, recordable
incidents decreased from 30 a year
to 8. Implementation of the Alcoa
Business System also contributed to
improving worker safety.
Name Change, New Growth
Waste Recycling Awards
Alcoa Building Products, Inc. now
is Alcoa Home Exteriors, Inc. The
name change reflects the company’s
identity and customer focus as a
color and design solution provider
for homeowners. The business
expanded its customer offerings
by adding cedar-look colors and
textures to the Mastic® premium
brand Quest3® Series vinyl siding
product line.
Portland Aluminium in Australia
received national recognition for
its spent pot lining (SPL) treatment
and fluoride recycling project.
The Banksia Foundation Award –
Australia’s most prestigious environmental honor – recognized the SPL
process’s positive impact on the
global aluminum industry. The Portland project also was the inaugural
winner of the Victorian Premier’s
Business Sustainability Award.
New Closure Openings
Alcoa Closure Systems International
(CSI) Japan opened an export plant in
China to meet Japanese customers’
need for lower-cost closures that meet
strict quality standards. Planned to
meet the needs of major customers,
the plant is the first offshore facility
manufacturing plastic closures exclusively for Japanese beverage consumers. In 2003, more than 20%
of CSI Japan’s total plastic closure
Gabriele
Manente,
Fusina,
Italy
shipments will be produced there.
Alcoa CSI Nepal and Nilkamal
Plastic’s joint-venture closure plant
in Hetauda, Nepal, began shipping
product to major customers in
India and the surrounding region.
EHS News
New
Wastewater
Treatment
Facility
Alcoa’s Harderwijk extrusions
plant in The
Netherlands has a
new wastewater
treatment facility
that represents one
of Alcoa Europe’s
largest investments
in 2002. The facility meets new,
more stringent
discharge limits.
OHSAS
Certification
Alumar received OHSAS (Occupational Health and Safety Assessment
Series) certification 18001/BS 8800
from Oslo-based Det Norske Veritas,
recognizing outstanding management
of worker health and safety issues.
Alumar, a joint venture managed
Making Music: In a project designed to expose
children in communities around its operations
to music and other performing arts, Jamalco
sponsored violin lessons by musicologist Dr. Olive
Lewin and bought instruments for a group of
school children in Hayes, Clarendon. The students
performed at the national concert, Music for
Strings, in the capital city of Kingston. Dr. Lewin
founded and is director of the Jamaican Folk
Singers and the Jamaica Orchestra for Youth.
21
News 2002
Innovation News
Technologies for the Future
Barbara Stevens, Marrinup, Western Australia
Environmental Leader
Alcoa Shanghai has a growing reputation for advanced environmental,
health, and safety (EHS) systems.
In 2001, its first year of participation
in China’s National Health & Safety
Cup Award competition, it was
selected as one of 27 companies in
Shanghai with top-tier performance.
In 2002, the city of Shanghai presented
it as one of 18 regional companies to
be recognized nationally for the
award, and the Minhang Development Zone exempted it from monthly
environmental inspections. The
facility also was the only factory
cited for EHS practices by both the
National Light Industry Association
and the Shanghai Economic Committee, while the Shanghai Electric Co.
asked that Alcoa Shanghai train
its senior managers in health and
safety management systems.
Alcoa continues to use its deep
capabilities in research, development,
and applied engineering to create
and refine new manufacturing technologies and to develop innovative
processes and products.
For years Alcoa has used proprietary design technologies to enable
new alloy and process development.
Today processes are collapsed and
streamlined to their fundamentals –
across businesses ranging from
primary operations to flat-rolled
products to extrusions – to create
innovative solutions which meet
market needs through the development of new end-use applications
for products and services.
Integrated Alcoa teams are working
together to find and capitalize on
material, design, and manufacturing
options that reduce costs and time to
market, while improving overall product and environmental performance.
Estela Nuñez,
Wheaton,
Illinois, USA
New Corporate Goal
Alcoa established a new corporate
recycling usage goal: by 2020, 50%
of its products, except raw ingot sold
directly to others, will be made from
recycled aluminum. Aluminum has
proved itself – 440 million tons of the
680 million tons produced since
1886 are still in use. Among the ways
the company will achieve its goal are
customer scrap buybacks, increased
recycling of aluminum products that
have reached the end of their useful
life, alloy development, and changes
in scrap processing technology.
22
Less Is More
Fridge Pack™, a long, slender paperboard package for aluminum beverage cans, drew rave reviews from
consumers and a 10% rise in sales in
Coca-Cola test markets. Developed
by Alcoa Rigid Packaging and Riverwood International, the new design
fits both crowded refrigerator shelves
and doors, allowing more cans to be
chilled. A unique opening feature
dispenses cans at the front of the box.
Australia has a FridgeMate, European
beverage fillers are testing a version,
and Pepsi-Cola is testing an 8-can
package in the southern U.S.
Huck’s Solutions
Huck Fasteners continued to
introduce products that enhance
the performance of entire assemblies. Huck shaping technology is
incorporated in its new U-Spin™
bolt, which combines the exacting
clamp of a Huckbolt® with a U-bolt
configuration, resulting in speedy
four-at-once capability with precise
equal clamp on each leg. Level loading means superior joint life and no
retightening. Other new solutions
to customer needs include the
BuzzBolt™/ BuzzNut™ and smallerdiameter Huck-Spin® Fasteners.
Ingenious Foil!
Alcoa Consumer Products introduced
the biggest innovation in aluminum
foil since 1947: Reynolds Wrap®
Release® Non-Stick Aluminum Foil,
coated with a proprietary food-safe,
non-stick surface. The Marketing
Intelligence Service, which tracks new
products worldwide, gave the foil its
innovation rating, granted only to
products that offered “breakthrough
features or benefits.” Alcoa has
successfully launched the product
in the U.S. and Canada, as well as
BacoFoil® Release™ Non-Stick
Aluminum Foil in the U.K. In-store
placement of Release in the U.S.
exceeded industry averages, with
89% distribution within eight weeks
of the initial shipment.
Closures for Every Need
Alcoa CSI introduced several new
closures. In Japan, CSI is providing
products that offer higher performance, including AS-Lok® for aseptic
filling, PS-Lok® for hot-fill applications, and in early 2003, GS-Lok®
for carbonated
products. CSI
Japan already
has achieved
conversion
from traditional lined closures of
60% of the Japanese market. Other
CSI introductions include Seal-MAX™
for the U.S. dairy market; a 43mm
Wing-Lok® LT to meet the trend for
easy-open, smaller juice packages;
and Alco-Lok™ for the distilled spirits
and malt beverage markets. CSI also
supplies closures for the first U.S.
wine packaged in a shatter-proof
plastic bottle.
Smelter Sets Record
All aluminum smelters wrestle
with the problem of deteriorating
flue walls, caused by chemicals used
in processing. Using a combination
of research, controlled experimentation, and rigorous maintenance,
the baking furnace team at Alcoa’s
Deschambault, Quebec smelter
continued setting world-class benchmarks. Flue wall life has reached
more than double the normal rate
targeted in the industry. The usual
life of a flue wall is 80 to 100 fire
cycles. A fire cycle is the standard
measure of flue wall age, derived
from the progress of fire exhaust
manifolds through an entire section,
or seven flue walls.
Manisha
Gosalia,
New York,
NY, USA
Jean-Pierre Rapin,
Quebec, Canada
More Tubes in Texas
Alcoa relocated two welded tube production lines, purchased from Scottsboro Aluminum in Alabama, to its
Texarkana, TX plant. The lines manufacture products with diameters from
one-half to two inches and a range of
possible characteristics, including various alloys, gauges, and finishes, for
furniture, recreational, and medical-aid
applications. This product addition
has been well-received by potential
customers, who have shown high
interest and are awaiting qualification
metal. Start up, commissioning, and
customer qualification for Line 1 is
scheduled for April 2003, with Line
2 to follow in May.
First-Class Castings
Alcoa Howmet Castings won the
Investment Castings Institute’s
Castings of the Year contest with its
rudder assembly for an aerospace
application. The one-piece casting
marks a major advance, with
consistent, dimensionally accurate
design that greatly reduces rejection
rates and saves 50 hours in the
assembly process.
Employer of the Year
The Australian National Training
Authority, the country’s leading
vocational education and training
advisory body, named Alcoa
Employer of the Year. The company
was recognized for its commitment
to employees and belief that its
success comes through people,
demonstrated in its partnerships
with local communities and their
education and training institutions.
How
Others
See Us
Boeing Award
for Huck
Huck Fasteners’
Carson Aerospace Fastener
Division shared
Boeing’s
celebration of
the 100th C-17
Globemaster III®
when Boeing recognized Huck’s
long-time contributions as a supplier.
Huck, which has supported the C-17
since 1982, received an award for its
on-time delivery, quality, and relentless commitment to Boeing. There
are approximately 423,000 Huck
titanium threaded pins and 241,000
Huck titanium Huckbolt® Fasteners
and collars in each aircraft.
Beyond Cookies: With an Alcoa Foundation grant,
the Committee of 200 (C200), a group of female
business leaders, is piloting “From Badge to
Business.” The program will involve Alcoa
leaders to encourage Girl Scouts to consider
business careers. Front, l. to r.: Troop Leader
Beth McLeod; Girl Scout Andrea McLeod;
Girl Scout Jazzie Rae Gonzalez. Back, l. to r.:
Alcoa CSI President Sandra Beach Lin; Executive
Director and C200 President Anna Lloyd; Alcoa
Vice President and Alcoa Engineered Products
President Ronee Hagen; Chicago Girl Scouts
Chief Executive Officer Brooke Wiseman.
23
News 2002
Automakers Honor AFL
In 2001, AFL acquired the Siemens
wire harness operations supplying
Volkswagen (VW). In just one year,
AFL won Volkswagen Group’s Entrepreneurial Performance Award. AFL
was recognized at a ceremony in
Europe and again at a ceremony for
its support of VW’s plant in Puebla,
Mexico. All of the awards acknowledged AFL’s seamless integration of
the Siemens business while providing
quality and service improvements.
AFL Brazil won Ford of Brazil’s
Supplier of the Year – 2001 award
in the Electrical Systems category,
recognizing its ability to meet all
Ford release schedules with 100%
delivery performance and a singledigit defect rate. The award
was one of only ten given to either
production or other suppliers.
Honors for Alloys
ASM International®, the global society for materials engineers and scientists, gave Alcoa its 2002 Engineering
Materials Achievement Award for
the development and application of
new aluminum-alloy products for
commercial aircraft that benefit the
industry, consumers, and society as
a whole. The Alcoa alloys provide
airframe manufacturers with greater
strength and better corrosion and
fracture resistance.
Xingyun Shen, Barbara Trewick, and Chris
Devens, Davenport, Iowa, USA
24
Valmir
Cândido
da Silva,
Itapissuma,
Brazil
Joint Packaging Award
The U-PAD packaging system,
developed by Motorola Broadband
Communications Sector, the
Motorola Technology Center, and
Alcoa Flexible Packaging, received
an Ameristar Packaging Award from
the Institute of Packaging Professionals in the electronics category. The
plastic U-PAD cushions use Alcoa’s
patented thermoformed Fragility
Packaging Technology. The recyclable
system is comprised of two hinged
box inserts that provide four protective cells. U-PADs offer superior
cushioning and reduce storage space,
freight costs, and labor.
Spotlight on Alcoans
• The London Metal Exchange
(LME), the world’s largest nonferrous
metals exchange, selected Executive
VP John Pizzey as its new chairman,
effective in 2003. His appointment
is a change for the LME, since he
comes from the metal producing
side. “Change is good, because it can
encourage the LME board to think
about new ideas and take a fresh
look at older ones,” he said.
• Executive VP Barbara Jeremiah,
featured in a Daily Deal newsletter “Corporate Dealmaker”
article, and VP Hamish Petrie,
in HR Executive magazine, told
the business community about
their areas of expertise. Barbara is
in charge of mergers, acquisitions,
and divestitures – activities at
the forefront of Alcoa’s recent
growth. Hamish explained
Alcoa’s executive compensation
program and its strong link to “the
corporate Values.”
• Alcoa VP Bill O’Rourke told
Occupational Hazards magazine
that Alcoans are very serious about
attaining the company goal of zero
injuries. He noted that 78% of
Alcoa’s locations didn’t have a lost
workday in 2002. The magazine
named Alcoa one of America’s safest
companies.
Juan
Francisco
Zuluaga
Olivares,
Amorbieta,
Spain
• Cover stories in two very different
trade publications featured ways that
Alcoans are boosting productivity
and reducing costs. Purchasing magazine highlighted purchasing executive
Christie Breves and Alcoa Business
Support Services, focusing on ways
the people, processes, and technology
have been pulled together to reduce
procurement costs. Howmet Castings
was featured in Aviation Week &
Space Technology magazine for its
use of process improvement techniques to boost yields.
• “Alcoa has its sights on becoming
one of the world’s top ten packaging
companies,” said Executive VP Bill
Leahey. He was interviewed for an
article in Metal Bulletin Monthly.
• In a Pittsburgh Business Times
newspaper article, Alcoa Home
Exteriors President Gary Acinapura
described new marketing efforts
designed to grow the business by
making it more consumer-oriented.
■
DATA
Financial and
Corporate
26 Trends in Alcoa’s
Major Markets
28 Selected Financial Data
29 Management’s
Discussion and Analysis
42 Management’s Report
42 Independent
Accountant’s Report
43 Consolidated
Financial Statements
47 Notes to
Financial Statements
63 Supplemental
Financial Information
64 11-Year Financial Data
66 Directors
67 Officers
68 Shareholder
Information
Isabel Summe, Alcoa Center, Pennsylvania, USA
25
Trends
in Major
Markets
Aerospace
Automotive
7.4% $1.5 billion
13.3% $2.7 billion
Packaging and
Consumer
24.7% $5.0 billion
Alcoa segments that sell
products to this market: FlatRolled Products, Engineered
Products, Other
Alcoa segments that sell
products to this market: FlatRolled Products, Engineered
Products, Other
Alcoa segments that sell
products to this market: FlatRolled Products, Packaging
and Consumer
• Alcoa aerospace products
are widely used in the manufacturing of aircraft and
aircraft engines, including
high-technology airfoils for jet
engines, fastening systems,
and advanced alloys for the
fuselage, wings, landing gear,
and wheels. Aerospace products are also serving defense
and space applications.
• Metallics make up approximately 90% of large commercial aircraft weight, and this is
projected to remain constant
as new advanced alloys in
production and under development will ensure Alcoa’s
competitiveness by delivering
materials and solutions to
aircraft designers and manufacturers at less weight
and cost.
• The overall metallic market
for commercial aircraft continues to grow and is expected
to reach nearly $10 billion
by 2010, consistent with the
increased forecast demand
for passenger aircraft.
• Alcoa revenues in this market
come from a range of products
for automotive applications;
from chassis, suspension and
drivetrain components to body
structures and wheels; and
electrical distribution systems.
• Since 1990 in the U.S. the use
of aluminum has doubled in
cars and has tripled in sportutility vehicles, light trucks,
and vans. The U.S. trend
toward SUVs and light trucks
continues, now exceeding half
of total production. Aluminum
Association, Alcoa
• Aluminum use in automobiles
is forecast to increase in
North America from 258 lbs.
per vehicle in 2000 (274 lbs.
in 2002) to 318 lbs. by 2010;
in Europe from 196 lbs. to
268 lbs.; and in Japan from
196 lbs. to 263 lbs. The worldwide average is expected to
grow from 225 lbs. to 287 lbs.,
with continued growth expected
in closures, chassis/suspension
systems, and wheels, where
Alcoa is well positioned. Ducker
• Alcoa’s packaging and
consumer product revenues
are primarily from sales of
beverage can sheet, bottle
closures, flexible packaging,
graphic products, plastic
film/sheet, plastic food packaging and consumer products
including Reynolds Wrap® and
other Reynolds® products.
• Reynolds® products are in more
than 90% of U.S. households.
• U.S. grocery store sales rose
1.5% in 2002 to $432 billion.
U.S. Census
• Noncarbonated soft drinks are
the fastest-growing beverage
market, with bottled water
increasing 26% per year for
the last five years.
• Growth in U.S. PET, which
is used in plastic food and
beverage containers, grew
more than 35% in 2002. Alcoa
Closure Systems International
is a leading supplier of closures
to this market globally.
Large Commercial Aircraft Demand
100+ passengers
North American
Light Vehicle
Aluminum
Content
lbs. per vehicle
Aluminum
Consumption
for Beverage
Cans
billions of lbs.
1000
800
300
250
200
600
150
400
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
200
100
0
50
Source: Various market contributors
Aerospace
Metallic
Market
Large
Commercial
Aircraft
$ billions
Source: Ducker
10
8
98 99 00 01 02 0
North American
Light Truck &
Auto Sales
millions
20
15
Pacific
Middle East
& Africa
Europe
Latin America
& Mexico
U.S. & Canada
Source: CRU Alcoa
9
6
3
98 99 00 01 02
Growth in
U.S. PET
Consumption
millions of units
15,000
12,000
6
9,000
4
10
6,000
2
5
3,000
0
Source: Various
market contributors
26
1992 2000 2010
Source: DRI
98 99 00 01 02
Source: Container
Consulting
98 99 00 01 02
Commercial
Transportation
Building and
Construction
Aluminum and
Alumina
Industrial Products
and Other
4.4% $0.9 billion
10.8% $2.2 billion
24.6% $5.0 billion
14.8% $3.0 billion
Alcoa segments that sell
products to this market: FlatRolled Products, Engineered
Products, Other
Alcoa segments that sell
products to this market: FlatRolled Products, Engineered
Products, Other
Alcoa segments that sell
products to this market:
Primary Metals, Alumina
and Chemicals
Alcoa segments that sell
products to this market: FlatRolled Products, Engineered
Products, Other
• Alcoa revenues in this market
come from sales of aluminum
sheet, extrusions, and components such as fasteners, wire
harnesses, and wheels for
medium/heavy-duty trucks
and trailers; and buses, boats,
motorcycles, etc.
• In North America, heavy truck
build rates rose 28%, assisted
by new engine regulations,
while trailer production fell 4%.
Trailer build-rate growth is
expected to surpass truck
increases through 2003.
• The trucking industry continues
to manage the payload/fuel
efficiency equation. Compared
to steel dual wheels, a tractor/
trailer outfitted with Alcoa aluminum duals can boost a payload up to 641 lbs. (290.65 kg).
Payload increases with Alcoa
wide-base wheels reach as
much as 1,353 lbs. (613.77 kg).
• OEMs are demonstrating
interest in outsourcing, a trend
expected to increase. Alcoa
Fujikura Ltd. offers simplified
solutions to assist OEMs with
their assembly initiatives.
• Alcoa’s revenues in this market
are from an array of fabricated
aluminum products for commercial and residential applications, as well as vinyl extrusions
and injection moldings for new
homes and remodeling.
• Low mortgage rates in the
U.S. spurred record highs for
housing starts, which were up
6.4% over 2001, and for new
home sales, rising 7.5%. U.S.
Commerce Dept., National
Association of Home Builders
• Home improvement expenditures in the U.S. have grown
at an average rate of 6% over
the last 4 years. U.S. Census
• U.S. new nonresidential construction declined 18% in the
midst of economic uncertainty
and corporate reductions in
fixed investments. In Europe,
new nonresidential construction experienced only a slight
decline, as growth in Italy, U.K.,
and Spain outweighed declines
in Germany and France. U.S.
Census, Euroconstruct
• Alcoa is the world’s largest
producer of alumina, a powdery
oxide of aluminum refined
from bauxite ore and used to
produce aluminum and aluminabased chemicals. Alcoa’s
2002 alumina production rose
4% to over 13 million metric
tons. In 2002, 55% of Alcoa
World Alumina and Chemicals’
refinery production was supplied to outside customers.
• Aluminum ingot is an internationally produced, priced,
and traded commodity whose
principal trading market is
the London Metal Exchange,
or LME.
• Worldwide primary aluminum
capacity in 2002 was estimated
at 28.8 million mtpy, of which
7% was idle. CRU
• Alcoa’s worldwide primary aluminum capacity is estimated
at 3.9 million mtpy, of which
11% is idle. During 2002,
Alcoa permanently closed less
competitive, idle capacity at
smelters in Oregon and Texas
and reduced production in
North Carolina.
• Alcoa’s revenues from this market include sales of aluminum
sheet, plate, and extrusions
to distributors and sales
of products and services for
telecommunications and
power generation.
• In 2002, U.S. aluminum sales
through distributors reversed
a downward move and grew
by 2%, a trend that is expected
to continue. NAAD
• Projected build rates for heavyduty gas turbines in the U.S.
and Europe could drop as
much as approximately 60%
through 2004, primarily due
to power plant overcapacity.
General Electric, Siemens
Power Generation
North American
Heavy Truck
Production
thousands
U.S. Repair & Improvement
Expenditures
billions of dollars
Worldwide Aluminum Ingot Inventory
millions of metric tons
North American
Telecommunications Capital
Expenditures
billions of dollars
350
300
170
2,500
250
2,000
150
100
80
60
1,500
200
1,000
130
150
500
110
100
40
0
93 94 95 96 97 98 99 00 01 02
93 94 95 96 97 98 99 00 01 02
20
50
Source: ACT Research
Producers
98 99 00 01 02
Aluminum
Wheel
Penetration in
Heavy-Duty
Trucks
percent
Source: U.S. Census
60
50
40
30
20
North America
Western Europe
Japan
Source: Alcoa
10
0
98 99 00 01 02
Source: RHK, Inc.
Source: LME, IPAI
New
Nonresidential
Construction
Annual Growth
Rates
percent
10
5
0
Western
World Alumina
Demand
millions of
metric tons
50
40
30
-5
U.S. New
Nonresidential
Construction
-10
-15
Europe New
Nonresidential
Construction
Source: U.S. Census,
Euroconstruct
LME Warehouse
-20
98 99 00 01 02
Total imports into
CIS and China
Nonmetallurgical
alumina
Smelter-grade
alumina
Source: CRU
20
10
98 99 00 01 02
27
98 99 00 01 02
Selected Financial Data
(in millions, except per-share amounts and ingot prices)
2002
Sales
Income from continuing operations
(Loss) income from discontinued operations
Cumulative effect of accounting change
Net income
Earnings (loss) per share:
Basic:
Income from continuing operations
(Loss) income from discontinued operations
Cumulative effect of accounting change
Net income
Diluted:
Income from continuing operations
(Loss) income from discontinued operations
Cumulative effect of accounting change
Net income
Alcoa’s average realized price per pound for
aluminum ingot
LME average 3-month price per pound for
aluminum ingot
Cash dividends paid per common share
Total assets
Short-term borrowings
Long-term debt
2001
2000
1999
1998
$20,263
498
(112)
34
420
$22,497
907
1
—
908
$22,659
1,477
12
(5)
1,484
$16,133
1,048
6
—
1,054
$15,259
848
5
—
853
.59
(.13)
.04
1.06
—
—
1.81
.02
(.01)
1.42
.01
—
1.21
.01
—
.50
1.06
1.82
1.43
1.22
.58
(.13)
.04
1.05
—
—
1.79
.02
(.01)
1.40
.01
—
1.20
.01
—
.49
1.05
1.80
1.41
1.21
.66
.72
.77
.67
.67
.62
.66
.71
.63
.63
.600
29,810
37
8,450
.600
28,355
162
6,486
.500
31,691
2,715
5,408
.403
17,066
340
2,718
.375
17,463
431
3,051
The financial information for all prior periods has been reclassified to reflect assets held for sale and discontinued operations.
See Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Notes to the Consolidated Financial Statements
for a discussion of special items, the adoption of new accounting standards, goodwill impairment, and discontinued operations that impacted net income
in 2002 and special items, gains on asset sales, and various charges to cost of goods sold and selling and general administrative expenses that impacted
net income in 2001. In 2000, net income includes the cumulative effect of accounting change for revenue recognition.
Dividends Paid per Common Share
Alcoa’s Average Realized
Price per Pound for Ingot
dollars
cents per pound
0.500
0.375
0.125
0.403
0.028
0.375
0.500
99
00
0.600
0.600
0.100
0.600
0.77
Variable
0.67
0.67
98
99
0.72
0.66
0.500
Base
0.250
98
01
02
28
00
01
02
Management’s Discussion and
Analysis of Financial Condition
and Results of Operations
(dollars in millions, except per-share amounts and ingot prices;
shipments in thousands of metric tons [mt])
Certain statements in this report under this caption and elsewhere
relate to future events and expectations and, as such, constitute
forward-looking statements. Forward-looking statements also
include those containing such words as ‘‘anticipates,’’ ‘‘believes,’’
‘‘estimates,’’ ‘‘expects,’’ ‘‘hopes,’’ ‘‘targets,’’ ‘‘should,’’ ‘‘will,’’
‘‘will likely result,’’ ‘‘forecast,’’ ‘‘outlook,’’ ‘‘projects,’’ or similar
expressions. Such forward-looking statements involve known and
unknown risks, uncertainties, and other factors that may cause
actual results, performance, or achievements of Alcoa to be different
from those expressed or implied in the forward-looking statements.
For discussion of some of the specific factors that may cause
such a difference, see Notes L and W to the Consolidated Financial
Statements and the disclosures included below under Segment
Information and Market Risks.
Alcoa is the world’s leading producer of primary aluminum,
fabricated aluminum, and alumina, and is active in all major
aspects of the industry: technology, mining, refining, smelting,
fabricating, and recycling. Aluminum is a commodity that is traded
on the London Metal Exchange (LME) and priced daily based
on market supply and demand. Aluminum and alumina represent
approximately two-thirds of Alcoa’s revenues, and the price of
aluminum influences the operating results of Alcoa. Nonaluminum
products include precision castings, industrial fasteners, vinyl siding,
consumer products, food service and flexible packaging products,
plastic closures, fiber-optic cables, and electrical distribution
systems for cars and trucks.
Alcoa is a global company operating in 39 countries. North
America is the largest market with 67% of Alcoa’s revenues.
Europe is also a significant market with 21% of the company’s
revenues. Alcoa also has investments and activities in Asia and
Latin America, which present opportunities for substantial
growth, particularly in Brazil, China, and Korea. Governmental
policies and other economic factors, including inflation and
fluctuations in foreign currency exchange rates and interest rates,
affect the results of operations in these emerging markets.
and restructuring initiatives; lower costs recognized in 2002 for
contract losses, customer claims and bad debts; the favorable
impact in 2002 of ceasing amortization of goodwill and recording
cumulative effect income for the change in accounting for
goodwill; lower restructuring charges recognized in 2002 compared
with 2001; and lower minority interests’ share of earnings. See
the discussion that follows for additional details on the results
of operations.
During the fourth quarter of 2002, Alcoa performed a portfolio
review of its businesses and the markets they serve. As a result of
this review, Alcoa committed to a plan to divest certain noncore
businesses that do not meet internal growth and return measures.
Certain of the businesses to be divested were classified as discontinued operations and a $78 (after tax and minority interests)
impairment charge was recorded to reduce the carrying value
of these businesses to their estimated fair value less costs to sell.
These businesses include Alcoa’s commodity automotive fasteners
business, certain fabricating businesses serving the residential
building and construction market in North America, and a
packaging business in South America. Alcoa also intends to divest
the protective packaging business of Ivex Packaging Corporation
(Ivex), as this line of business does not meet future growth plans
of the company.
Certain other businesses to be divested were classified as
assets held for sale due to management’s belief that Alcoa may
enter into supply agreements in connection with the sale of these
businesses. Alcoa recorded a loss of $143 (after tax and minority
interests) in special items, representing the impairment charge
to reduce these businesses to their estimated fair value less costs
to sell. These businesses include certain architectural products
businesses in North America, certain fabricating and packaging
operations in South America, and foil facilities in St. Louis, MO
and Russellville, AR.
The financial information of all prior periods has been
reclassified to reflect these businesses as assets held for sale and/or
discontinued operations. See Note B to the Consolidated Financial
Statements for further information.
Net Income and LME Average Price
1,484
Results of Operations
1,054
Earnings Summary
Alcoa’s net income for 2002 was $420, or $0.49 per diluted share,
compared with $908, or $1.05 per share, in 2001. The decline in
net income is primarily due to lower realized prices for alumina
and aluminum; lower volumes in businesses serving the aerospace,
commercial building and construction, telecommunications, and
industrial gas turbine markets; power sales that were recognized
in 2001; a goodwill impairment charge; lower gains on sales of
assets and lower equity income in 2002; and losses recognized on
discontinued operations in 2002. Partially offsetting these declines
were benefits resulting from continued focus on cost savings
Net Income
908
853
LME
0.71
0.63
0.63
98
99
420
0.66
0.62
00
01
02
29
Alcoa’s net income for 2001 was $908, or $1.05 per diluted
share, compared with $1,484, or $1.80 per share, in 2000. Net
income in 2001 included special after-tax charges of $355 related
to the strategic restructuring of Alcoa’s primary and fabricating
businesses to optimize assets and lower costs. Results for 2001
were also negatively affected by lower realized prices and lower
volumes due to weak market conditions in the transportation,
building and construction, and distribution markets. Also impacting
earnings in 2001 were costs incurred for contract losses, customer
claims, and bad debts. These negative factors were partially offset
by cost savings and gains on the sales of businesses. In 2001, Alcoa
announced a goal to reduce costs by $1,000 by December 2003.
Return on average shareholders’ equity for 2002 was 4.1%
compared with 8.3% in 2001 and 16.8% in 2000. The decrease in
2002 was primarily due to lower earnings, as discussed above. The
decrease in 2001 was due to the earnings decline mentioned above
and a larger average number of shares outstanding during the
period primarily resulting from the Reynolds acquisition in 2000.
Sales — Sales in 2002 were $20,263 compared with sales of
$22,497 in 2001. The 10% decline in sales was primarily due to
lower volumes in downstream businesses serving the aerospace,
commercial building and construction, telecommunications, and
industrial gas turbine markets; lower realized prices for alumina
and aluminum; the lack of power sales in 2002 that were recognized in 2001; the divestiture of Thiokol Propulsion (Thiokol)
in 2001; and the contribution of the net assets of Reynolds’ metals
distribution business (RASCO) in 2001 to a joint venture, Integris
Metals, Inc. (Integris), in which Alcoa retained a 50% equity
interest. These decreases were somewhat offset by increased
volumes in businesses serving the automotive and commercial
transportation markets, increased volumes in the alumina and
primary metals businesses, and the acquisitions of Ivex and several
smaller businesses.
Sales in 2001 of $22,497 were essentially flat compared with
sales of $22,659 in 2000. The positive impact in 2001 of the
full year’s results of the Reynolds and Cordant acquisitions made
in 2000 was offset by lower realized prices for alumina and
aluminum, lower volumes, and the sale of Thiokol.
Cost of Goods Sold — COGS as a percentage of sales was 80.2%
in 2002 compared with 78% in 2001. The increase in the percentage
in 2002 was primarily due to lower realized prices, the lack of
significant power sales in 2002, and lower volumes. These unfavorable impacts were somewhat offset by ongoing cost reductions
generated by productivity and purchasing cost savings and a higher
LIFO benefit of $38 in 2002 as a result of a reduction in inventories
and lower purchased material costs.
COGS as a percentage of sales was 78% in 2001 compared
with 75.5% in 2000. The increase in the percentage was primarily
due to lower realized prices, lower volumes, and a full year’s
impact of the higher cost of sales ratios of the acquired Reynolds
and Cordant businesses. Additionally, COGS was impacted by
a pretax charge of $56 for contract losses, customer claims, and
the power failure at the company’s Warrick, IN smelter. Partially
offsetting these negative factors were cost savings and operating
improvements.
Selling and General Administrative Expenses — S&GA
expenses were $1,147, or 5.7% of sales, in 2002 compared with
S&GA expenses of $1,256, or 5.6% of sales, in 2001, resulting
in a decrease of $109. The 9% decrease in S&GA expenses in 2002
was primarily due to lower bad debt expense, bad debt recoveries,
and lower employee compensation costs.
S&GA expenses in 2001 increased to $1,256 compared with
S&GA expenses of $1,088, or 4.8% of sales, in 2000. The increase
in S&GA expenses in 2001 was primarily due to customer bad
debt write-offs of $78 and the full-year impact of the acquisitions
of Reynolds and Cordant.
Selling and General
Administrative Expenses
millions of dollars
1,256
1,147
1,088
779
831
Revenues by Market
billions of dollars
15.3
0.7
1.1
1.7
1.9
2.8
16.1
1.2
0.9
2.0
1.9
2.9
3.8
4.0
3.3
3.2
98
99
22.7
1.1
1.4
2.4
22.5
0.8
2.0
2.5
2.4
2.5
5.0
4.3
20.3
0.9
1.5
2.2
2.7
Commercial Transportation
Aerospace
Building and Construction
Automotive
3.1
Industrial Products and Other
5.8
5.4
4.9
Aluminum and Alumina
4.6
5.0
5.0
Packaging and
Consumer
00
01
02
30
98
99
00
01
02
Research and Development Expenses — R&D expenses
were $214 in 2002 compared with $203 in 2001 and $194 in 2000.
The increases were primarily due to increases in spending in the
Primary Metals segment related to inert anode technology. The
full-year impact in 2001 of acquisitions made in 2000 also contributed to the increase in R&D expenses in 2001 compared with 2000.
Provision for Depreciation, Depletion, and Amortization —
The provision for depreciation, depletion, and amortization was
$1,108 in 2002 compared with $1,234 in 2001. The 10% decrease
was primarily the result of ceasing amortization of goodwill in
2002 under the provisions of Statement of Financial Accounting
Standards (SFAS) No. 142, ‘‘Goodwill and Other Intangible Assets.’’
The elimination of goodwill amortization expense of $171 in 2002
was partly offset by increases in depreciation and amortization
expense related to acquisitions in 2002.
The provision for depreciation, depletion, and amortization was
$1,234 in 2001 compared with $1,199 in 2000. The 3% increase
was primarily due to the full-year impact of the Reynolds and
Cordant acquisitions.
Impairment of Goodwill — In the fourth quarter of 2002,
Alcoa recorded an impairment charge of $44 for goodwill associated with its operations serving the telecommunications market.
Alcoa’s telecommunications business experienced lower than
expected operating profits and cash flows in the second half of
2002. As a result of this trend and the overall industry expectations, the projected operating profits and cash flows for the
telecommunications business were reduced for the next five years.
The projected decline in cash flows resulted in the recognition
of the $44 impairment loss.
Special Items — Special items of $407 were recognized in 2002
compared with $565 in 2001. During 2002, Alcoa recorded special
charges of $407 ($261 after tax and minority interests) for restructurings, consisting of charges of $39 ($23 after tax and minority
interests) in the third quarter of 2002 and charges of $368 ($238
after tax and minority interests) in the fourth quarter of 2002.
The third quarter special charge of $39 was primarily the result
of the curtailment of aluminum production at three smelters.
Alcoa temporarily curtailed aluminum production at its Badin, NC
plant and permanently closed its Troutdale, OR plant as well as
approximately 25% of the capacity at its Rockdale, TX facility. The
remaining carrying value and results of operations related to these
facilities were not material. The fourth quarter special charge of
$368 was primarily the result of restructuring operations for those
businesses experiencing negligible growth due to continued market
declines as well as the decision to divest certain businesses that
have failed to meet internal growth and return measures. Of the
total special charge of $368, $154 ($95 after tax and minority
interests) was related to the restructuring of operations of
businesses serving the aerospace, automotive, and industrial gas
turbine markets, and in the U.S. smelting system. The remaining
$214 ($143 after tax and minority interests) of the total special
charge of $368 was related to impairment charges on businesses
to be divested, comprised of certain architectural products
businesses in North America, certain fabricating and packaging
operations in South America, and foil facilities in St. Louis, MO
and Russellville, AR.
The 2002 charges were comprised of asset write-downs of
$278, consisting of $136 of goodwill on businesses to be divested,
as well as $142 for structures, machinery, and equipment; employee
termination and severance costs of $105 related to approximately
8,500 salaried and hourly employees at over 70 locations, primarily
in Mexico, Europe, and the U.S.; and exit costs, including environmental, demolition, and lease termination costs, of $31. Special
charges in 2002 were not recorded in the segment results. The
impact to the segments would have been a pretax charge of $3 in
Alumina and Chemicals, $64 in Primary Metals, $65 in Flat-Rolled
Products, $199 in Engineered Products, $46 in Packaging and
Consumer, and $28 in the Other group.
Alcoa expects to substantially complete all actions relative to
the 2002 restructuring charges by the end of 2003. Cost savings
associated with lower employee and other costs are anticipated to
be approximately $75 to $100 in 2003 and $125 to $150 in 2004.
Cost savings associated with suspending depreciation on these
assets are expected to be approximately $35 in 2003.
During 2001, Alcoa recorded charges of $565 ($355 after tax
and minority interests) as a result of a restructuring plan based on
a strategic review of the company’s primary products and fabricating businesses aimed at optimizing and aligning its manufacturing
systems with customer needs, while positioning the company
for stronger profitability. The charge of $565 consisted of a charge
of $212 ($114 after tax and minority interests) in the second
quarter of 2001 and a charge of $353 ($241 after tax and minority
interests) in the fourth quarter of 2001. The second quarter charge
was primarily due to actions taken in Alcoa’s primary products
businesses because of economic and competitive conditions. These
actions included the shutdown of three facilities in the U.S. The
fourth quarter charge was primarily due to actions taken in Alcoa’s
fabricating businesses. These actions included the shutdown
of 15 facilities in the U.S. and Europe.
The 2001 special charges consisted of asset write-downs of
$371, employee termination and severance costs of $178 related
to workforce reductions of approximately 10,400 employees,
and other exit costs of $16 related to the shutdown of facilities.
These charges were not recorded in the segment results. The
impact to the segments would have been a pretax charge of $94
in Alumina and Chemicals, $157 in Primary Metals, $105 in
Flat-Rolled Products, $126 in Engineered Products, and $63 in
the Other group.
During 2002, various adjustments were recorded to the 2001
restructuring program reserves. Additional restructuring charges
of $18 were recorded for additional asset impairments related to
the 2001 restructuring plan and for additional employee termination
and severance costs, primarily related to additional severance costs
not accruable in 2001 for layoffs of approximately 250 salaried
and hourly employees, primarily in Europe and Mexico. Also,
reversals of restructuring reserves of $32 were recorded due to
changes in estimates of liabilities resulting from lower than expected
costs associated with certain plant shutdowns and disposals.
As of December 31, 2002, approximately 9,200 of the 10,650
employees associated with the 2001 restructuring program
had been terminated. The remaining reserve balance associated
with the 2001 restructuring program was approximately $130
at December 31, 2002. This reserve consisted primarily of asset
31
write-down costs of $60 and employee termination and severance
costs of $70. These reserves are for ongoing site remediation
work and employee layoff costs that primarily consist of monthly
payments made over an extended period.
Interest Expense — Interest expense was $350 in 2002 compared
with $371 in 2001. The 6% decrease in 2002 was primarily due
to lower average effective interest rates, partially offset by higher
borrowings during the year.
In 2001, interest expense decreased 13% to $371, from $427 in
2000, due to lower interest rates as well as the pay down of debt,
primarily short-term borrowings.
Other Income — Other income was $179 in 2002 compared
with $308 in 2001. The 42% decrease was primarily due to $62
higher net gains on asset sales in 2001, as noted below, and a
decrease of $46 in equity earnings, driven by lower earnings at
Elkem ASA (Elkem).
In 2001, other income increased to $308 compared with $154
in 2000. The increase was primarily due to $114 ($93 after tax)
of gains on asset sales related primarily to the sales of Thiokol,
Alcoa Proppants, Inc., and Alcoa’s interest in a Latin American
cable business, as well as the impact of foreign currency exchange
adjustments.
Foreign exchange losses included in other income were $30
in 2002, $11 in 2001, and $82 in 2000.
Income Taxes — Alcoa’s effective tax rate of 31.5% in 2002
differed from the statutory rate of 35% and Alcoa’s 2001 and 2000
effective tax rates of 31.9% and 33.5%, respectively, primarily
due to taxes on foreign income, the impact of ceasing goodwill
amortization, and adjustments to prior-year taxes.
Minority Interests — Minority interests’ share of income
from operations was $135 in 2002 compared with $208 in 2001
and $381 in 2000. The decreases were due to lower earnings
at Alcoa Aluminio, Alcoa World Alumina and Chemicals, and
Alcoa Fujikura Ltd. (AFL). The goodwill impairment charge of
$44 (pretax) contributed to the earnings decline of AFL in 2002.
Loss From Discontinued Operations — Loss from discontinued operations was $112 in 2002 compared with income from
discontinued operations of $1 in 2001 and $12 in 2000. The loss
of $112 recognized in 2002 is comprised of $34 in operating
losses of certain businesses to be disposed of as well as an impairment loss of $78 recognized for the write-down of the carrying
amount of the businesses to estimated fair value less costs to sell.
See Note B to the Consolidated Financial Statements for further
information.
Cumulative Effect of Accounting Change — Cumulative
effect income of $34 was recognized in 2002 for the change in
accounting for goodwill under SFAS No. 142. A cumulative effect
loss of $5 was recognized in 2000 for the change in accounting
for revenue recognition under Staff Accounting Bulletin 101,
‘‘Revenue Recognition in Financial Statements.’’ See Notes A and D
to the Consolidated Financial Statements for further information.
32
Segment Information
Alcoa’s operations consist of five worldwide segments: Alumina
and Chemicals, Primary Metals, Flat-Rolled Products, Engineered
Products, and Packaging and Consumer. Alcoa businesses that are
not reported to management as part of one of these five 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
last-in, first-out (LIFO) inventory accounting, minority interests,
special items, discontinued operations, and accounting changes are
excluded from segment ATOI. In addition, certain expenses, such
as corporate general administrative expenses and depreciation
and amortization on corporate assets, are not included in segment
ATOI. 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, assets held for sale, and other amounts.
ATOI for all segments totaled $1,481 in 2002 compared with
$2,042 in 2001 and $2,377 in 2000. See Note O to the Consolidated
Financial Statements for additional information. The following
discussion provides shipment, revenue, and ATOI data for each
segment for the years 2000 through 2002. The financial information
and data on shipments of all prior periods have been reclassified
to reflect discontinued operations.
Alumina and Chemicals
Alumina production (mt)
Third-party alumina shipments (mt)
2002
13,027
7,486
2001
12,527
7,217
2000
13,968
7,472
Third-party sales
Intersegment sales
Total sales
$1,743
955
$2,698
$1,908
1,021
$2,929
$2,108
1,104
$3,212
After-tax operating income
$ 315
$ 471
$ 585
This segment consists of Alcoa’s worldwide alumina and chemicals
system that includes the mining of bauxite, which is then refined
into alumina. Alumina is sold directly to internal and external
smelter customers worldwide or is processed into industrial chemical products. The industrial chemical products are sold to a broad
spectrum of markets including refractories, ceramics, abrasives,
chemicals processing, and other specialty applications. Slightly
more than half of Alcoa’s alumina production is sold under supply
contracts to third parties worldwide, while the remainder is used
internally. Alumina comprises approximately three-quarters of the
total third-party sales.
In 2002, third-party sales of alumina decreased 8% compared
with 2001, primarily due to an 11% decline in realized prices,
which more than offset increased shipments. In 2001, third-party
sales of alumina decreased 13% compared with 2000, primarily
due to a decrease in shipments of 3% and a decrease in realized
prices of 10%.
Third-party sales of alumina-based chemical products were
down 12% in 2002 compared to 2001 and down 31% in 2001
compared with 2000, primarily due to lower volumes.
ATOI for this segment declined 33% in 2002 compared with
2001, primarily due to lower realized prices, partially offset by
increased volumes and cost improvements. ATOI in 2001 fell 20%
from 2000 due to lower volumes resulting from production curtailments at Point Comfort, TX and Brazil and the shutdown of the
alumina refinery in St. Croix, as well as lower prices.
Alumina Production
thousands of metric tons
12,938
13,273
13,968
12,527
13,027
western U.S. in 2001. Third-party sales in 2001 decreased $324, or
9%, from 2000. The decrease was primarily due to a 10% decrease
in shipments and lower realized prices, partially offset by power
sales and the full-year results of the Reynolds acquisition. Alcoa’s
average third-party realized price for ingot in 2002 was 66 cents
per pound, a decrease of 8% from the average realized price of
72 cents per pound in 2001. In 2000, the average realized price was
77 cents. This compares with average 3-month prices on the LME
of 62 cents per pound in 2002, 66 cents per pound in 2001, and
71 cents per pound in 2000.
ATOI for this segment decreased $255, or 28%, in 2002 compared
with 2001. The decline was primarily due to lower realized prices and
the lack of significant power sales in 2002. These decreases were
somewhat offset by increased volumes and lower foreign taxes.
ATOI decreased by $95, or 10%, in 2001 compared with 2000. The
decrease was primarily attributed to lower volumes and lower prices,
partially offset by power sales. The year-over-year impact of power
sales, net of volume-related decreases, was approximately $50.
Aluminum Production
thousands of metric tons
98
99
00
01
3,539
3,488
3,500
00
01
02
2,851
02
2,471
Primary Metals
2002
3,500
2,073
2001
3,488
1,873
2000
3,539
2,071
Third-party sales
Intersegment sales *
Total sales
$3,174
2,655
$5,829
$3,432
2,849
$6,281
$3,756
3,395
$7,151
After-tax operating income
$ 650
$ 905
$1,000
Aluminum production (mt)
Third-party aluminum shipments (mt)
*Intersegment sales have been adjusted from amounts previously reported
to reflect the elimination of intrasegment sales. These adjustments had
no impact on ATOI.
This segment consists of Alcoa’s worldwide smelter system.
Primary Metals receives alumina primarily from the Alumina and
Chemicals segment and produces aluminum ingot to be used by
Alcoa’s fabricating businesses, as well as sold to external customers,
aluminum traders, and commodity markets. Results from the sale
of aluminum powder, scrap, and excess power are also included
in this segment, as well as the results of aluminum derivative
contracts. Aluminum ingot produced by Alcoa and used internally
is transferred to other segments at prevailing market prices. The
sale of ingot represents approximately 90% of this segment’s thirdparty sales.
Third-party sales in 2002 decreased $258, or 8%, compared
with 2001. Higher shipments in 2002 were more than offset by
lower realized prices and the lack of significant power sales resulting from production curtailments at plants located in the north-
98
99
Alcoa has approximately 445,000 mt per year (mtpy) of idle
capacity on a base capacity of 3,948,000 mtpy.
Flat-Rolled Products
2002
1,774
2001
1,818
2000
1,960
Third-party sales
Intersegment sales
Total sales
$4,640
68
$4,708
$4,999
64
$5,063
$5,446
97
$5,543
After-tax operating income
$ 220
$ 262
$ 299
Third-party aluminum shipments (mt)
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 sold directly to customers in the
packaging and consumer market and is used to produce aluminum
33
beverage cans. Seasonal increases in RCS sales are generally experienced in the second and third quarters of the year. This segment
also includes sheet and plate used in transportation and distributor
markets, of which approximately two-thirds is sold directly to
customers while the remainder is sold through distributors.
Approximately 60% of the third-party sales in this segment are
derived from sheet and plate, and foil used in industrial markets,
while the remaining 40% of third-party sales consists of RCS.
Sales of RCS, sheet, and plate are dependent on a relatively small
number of customers.
In 2002, third-party sales decreased $359, or 7%, compared
with 2001. The decrease was primarily due to lower metal prices,
an unfavorable mix for sheet and plate in the U.S. and Europe due
to continued weakness in the aerospace market, and lower volumes
for RCS and sheet and plate in Europe. In 2001, third-party sales
from this segment decreased by $447, or 8%, compared with 2000.
This decrease was driven primarily by 7% lower shipments due to
weakness in the transportation and distribution markets in North
America and Europe, partially offset by sales increases resulting
from the acquisition of British Aluminium and improved mix on
sheet and plate sales.
ATOI for this segment decreased $42, or 16%, in 2002 compared
with 2001. The decrease in 2002 was primarily due to unfavorable
product mix for sheet and plate in the U.S. and Europe, as well as
lower volumes and lower prices in Europe. These decreases were
partially offset by cost savings in the RCS business. ATOI decreased
$37, or 12%, in 2001 compared with 2000 due to lower volumes
in North America and Europe, which were partly offset by a more
profitable product mix for sheet and plate in the U.S.
Revenues by Segment
billions of dollars
15.3
1.8
0.9
2.1
2.5
16.1
1.9
0.8
2.2
2.6
4.9
5.1
3.1
3.5
98
99
22.7
2.1
2.1
3.7
22.5
2.0
2.7
4.1
3.7
5.4
5.0
5.3
00
20.3
1.8
2.9
3.4
3.2
Engineered Products
2002
891
2001
900
2000
1,021
Third-party sales
Intersegment sales
Total sales
$5,018
34
$5,052
$5,765
35
$5,800
$5,199
62
$5,261
After-tax operating income
$ 107
$ 173
$ 198
Third-party aluminum shipments (mt)
This segment includes hard- and soft-alloy extrusions, including
architectural extrusions, super-alloy castings, steel and aluminum
fasteners, aluminum forgings, and wheels. These products serve the
transportation, building and construction, and distributor markets
and are sold directly to customers and through distributors.
Third-party sales decreased $747, or 13%, in 2002 compared
with 2001. The decrease was primarily due to lower volumes in
businesses serving the aerospace, industrial gas turbine, and
commercial building and construction markets as these markets
continued to decline, somewhat offset by increased volumes in
businesses serving the commercial transportation market during
the year. In 2001, third-party sales increased $566, or 11%,
compared with 2000, primarily due to a full year’s results of the
2000 acquisitions of Reynolds, Cordant, and British Aluminium,
partially offset by a decrease in volume primarily in North America
due to weakness in the transportation and distributor markets.
ATOI for this segment decreased $66, or 38%, in 2002 compared
with 2001. The decrease was primarily due to declining volumes
as a result of continued weakness in certain markets, as noted,
partially offset by productivity and purchasing cost savings, higher
volumes due to a stronger commercial transportation market
during the year, and the absence of goodwill amortization of $61
in 2002. ATOI decreased $25, or 13%, in 2001 compared with 2000.
This decrease was primarily due to decreased volumes and prices
as a result of weak market conditions and the impact of exchange
rate fluctuations in Brazil, somewhat offset by the positive impact
of acquisitions and cost reduction efforts.
Alumina and Chemicals
Packaging and Consumer
Packaging and Consumer
Primary Metals
Third-party aluminum shipments (mt)
2.8
Other
4.6
Flat-Rolled Products
5.7
5.0
Engineered Products
01
02
34
Third-party sales
After-tax operating income
2002
162
2001
141
2000
119
$2,882
$ 198
$2,691
$ 184
$2,079
$ 131
This segment includes consumer products, foodservice, flexible
packaging, and packaging graphics design, as well as closures and
packaging machinery businesses. The principal products in this
segment include aluminum foil; plastic wraps and bags; metal and
plastic beverage and food closures; flexible packaging; prepress
services; and thermoformed plastic containers and extruded plastic
sheet and film. Consumer products are marketed under brands
including Reynolds Wrap姞, Diamond姞, Baco姞, and Cut-Rite姞 wax
paper. Seasonal increases generally occur in the third and fourth
quarters of the year for such products as consumer foil and
plastic wraps and bags, while seasonal slowdowns for closures
generally occur in the fourth quarter of the year. Products are
generally sold directly to customers, consisting of supermarkets,
beverage companies, food processors, retail chains, and commercial
foodservice distributors.
Third-party sales increased $191, or 7%, in 2002 compared with
2001. The increase was primarily due to the acquisition of Ivex
in 2002, which contributed approximately $240, as well as higher
volumes in the closures, consumer products, and packaging design
businesses. These increases were partly offset by lower volumes,
lower prices, and currency devaluation in Latin America. Thirdparty sales increased $612, or 29%, in 2001 compared with 2000.
The increase was primarily due to the full-year results of the Reynolds
acquisition as well as several smaller acquisitions in 2000.
ATOI increased $14, or 8%, in 2002 compared with 2001.
The increase was primarily due to the acquisition of Ivex, which
contributed approximately $12. Also impacting ATOI, to a lesser
extent, were higher volumes in the closures, consumer products,
and packaging design businesses, as well as cost savings across
various businesses within this segment. These increases were
partially offset by the negative impact of the business conditions
in Latin America, as noted. ATOI increased $53, or 40%, in 2001
compared with 2000, due primarily to acquisitions as well as
improved volumes in closures sales.
Other
2002
308
2001
228
2000
187
Third-party sales
$2,806
$3,702
$4,071
After-tax operating income
$
$
$ 164
Third-party aluminum shipments (mt)
(9)
47
This group includes other Alcoa businesses that are not included
in the segments previously mentioned. This group includes AFL ,
which produces electrical components for the automotive industry
and fiber-optic cable and provides services to the telecommunications industry; the residential building products operations, Alcoa
Home Exteriors (formerly Alcoa Building Products); automotive
parts businesses; Thiokol, a producer of solid rocket propulsion
systems (Thiokol was sold in April 2001); and RASCO (In November 2001, the net assets of RASCO were contributed to a joint
venture, Integris, in which Alcoa retains a 50% equity interest.
Effective January 1, 2002, equity income from Integris is included
in corporate.). Products in this segment are generally sold directly
to customers or through distributors. AFL sales are dependent on
a relatively small number of customers. Seasonal increases in the
building products business generally occur in the second and third
quarters of the year.
In 2002, third-party sales decreased $896, or 24%, compared
with 2001. The decrease was due to the divestiture of Thiokol and
the contribution of the net assets of RASCO to a joint venture in
2001, as well as lower volumes in the AFL telecommunications
business, as the market for this business continued to decline.
These decreases were partially offset by volume increases in the
automotive businesses (aided by the acquisition of the remaining
50% interest in Engineered Plastic Components, Inc.). In 2001,
third-party sales decreased $369, or 9%, compared with 2000, due
primarily to the sale of Thiokol in 2001, as well as lower volumes
and prices in the AFL automotive and telecommunications
businesses. These decreases were somewhat offset by improved
demand for residential building products.
In 2002, ATOI for this group decreased $56 compared with
2001. The decrease was due to volume declines in the telecommunications business, an impairment loss on goodwill of $39 (before
minority interests) associated with the AFL telecommunications
business, and the absence of gains on the sales of Thiokol, Alcoa
Proppants, Inc., and Alcoa’s interest in a Latin American cable
business that were recognized in 2001. These decreases were
partially offset by performance improvements in the automotive
businesses and the absence of goodwill amortization that favorably
impacted the segment by $32 in 2002. In 2001, ATOI for this group
decreased $117 compared with 2000, primarily as a result of
volume and price declines at AFL , partially offset by gains from
the sales of Thiokol, Alcoa Proppants, Inc., and Alcoa’s interests
in a Latin American cable business as well as improved sales of
building products.
Reconciliation of ATOI to Consolidated Net Income — The
following table reconciles segment ATOI to consolidated net income.
2002
$1,481
Total after-tax operating income
Impact of intersegment profit
eliminations
Unallocated amounts (net of tax):
Interest income
Interest expense
Minority interests
Corporate expense
Special items
Discontinued operations
Accounting changes
Other
Consolidated net income
2001
$2,042
(6)
(20)
30
(227)
(135)
(234)
(286)
(112)
34
(125)
$ 420
40
(242)
(208)
(261)
(397)
1
—
(47)
$ 908
2000
$2,377
24
40
(278)
(381)
(227)
—
12
(5)
(78)
$1,484
Items required to reconcile segment 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;
● Minority interests;
● 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;
● Special items (excluding minority interests) related to
restructurings in 2002 and 2001;
● Discontinued operations;
● Accounting changes for goodwill in 2002 and revenue
recognition in 2000; and
● Other, which includes the impact of LIFO, differences
between estimated tax rates used in the segments and the
corporate effective tax rate and other nonoperating items
such as foreign exchange.
35
The increase in Other in 2002 in the reconciliation was primarily
due to the impact of intracompany profit eliminations and differences between the estimated tax rates used in the segments and
the corporate effective tax rate, somewhat offset by the impact of
LIFO adjustments.
Market Risks
In addition to the risks inherent in its operations, Alcoa is exposed
to financial, market, political, and economic risks. The following
discussion provides additional detail regarding Alcoa’s exposure
to the risks of changing commodity prices, foreign exchange rates,
or interest rates.
Derivatives
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 selects. SRMC reports to the Board
of Directors on the scope of its derivative activities.
All of the aluminum and other commodity contracts, as well as
various types of derivatives, are held for purposes other than trading.
They are used primarily to mitigate uncertainty and volatility,
and cover underlying exposures. The company is not involved in
energy-trading activities, weather derivatives, or to any material
extent in other nonexchange commodity trading activities.
The following discussion includes sensitivity analyses for
hypothetical changes in the commodity price, exchange rate, or
interest rate contained in the various derivatives used for hedging
certain exposures. In all cases, the hypothetical change was
calculated based on a parallel shift in the forward price curve existing at December 31, 2002. The forward curve takes into account
the time value of money and the future expectations regarding the
value of the underlying commodity, currency, and interest rate.
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 enter into long-term
fixed-price commitments. These commitments expose Alcoa to
the risk of fluctuating aluminum prices between the time the order
is committed and the time that the order is shipped.
Alcoa’s aluminum commodity risk management policy is to
manage, through the use of futures and options contracts, the
aluminum price risk associated with a portion of its fixed price
firm commitments. At December 31, 2002, these contracts totaled
approximately 739,000 mt with a fair value loss of approximately
$21 ($14 after tax). A hypothetical 10% increase (or decrease)
in aluminum ingot prices from the year-end 2002 level of $1,350
per mt would result in a pretax gain (or loss) of $93 related to
these positions.
36
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 sell forward a portion of its
anticipated primary aluminum and alumina production to reduce
the risk of fluctuating market prices on these sales. Toward this
end, Alcoa may enter into short positions using futures and
options contracts. At December 31, 2002, these contracts totaled
205,000 mt with a fair value gain of approximately $7 ($4 after
tax and minority interests). These contracts act to fix a portion
of the price related to these sales contracts. A hypothetical 10%
increase (or decrease) in aluminum ingot prices from the year-end
2002 level of $1,350 per mt would result in a pretax loss (or gain)
of $27 related to these positions.
Alcoa purchases natural gas to meet its production requirements. These purchases expose the company to the risk of higher
natural gas prices. To hedge this risk, Alcoa enters into long
positions, principally using futures and options. Alcoa follows a
stable pattern of purchasing natural gas; therefore, it is highly likely
that anticipated natural gas purchases will occur. The fair value
of the contracts for natural gas was a gain of approximately $42
($25 after tax and minority interests) at December 31, 2002. A
hypothetical 25% increase (or decrease) in the market price of
natural gas from year-end 2002 levels would result in a pretax gain
(or loss) of $50 related to these positions.
Alcoa also purchases certain other commodities, such as
electricity and fuel oil, for its operations and may enter into
futures and options contracts to eliminate volatility in the prices
of such products. None of these contracts were material at
December 31, 2002.
Financial Risk
Currencies — Alcoa is subject to significant exposure from
fluctuations in foreign currencies. Foreign currency exchange
contracts are used to hedge the variability in cash flows from
the forecasted payment or receipt of currencies other than the
functional currency. These contracts cover periods commensurate
with known or expected exposures, generally within three years.
The fair value of these contracts was a gain of approximately
$57 ($27 after tax and minority interests) at December 31, 2002.
Certain contracts, which are included in the $57 above, are used
to offset a portion of the impact of exchange and interest rate
changes on foreign currency denominated debt. The fair value
of these contracts was a gain of approximately $33 ($13 after tax
and minority interests) at December 31, 2002. Changes in the
fair value of these contracts are included in other income on the
Statement of Consolidated Income and offset a portion of the
impact of the exchange differences on the debt.
A hypothetical 10% strengthening (or weakening) of the U.S.
dollar at December 31, 2002 would result in a pretax loss (or gain)
of approximately $59 related to these positions.
Interest Rates — Alcoa uses interest rate swaps to help maintain
a strategic balance between fixed- and floating-rate debt and to
manage overall financing costs. The company has entered into pay
floating, receive fixed interest rate swaps to change the interest rate
risk exposure of its outstanding debt. The fair value of these swaps
was a gain of $80 ($52 after tax) at December 31, 2002.
At December 31, 2002 and 2001, Alcoa had $8,487 and $6,648
of debt outstanding at effective interest rates of 4.4% for 2002 and
5.0% for 2001, after the impact of settled and outstanding interest
rate swaps is taken into account. A hypothetical change of 10%
in Alcoa’s effective interest rate from year-end 2002 levels would
increase or decrease interest expense by $37.
Material Limitations — The disclosures with respect to
commodity prices, interest rates, 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
factors disclosed.
Alcoa is exposed to credit loss in the event of nonperformance
by counterparties on the above instruments, as well as credit or
performance risk with respect to its hedged customers’ commitments. Although nonperformance is possible, Alcoa does not
anticipate nonperformance by any of these parties. Futures and
options contracts are with creditworthy counterparties and are
further supported by cash, treasury bills, or irrevocable letters of
credit issued by carefully chosen banks. In addition, various master
netting arrangements are in place with counterparties to facilitate
settlement of gains and losses on these contracts.
For additional information on derivative instruments, see Notes
A, J, and V to the Consolidated Financial Statements.
Environmental Matters
Alcoa continues to participate in environmental assessments and
cleanups at a number of locations. These include approximately
28 owned or operating facilities and adjoining properties, approximately 38 previously owned or operated facilities and adjoining
properties, and approximately 72 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 W to the Consolidated 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.
The following discussion provides additional details regarding
the current status of Alcoa’s significant sites where the final
outcome cannot be determined or the potential costs in the future
cannot be estimated.
In February 2002, Alcoa submitted a final Analysis of Alternatives Report to the EPA related to PCB contamination of the Grasse
River, adjacent to Alcoa’s Massena, NY plant site. The range of
costs associated with the remedial alternatives evaluated in the
2002 report is between $2 and $525. Alcoa believes that rational,
scientific analysis supports a remedy involving the containment of
sediments in place via natural or man-made processes. Based on
the current assessment of the EPA decision-making process, Alcoa
has now concluded that the selection of the $2 alternative, based
on natural recovery only, is remote. Alcoa continues to believe
that alternatives involving the largest amounts of sediment removal
should not be selected for the Grasse River remedy. Therefore,
Alcoa believes that the alternatives that should reasonably be
considered for selection range from engineered capping and natural
recovery of $30 to a combination of moderate dredging, capping,
and natural recovery of $90. Accordingly, Alcoa has adjusted
the reserve for the Grasse River to $30, representing the low end
of the range of possible alternatives, as no one of the alternatives
is more likely to be selected than any other. The EPA’s ultimate
selection of a remedy could result in additional liability. However,
as the process continues, it allows for input that can influence
the scope and cost of the remedy that will be selected by the EPA
in its issuance of the formal Record of Decision (ROD). Alcoa may
be required to record a subsequent reserve adjustment at the time
the ROD is issued.
In connection with the sale of the Sherwin alumina refinery in
Texas, which was required to be divested as part of the Reynolds
merger in 2000, Alcoa has agreed to retain responsibility for the
remediation of then existing environmental conditions, as well as
a pro rata share of the final closure of the active waste disposal
areas, which remain in use. Alcoa’s share of the closure costs is
proportional to the total period of operation of the active waste
disposal areas. Alcoa estimated its liability for the active disposal
areas by making certain assumptions about the period of operation, the amount of material placed in the area prior to closure,
and the appropriate technology, engineering, and regulatory status
applicable to final closure. The most probable cost for remediation
has been reserved. It is reasonably possible that an additional
liability, not expected to exceed $75, may be incurred if actual
experience varies from the original assumptions used.
Based on the foregoing, it is possible that Alcoa’s results of
operations, in a particular period, could be materially affected by
matters relating to these sites. However, based on facts currently
available, management believes that adequate reserves have been
provided and that the disposition of these matters will not have
a materially adverse effect on the financial position or liquidity of
the company.
37
Alcoa’s remediation reserve balance at the end of 2002 was
$436, of which $68 was classified as a current liability, and reflects
the most probable costs to remediate identified environmental
conditions for which costs can be reasonably estimated. Of the
2002 reserve balance, approximately 33% relates to the Massena,NY
and Sherwin, TX plant sites. Remediation expenses charged to the
reserve were $50 in 2002, $72 in 2001, and $77 in 2000. These
include expenditures currently mandated, as well as those not
required by any regulatory authority or third party. In 2002, the
reserve balance was increased by $55 primarily to cover anticipated
future environmental expenditures at various sites, including
Massena, and for acquisitions made.
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
Cash from Operations
Cash provided from continuing operations was $1,914 in 2002
compared with $2,387 in 2001. The decrease of $473, or 20%, was
primarily due to a decline in net income as a result of lower realized
prices for alumina and aluminum, lower volumes in businesses
serving the aerospace, commercial building and construction,
telecommunications, and industrial gas turbine markets, and the
lack of significant power sales that were recognized in 2001. The
changes in noncash adjustments to net income were principally
offset by changes in assets and liabilities. See discussion under
Results of Operations for further details. Cash provided from
continuing operations was $2,387 in 2001 compared with $2,835
in 2000. The decrease of $448 was primarily due to lower earnings.
Cash from Operations
millions of dollars
2,851
2,411
2,381
2,197
1,839
98
99
00
01
02
Financing Activities
Cash provided from financing activities was $593 in 2002 compared
with cash used for financing activities of $3,127 in 2001, resulting
in a change of $3,720. The largest driver of the change was in
borrowing activities, including short-term borrowings, commercial
paper, and long-term debt. In 2002, these activities resulted in
net cash provided of $1,468, primarily used to fund the acquisitions
38
of Ivex and Fairchild Fasteners. In 2001, these activities resulted
in net cash payments to reduce borrowings by $1,458 using cash
provided by proceeds from the sales of operations required to be
divested from the Reynolds merger and from the sale of Thiokol.
Also contributing to the increase in 2002 compared with 2001
were lower levels of common stock repurchases of $1,228, somewhat
offset by a decrease in the level of common stock issued for stock
compensation plans of $497.
In August 2002, Alcoa issued $1,400 of notes. Of these notes,
$800 mature in 2007 and carry a coupon rate of 4.25%, and $600
mature in 2013 and carry a coupon rate of 5.375%. The proceeds
from these borrowings were used to fund the acquisition of Ivex
and to refinance commercial paper.
Alcoa maintains $4,000 of revolving-credit facilities with varying
expiration dates as backup to its commercial paper program. In
April 2002, Alcoa refinanced its $2,000 revolving-credit agreement
that expired in April 2002 into a revolving-credit agreement that
expires in April 2003. In addition, $1,000 in revolving-credit facilities
is due to expire in August 2003. Alcoa intends to refinance both
the April and August 2003 facilities in April 2003. There are no
other significant maturities of revolving-credit facilities or debt
issues scheduled in 2003.
Cash used for financing activities was $3,127 in 2001 compared
with cash provided from financing activities of $1,552 in 2000,
resulting in a change of $4,679. The largest driver of the change
was in borrowing activities, including short-term borrowings,
commercial paper, and long-term debt. In 2001, these activities
resulted in net cash payments of $1,458, as noted above, while
in 2000, these activities resulted in net cash provided of $2,694,
primarily to fund the acquisition of Cordant. Also contributing to
the decrease in 2001 compared with 2000 were higher common
stock repurchases of $689 and higher common stock dividends of
$100, partially offset by lower levels of common stock issued for
stock compensation plans of $301. The increase in common stock
dividends paid in 2001 compared with 2000 was due to an increase
in the total dividend paid from 50 cents per share in 2000 to
60 cents per share in 2001, due to the payout of a variable dividend
in addition to Alcoa’s base dividend in 2001. Alcoa had a variable
dividend program that provided for the distribution, in the following year, of 30% of Alcoa’s annual earnings in excess of $1.50
per basic share. In January 2002, the Board of Directors approved
a 20% increase in the base quarterly dividend from 12.5 cents
per common share to 15 cents per common share. In addition,
the Board approved eliminating the variable dividend.
In May 2001, Alcoa issued $1,500 of notes. Of these notes,
$1,000 mature in 2011 and carry a coupon rate of 6.5%, and $500
mature in 2006 and carry a coupon rate of 5.875%. In December
2001, Alcoa issued an additional $1,500 of notes. This issue consisted
of $1,000 of notes that mature in 2012 and carry a coupon rate
of 6% and $500 of floating-rate notes that mature in 2004.
Capital Expenditures and Depreciation
1,040
1,263
1,000
1,170
999
781
917
757
1,102
millions of dollars
931
In August 2002, Moody’s Investors Service downgraded the
long-term debt ratings of Alcoa from A1 to A2 and its rated subsidiaries principally from A2 to A3. Alcoa’s Prime-1 short-term rating
was not included in the downgrade. In October 2002, Standard &
Poor’s lowered Alcoa’s long-term corporate credit rating to A from
A+, while affirming Alcoa’s A-1 short-term corporate credit and
commercial paper ratings. The impact of the downgrades is not
expected to be material to the company.
Debt as a percentage of invested capital was 43.1% at the end
of 2002 compared with 35.8% for 2001 and 38.6% for 2000.
Capital Expenditures
Depreciation
Debt as a Percent of
Invested Capital
98
99
00
01
02
43.1
38.6
35.8
31.6
28.2
98
99
00
01
02
Investing Activities
Cash used for investing activities was $2,544 in 2002 compared
with cash provided from investing activities of $939 in 2001,
resulting in a change of $3,483. The increase in cash used for these
activities was primarily due to increased spending on acquisitions
of $1,094, comprised of Ivex, Fairchild Fasteners, and several smaller
acquisitions, and lower proceeds from the sale of assets of $2,380,
resulting from the sales of assets required to be divested from the
Reynolds merger, as well as from the sale of Thiokol in 2001.
Cash provided from investing activities was $939 in 2001
compared with cash used for investing activities of $4,309 in 2000,
resulting in a change of $5,248. The increase in cash in 2001 was
partly due to $2,507 of proceeds from asset sales in 2001 due to
the dispositions noted above. Additionally, cash paid for acquisitions
in 2001 was $159, while in 2000, cash paid for acquisitions was
$3,121, primarily attributable to the acquisition of Cordant.
Capital expenditures from continuing operations totaled $1,263
in 2002 compared with $1,170 and $1,102 in 2001 and 2000,
respectively. Of the total capital expenditures in 2002, 26% related
to capacity expansion. Also included were costs of new and expanded
facilities for environmental control in ongoing operations totaling
$115 in 2002, $80 in 2001, and $96 in 2000. Capital expenditures
related to environmental control are anticipated to be approximately
$100 in 2003.
Alcoa added $112, $270, and $94 to its investments in 2002,
2001, and 2000, respectively. Cash paid for investments of $112 in
2002 was primarily due to the purchase of additional shares in the
Norwegian metals producer, Elkem. Cash paid for investments of
$270 in 2001 is primarily due to Alcoa’s purchase of an 8% interest
in Aluminum Corporation of China (Chalco) for approximately
$150, as part of a strategic alliance to form a 50/50 joint venture at
Chalco’s facility in Pingguo, China, as well as an increased stake
in Elkem. Additions to investments in 2000 were primarily related
to Elkem.
In 2002 and 2001, Alcoa made announcements indicating its
intention to participate in several significant expansion projects.
These projects include the construction of a smelter in Iceland,
the expansion of a refinery and smelter in China, the investment
in several hydroelectric power construction projects in Brazil,
the expansion of operations in Canada, and the installation of
new emissions control equipment at its Warrick, IN facility. These
projects are in various stages of development and, depending on
business and/or regulatory circumstances, may not be completed.
The total anticipated costs of these projects, if all were completed,
is approximately $4,000 and will require funding over a number
of years through 2008. It is anticipated that these projects will
be funded through various sources, including cash provided from
operations, proceeds from the divestitures of certain businesses,
borrowing activities, and other structured financing activities such
as project financing. In addition, during 2002, Alcoa announced
its intention to evaluate other investments that may result in material
financing requirements if ultimately committed. These include
expansion of a smelter in Bahrain and other development opportunities in Suriname. Alcoa anticipates that financing required to
execute all of these investments will be readily available to it over
the time frame required.
In January 2003, Alcoa announced its intention to divest
businesses that no longer meet its portfolio requirements, with
proceeds used primarily to pay down debt. Certain of the businesses
to be divested include specialty chemicals, specialty packaging
equipment, certain architectural products businesses in North
America, commodity automotive fasteners, certain fabricating
and packaging operations in South America, and foil facilities in
St. Louis, MO and Russellville, AR. These businesses generated
approximately $1,300 in total revenues in 2002.
39
Contractual Obligations and Commercial Commitments
The company is obligated to make future payments under various contracts such as debt agreements, lease agreements, and unconditional
purchase obligations and has certain contingent commitments such as debt guarantees. The following tables represent the significant
contractual cash obligations and other commercial commitments of Alcoa as of December 31, 2002.
Contractual cash obligations
Long-term debt (including $21
of capital lease obligations)
Operating leases
Unconditional purchase obligations
Total contractual cash obligations
Total
Due in 2003
Due in 2004
Due in 2005
Due in 2006
Due in 2007
Thereafter
$ 8,450
694
3,381
$12,525
$ 85
134
194
$413
$596
112
201
$909
$1,453
91
213
$1,757
$596
74
205
$875
$ 899
60
177
$1,136
$4,821
223
2,391
$7,435
See Notes J, L, and T to the Consolidated Financial Statements for additional information regarding these obligations.
Total amounts
committed
$168
120
$288
Other commercial commitments
Standby letters of credit
Guarantees
Total commercial commitments
Less than 1 year
$147
—
$147
Amount of commitment expiration per period
1 – 3 years
4 – 5 years
$21
$ —
1
9
$22
$ 9
Over 5 years
$ —
110
$110
The standby letters of credit are related to environmental, insurance, and other activities. See Note L to the Consolidated Financial
Statements for additional information regarding guarantees.
Critical Accounting Policies
The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to
make judgments, estimates, and assumptions regardinguncertainties
that affect the reported amounts of assets and liabilities, disclosure
of contingent assets and liabilities, and the reported amounts of
revenues and expenses. Areas of uncertainty that require judgments,
estimates, and assumptions include the accounting for derivatives,
environmental matters, the testing of goodwill and other intangible
assets for impairment, proceeds on assets to be sold, pensions
and other postretirement benefits, and tax matters. Management
uses historical experience and all available information to make
these judgments and estimates, and actual results will inevitably
differ from those estimates and assumptions that are used to
prepare the company’s financial statements at any given time.
Despite these inherent limitations, management believes that
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (MD&A) and the financial statements
and related footnotes provide a meaningful and fair perspective
of the company. A discussion of the judgments and uncertainties
associated with accounting for derivatives and environmental
matters can be found in the Market Risks and Environmental
Matters sections of MD&A.
A summary of the company’s significant accounting policies
is included in Note A to the Consolidated Financial Statements.
Management believes that the application of these policies on
a consistent basis enables the company to provide the users of the
financial statements with useful and reliable information about
the company’s operating results and financial condition.
In 2002, Alcoa adopted the new standard of accounting for
goodwill and intangible assets with indefinite lives. The cumulative
effect adjustment recognized on January 1, 2002, upon adoption
of the new standard, was income of $34 (after tax). Also in 2002,
40
amortization ceased for goodwill and intangible assets with
indefinite lives. Amortization expense recognized in the Consolidated Income Statement was $171 in 2001 and $125 in 2000.
Additionally, goodwill and indefinite-lived intangibles are required
to be tested for impairment at least annually. The evaluation of
impairment involves comparing the current fair value of the
business to the recorded value (including goodwill). The company
uses a discounted cash flow model (DCF model) to determine
the current fair value of the business. A number of significant
assumptions and estimates are involved in the application of the
DCF model to forecasted operating cash flows, including markets
and market share, sales volumes and prices, costs to produce,
and working capital changes. Management considers historical
experience and all available information at the time the fair values
of its businesses are estimated. However, actual fair values that
could be realized in an actual transaction may differ from those
used to evaluate the impairment of goodwill.
In the fourth quarter of 2002, Alcoa committed to a plan to
divest certain noncore businesses that do not meet internal growth
and return measures. The fair values of all businesses to be divested
were estimated using accepted valuation techniques such as a
DCF model, earnings multiples, or indicative bids, when available.
A number of significant estimates and assumptions are involved
in the application of these techniques, including the forecasting
of markets and market share, sales volumes and prices, costs and
expenses, and multiple factors. Management considered historical
experience and all available information at the time the estimates
were made; however, the fair values that are ultimately realized
upon the sale of the businesses to be divested may differ from
the estimated fair values used to record the loss in 2002.
Other areas of significant judgments and estimates include the
liabilities and expenses for pensions and other postretirement
benefits. These amounts are determined using actuarial methodologies and incorporate significant assumptions, including the rate
used to discount the future estimated liability, the long-term rate
of return on plan assets, and several assumptions relating to the
employee workforce (salary increases, medical costs, retirement age,
and mortality). The rate used to discount future estimated liabilities
is determined considering the rates available at year-end on debt
instruments that could be used to settle the obligations of the plan.
The impact on the liabilities of a change in the discount rate of
1
⁄4 of 1% is approximately $340 and a change of $5 to after-tax
earnings in the following year. The long-term rate of return is
estimated by considering historical returns and expected returns on
current and projected asset allocations and is generally applied to
a five-year average market value of assets. A change in the assumption for the long-term rate of return on plan assets of 1⁄4 of 1%
would impact after-tax earnings by approximately $13 for 2003.
Effective January 1, 2003, Alcoa reduced the assumption for the
expected long-term return on plan assets to 9.0% from 9.5%.
The recent declines in equity markets and interest rates
have had a negative impact on Alcoa’s pension plan liability and
fair value of plan assets. As a result, the accumulated benefit
obligation exceeded the fair value of plan assets at the end of 2002,
which resulted in an $820 charge to shareholders’ equity in the
fourth quarter.
As a global company, Alcoa records an estimated liability or
benefit for income and other taxes based on what it determines
will likely be paid in the various tax jurisdictions in which it
operates. Management uses its best judgment in the determination
of these amounts. However, the liabilities ultimately realized and
paid are dependent on various matters including the resolution
of the tax audits in the various affected tax jurisdictions and may
differ from the amounts recorded. An adjustment to the estimated
liability would be recorded through income in the period in
which it becomes probable that the amount of the actual liability
differs from the amount recorded.
Related Party Transactions
Alcoa buys products from and sells products to various related
companies, consisting of entities in which Alcoa retains a 50% or
less equity interest, at negotiated prices between the two parties.
These transactions were not material to the financial position or
results of operations of Alcoa at December 31, 2002.
Recently Issued and Adopted
Accounting Standards
Effective December 31, 2002, Alcoa adopted Financial Accounting
Standards Board (FASB) Interpretation No. 45 (FIN 45), ‘‘Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others.’’ FIN 45 is an
interpretation of FASB Statement Nos. 5, 57, and 107. FIN 45
elaborates on the disclosures to be made by a guarantor about
its obligations under certain guarantees that it has issued, and
it requires the recognition of a liability at fair value by a guarantor
at the inception of a guarantee. The disclosure requirements of
FIN 45 are effective as of December 31, 2002. See Note L to the
Consolidated Financial Statements for additional details. The initial
recognition and measurement provisions of FIN 45 are effective
on a prospective basis for all guarantees issued or modified after
December 31, 2002. Alcoa has not issued or modified any material
guarantees since December 31, 2002.
Effective December 31, 2002, Alcoa adopted the disclosure
provisions of FASB Interpretation No. 46 (FIN 46), ‘‘Consolidation
of Variable Interest Entities.’’ FIN 46 addresses consolidation
and disclosure by business enterprises of variable interest entities.
See Note L to the Consolidated Financial Statements for additional
details. Alcoa is currently evaluating the impact of this standard.
Effective December 31, 2002, Alcoa adopted the disclosure
requirements of SFAS No. 148, ‘‘Accounting for Stock-Based
Compensation – Transition and Disclosure – an amendment of FASB
Statement No. 123.’’ SFAS No. 148 provides alternative methods
of transition for entities that voluntarily change to the fair value
method of accounting for stock-based employee compensation,
and it also amends the disclosure provisions of SFAS No. 123
to require prominent disclosure about the effects of an entity’s
accounting policy decisions with respect to stock-based employee
compensation in both annual and interim financial reporting.
See Notes A and P to the Consolidated Financial Statements for
the disclosures related to the company’s method of accounting
for stock-based compensation.
Effective January 1, 2003, Alcoa will adopt SFAS No. 143,
‘‘Accounting for Asset Retirement Obligations.’’ This statement
establishes standards for accounting for obligations associated with
the retirement of tangible long-lived assets. Under the provisions
of this standard, Alcoa will record the estimated fair value of
liabilities for existing asset retirement obligations as well as associated asset retirement costs, which will be capitalized as increases
to the carrying amounts of related long-lived assets. The amounts
recorded are for legal obligations associated with the normal
operation of Alcoa’s bauxite mining, alumina refining, and aluminum
smelting facilities and the retirement of those assets. The company’s
asset retirement obligations consist primarily of environmental
remediation costs associated with landfills, spent pot lining disposal,
bauxite residue disposal, and mine reclamation. Alcoa is currently
evaluating the cumulative effect impact of the application of SFAS
No. 143 on the Consolidated Financial Statements.
Effective January 1, 2003, Alcoa will adopt SFAS No. 146,
‘‘Accounting for Costs Associated with Exit or Disposal Activities.’’
SFAS No. 146 nullifies Emerging Issues Task Force (EITF) Issue
No. 94-3, ‘‘Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity,’’ under which a
liability for an exit cost was recognized at the date of an entity’s
commitment to an exit plan. SFAS No. 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized
at fair value when the liability is incurred. The provisions of this
statement will be applied to any future exit or disposal activities.
41
Management’s Report to
Alcoa Shareholders
Report of Independent Accountants
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.
To the Shareholders and Board of Directors
Alcoa Inc. (Alcoa)
Alain J. P. Belda
Chairman and
Chief Executive Officer
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, 2002 and 2001, and
the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2002, in conformity
with accounting principles generally accepted in the United States
of America. 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 of America, which require
that we plan and perform the audit 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 our opinion.
As discussed in Notes B and D to the consolidated financial
statements, Alcoa changed its method of accounting for longlived asset impairments, and goodwill and other intangible assets
in 2002.
600 Grant St., Pittsburgh, Pa.
January 8, 2003
Richard B. Kelson
Executive Vice President
and Chief Financial Officer
42
Statement of Consolidated Income
Alcoa and subsidiaries
(in millions, except per-share amounts)
For the year ended December 31
Sales (A and O)
Cost of goods sold
Selling, general administrative, and other expenses
Research and development expenses
Provision for depreciation, depletion, and amortization (D)
Impairment of goodwill (D)
Special items (C)
Interest expense (U)
Other income, net (M)
2002
2001
2000
$20,263
$22,497
$22,659
16,247
1,147
214
1,108
44
407
350
(179)
17,539
1,256
203
1,234
—
565
371
(308)
17,111
1,088
194
1,199
—
—
427
(154)
19,338
20,860
19,865
Income from continuing operations before taxes on income
Provision for taxes on income (R)
925
292
1,637
522
2,794
936
Income from continuing operations before minority interests’ share
Less: Minority interests’ share
633
135
1,115
208
1,858
381
Income from continuing operations
(Loss) income from discontinued operations (B)
Cumulative effect of accounting change (A and D)
498
(112)
34
907
1
—
1,477
12
(5)
Net Income
$
420
$
908
$ 1,484
Earnings (loss) per Share (Q)
Basic:
Income from continuing operations
(Loss) income from discontinued operations
Cumulative effect of accounting change
$
.59
(.13)
.04
$
1.06
—
—
$
1.81
.02
(.01)
$
.50
$
1.06
$
1.82
$
.58
(.13)
.04
$
1.05
—
—
$
1.79
.02
(.01)
$
.49
$
1.05
$
1.80
Net income
Diluted:
Income from continuing operations
(Loss) income from discontinued operations
Cumulative effect of accounting change
Net income
The accompanying notes are an integral part of the financial statements.
43
Consolidated Balance Sheet
Alcoa and subsidiaries
(in millions)
December 31
2002
Assets
Current assets:
Cash and cash equivalents (V)
Short-term investments (V)
Receivables from customers, less allowances: 2002 – $120; 2001 – $121
Other receivables
Inventories (F)
Deferred income taxes (R)
Prepaid expenses and other current assets
Total current assets
Properties, plants, and equipment, net (G)
Goodwill (D and E)
Other assets (H)
Assets held for sale (B)
Total Assets
Liabilities
Current liabilities:
Short-term borrowings ( J and V)
Accounts payable, trade
Accrued compensation and retirement costs
Taxes, including taxes on income
Other current liabilities
Long-term debt due within one year ( J and V)
Total current liabilities
Long-term debt, less amount due within one year ( J and V)
Accrued postretirement benefits (S)
Other noncurrent liabilities and deferred credits (I)
Deferred income taxes (R)
Liabilities of operations held for sale (B)
Total liabilities
Minority Interests (K)
$
344
69
2,378
174
2,441
468
439
2001
$
512
15
2,386
286
2,385
409
456
6,313
12,111
6,365
4,446
575
6,449
11,530
5,597
3,828
951
$29,810
$28,355
$
$
37
1,618
933
818
970
85
162
1,539
871
904
1,307
102
4,461
8,365
2,320
2,878
502
64
4,885
6,384
2,513
1,968
556
122
18,590
16,428
1,293
1,313
55
925
6,101
7,428
(2,828)
(1,754)
56
925
6,114
7,517
(2,706)
(1,292)
9,927
10,614
$29,810
$28,355
Commitments and Contingencies (L)
Shareholders’ Equity
Preferred stock (P)
Common stock (P)
Additional capital
Retained earnings
Treasury stock, at cost
Accumulated other comprehensive loss
Total shareholders’ equity
Total Liabilities and Equity
The accompanying notes are an integral part of the financial statements.
44
Statement of Consolidated Cash Flows
Alcoa and subsidiaries
(in millions)
For the year ended December 31
Cash from Operations
Net income
Adjustments to reconcile net income to cash from operations:
Depreciation, depletion, and amortization
Impairment of goodwill (D)
Change in deferred income taxes
Equity income, net of dividends
Noncash special items (C)
Gains from investing activities — sale of assets
Provision for doubtful accounts
Loss (income) from discontinued operations (B)
Accounting changes (A and D)
Minority interests
Other
Changes in assets and liabilities, excluding effects of acquisitions and divestitures:
Reduction (increase) in receivables
Reduction (increase) in inventories
Reduction (increase) in prepaid expenses and other current assets
Reduction in accounts payable and accrued expenses
(Reduction) increase in taxes, including taxes on income
Net change in noncurrent assets and liabilities
Reduction (increase) in net assets held for sale
2002
$
Cash from operations
Financing Activities
Net changes to short-term borrowings
Common stock issued for stock compensation plans
Repurchase of common stock
Dividends paid to shareholders
Dividends paid to minority interests
Net change in commercial paper
Additions to long-term debt
Payments on long-term debt
Cash provided from (used for) financing activities
Cash and cash equivalents at end of year
$
$ 1,484
1,211
—
135
(66)
—
(14)
10
(12)
5
381
32
411
202
36
(318)
(232)
(239)
113
578
(11)
(69)
(429)
(49)
(431)
19
(441)
109
5
(79)
412
(320)
(17)
2,387
2,835
24
16
1,839
2,411
2,851
(382)
55
(224)
(509)
(197)
445
1,636
(231)
(2,570)
552
(1,452)
(518)
(251)
(1,290)
3,343
(941)
2,123
251
(763)
(418)
(212)
530
1,918
(1,877)
593
(3,127)
1,552
(1,170)
(7)
(159)
2,507
(270)
41
6
(9)
(1,102)
(19)
(3,121)
22
(94)
21
—
(16)
(2,544)
Effect of exchange rate changes on cash
908
1,246
—
(24)
(56)
525
(114)
78
(1)
—
208
9
(1,263)
(7)
(1,253)
127
(112)
(54)
26
(8)
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
2000
1,116
44
(178)
(40)
394
(52)
16
112
(34)
135
8
(75)
Cash (used for) provided from discontinued operations
Cash (used for) provided from investing activities
$
1,914
Cash provided from continuing operations
Investing Activities
Capital expenditures
Capital expenditures of discontinued operations
Acquisitions, net of cash acquired (N)
Proceeds from the sale of assets
Additions to investments
Changes in short-term investments
Changes in minority interests
Other
420
2001
939
(4,309)
(56)
(26)
(16)
(168)
512
197
315
78
237
344
$
The accompanying notes are an integral part of the financial statements.
45
512
$
315
Statement of Shareholders’ Equity
Alcoa and subsidiaries
(in millions, except per-share amounts)
Comprehensive
income
Preferred
stock
Common
stock
Additional
capital
Retained
earnings
Accumulated
other
Treasury comprehensive
loss
stock
Total
shareholders’
equity
December 31
Balance at end of 1999
$56
$395
$1,704
$6,061
$(1,260)
$ (638)
$ 6,318
Comprehensive income — 2000:
Net income — 2000
$1,484
1,484
1,484
Other comprehensive income (loss):
Change in minimum pension liability,
net of $(3) tax expense
5
Unrealized translation adjustments
(263)
(258)
(258)
Comprehensive income
$1,226
(2)
(2)
Cash dividends: Preferred @ $3.75 per share
Common @ $.500 per share
(416)
(416)
Treasury shares purchased
(763)
(763)
Stock issued: Reynolds acquisition
135
4,367
4,502
Stock issued: compensation plans
251
306
557
Stock issued: two-for-one split
395
(395)
—
Balance at end of 2000
56
925
5,927 †
7,127
(1,717)
(896)
11,422
Comprehensive income — 2001:
Net income — 2001
$ 908
908
908
Other comprehensive income (loss):
Change in minimum pension liability,
net of $27 tax benefit
(51)
Unrealized translation adjustments
(241)
Unrecognized gains/(losses) on derivatives,
net of tax and minority interests of $124 (V):
Cumulative effect of accounting change
(4)
Net change from periodic revaluations
(175)
Net amount reclassified to income
75
Net unrecognized losses on derivatives
(104)
(396)
(396)
Comprehensive income
$ 512
(2)
(2)
Cash dividends: Preferred @ $3.75 per share
Common @ $.600 per share
(516)
(516)
Treasury shares purchased
(1,452)
(1,452)
Stock issued: compensation plans
187
463
650
Balance at end of 2001
56
925
6,114 †
7,517
(2,706)
(1,292)
10,614
Comprehensive loss — 2002:
Net income — 2002
$ 420
420
420
Other comprehensive income (loss):
Change in minimum pension liability,
net of $421 tax benefit
(851)
Unrealized translation adjustments
309
Unrealized losses on available-for-sale
securities, net of $13 tax benefit
(25)
Unrecognized gains on derivatives, net of
tax and minority interests of $(106) (V):
Net change from periodic revaluations
60
Net amount reclassified to income
45
Net unrecognized gains on derivatives
105
(462)
(462)
Comprehensive loss
$ (42)
(2)
(2)
Cash dividends: Preferred @ $3.75 per share
Common @ $.600 per share
(507)
(507)
Treasury shares purchased
(1)
(224)
(225)
Stock issued: compensation plans
(13)
102
89
Balance at end of 2002
$55
$925
$6,101 †
$7,428
$(2,828)
$(1,754) * $ 9,927
* Comprised of unrealized translation adjustments of $(818), minimum pension liability of $(912), unrealized losses on available-for-sale securities of
$(25), and unrecognized gains/(losses) on derivatives of $1
†Includes stock to be issued under options of $130, $138, and $182 in 2002, 2001, and 2000, respectively
Share Activity
Common stock
(number of shares)
Preferred stock
Balance at end of 1999
557,649
Treasury shares purchased
Stock issued: Reynolds acquisition
Stock issued: compensation plans
Balance at end of 2000
557,649
Treasury shares purchased
Stock issued: compensation plans
Balance at end of 2001
557,649
Treasury shares purchased
(11,625)
Stock issued: compensation plans
Balance at end of 2002
546,024
The accompanying notes are an integral part of the financial statements.
46
Issued
789,391,852
Treasury
(53,893,856)
(21,742,600)
135,182,686
924,574,538
924,574,538
924,574,538
16,579,158
(59,057,298)
(39,348,136)
21,412,772
(76,992,662)
(6,313,100)
3,550,686
(79,755,076)
Net outstanding
735,497,996
(21,742,600)
135,182,686
16,579,158
865,517,240
(39,348,136)
21,412,772
847,581,876
(6,313,100)
3,550,686
844,819,462
Notes to Consolidated
Financial Statements
(dollars 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 the equity basis.
The Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the
United States of America 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.
Cash Equivalents. Cash equivalents are highly liquid investments purchased with an original maturity of three months or less.
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 F 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 5 and 25 years for machinery and equipment. Gains 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 G and U for additional detail.
Amortization of Intangibles. Intangible assets with finite
useful lives are amortized generally on a straight-line basis over
the periods benefited, with a weighted average useful life of
ten years. Goodwill and intangible assets with indefinite useful
lives are not amortized. Prior to 2002, goodwill and indefinitelived intangible assets were amortized over periods not exceeding
40 years. The carrying values of goodwill and other intangible
assets with indefinite useful lives are tested at least annually
for impairment. If it is determined that the carrying value exceeds
fair value, an impairment loss is recognized. See Note D for
additional information.
Revenue Recognition. Alcoa recognizes revenue when title,
ownership, and risk of loss pass to the customer. In 2000, Alcoa
changed its method of accounting for revenue recognition in
accordance with the provisions of Staff Accounting Bulletin 101,
‘‘Revenue Recognition in Financial Statements.’’ The application
of this method of accounting for revenue recognition resulted
in a cumulative effect charge to income of $5 (net of taxes and
minority interests of $3) in 2000. The change did not have a
significant effect on revenues or results of operations for the year
ended December 31, 2000.
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 W for
additional information.
Stock-Based Compensation. Alcoa accounts for stockbased compensation in accordance with the provisions of
Accounting Principles Board Opinion No. 25, ‘‘Accounting for
Stock Issued to Employees,’’ and related interpretations using the
intrinsic value method, which resulted in no compensation cost
for options granted.
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 in accordance with Statement of Financial Accounting
Standards (SFAS) Nos. 123 and 148, ‘‘Accounting for Stock-Based
Compensation.’’
Net income, as reported
Less: compensation cost determined
under the fair value method,
net of tax
Pro forma net income
Basic earnings per share:
As reported
Pro forma
Diluted earnings per share:
As reported
Pro forma
2002
$420
2001
$ 908
2000
$1,484
113
$307
178
$ 730
207
$1,277
$ .50
.37
$1.06
.85
$ 1.82
1.57
.49
.36
1.05
.84
1.80
1.55
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:
Average risk-free interest rate
Expected dividend yield
Expected volatility
Expected life (years):
New option grants
Reload option grants
2002
3.5%
2.1
42
2001
3.8%
1.6
43
2000
6.1%
1.6
40
3.0
2.5
2.5
2.0
2.5
2.0
The weighted average fair value per option granted was $9.96
in 2002, $9.54 in 2001, and $10.13 in 2000.
47
Derivatives and Hedging. Effective January 1, 2001, Alcoa
adopted SFAS No. 133, ‘‘Accounting for Derivative Instruments
and Hedging Activities,’’ as amended. The fair values of all outstanding derivative instruments are recorded on the Consolidated
Balance Sheet in other current and noncurrent assets and liabilities.
The transition adjustment on January 1, 2001 resulted in a net
charge of $4 (after tax and minority interests), which was recorded
in other comprehensive income.
Derivatives are held as part of a formally documented risk
management (hedging) program. All derivatives are straightforward and are held for purposes other than trading. Alcoa
measures hedge effectiveness by formally assessing, at least
quarterly, the historical and probable future high correlation of
changes in the fair value or expected future cash flows of the
hedged item. The ineffective portions are recorded in other income
or expense in the current period. If the hedging relationship ceases
to be highly effective or it becomes probable that an expected
transaction will no longer occur, gains or losses on the derivative
are recorded in other income or expense.
Changes in the fair value of derivatives are recorded in current
earnings along with the change in the fair value of the underlying
hedged item if the derivative is designated as a fair value hedge
or in other comprehensive income if the derivative is designated
as a cash flow hedge. If no hedging relationship is designated, the
derivative is marked to market through earnings.
Cash flows from financial instruments are recognized in the
statement of cash flows in a manner consistent with the underlying transactions.
Prior to the adoption of SFAS No. 133, gains and losses related
to transactions that qualified for hedge accounting, including
closed contracts, were deferred and reflected in earnings when
the underlying physical transactions took place.
Past accounting convention also required that certain
positions be marked to market. Mark-to-market gains and losses
were recorded in other income. As a result of the change in
accounting under SFAS No. 133, these contracts were re-designated
and qualified as hedges on January 1, 2001. See Note V for
additional information.
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 operations is made based on the appropriate economic
and management indicators.
Recently Issued and Adopted Accounting Standards.
Effective December 31, 2002, Alcoa adopted Financial Accounting
Standards Board (FASB) Interpretation No. 45 (FIN 45), ‘‘Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others.’’ FIN 45 is an interpretation of FASB Statement Nos. 5, 57, and 107. FIN 45 elaborates
on the disclosures to be made by a guarantor about its obligations
under certain guarantees that it has issued, and it requires the
recognition of a liability at fair value by a guarantor at the inception of a guarantee. The disclosure requirements of FIN 45 are
48
effective as of December 31, 2002. See Note L for additional details.
The initial recognition and measurement provisions of FIN 45
are effective on a prospective basis for all guarantees issued or
modified after December 31, 2002. Alcoa has not issued or modified
any material guarantees since December 31, 2002.
Effective December 31, 2002, Alcoa adopted the disclosure
provisions of FASB Interpretation No. 46 (FIN 46), ‘‘Consolidation
of Variable Interest Entities.’’ FIN 46 addresses consolidation
and disclosure by business enterprises of variable interest entities.
See Note L for additional details. Alcoa is currently evaluating
the impact of this standard.
Effective December 31, 2002, Alcoa adopted the disclosure
requirements of SFAS No. 148, ‘‘Accounting for Stock-Based
Compensation – Transition and Disclosure – an amendment of FASB
Statement No. 123.’’ SFAS No. 148 provides alternative methods
of transition for entities that voluntarily change to the fair value
method of accounting for stock-based employee compensation,
and it also amends the disclosure provisions of SFAS No. 123
to require prominent disclosure about the effects of an entity’s
accounting policy decisions with respect to stock-based employee
compensation in both annual and interim financial reporting.
See Stock-Based Compensation within this note and Note P for
the disclosures related to the company’s method of accounting
for stock-based compensation.
Effective January 1, 2003, Alcoa will adopt SFAS No. 143,
‘‘Accounting for Asset Retirement Obligations.’’ This statement
establishes standards for accounting for obligations associated with
the retirement of tangible long-lived assets. Under the provisions
of this standard, Alcoa will record the estimated fair value of
liabilities for existing asset retirement obligations as well as associated asset retirement costs, which will be capitalized as increases
to the carrying amounts of related long-lived assets. The amounts
recorded are for legal obligations associated with the normal
operation of Alcoa’s bauxite mining, alumina refining, and aluminum smelting facilities and the retirement of those assets. The
company’s asset retirement obligations consist primarily of environmental remediation costs associated with landfills, spent pot lining
disposal, bauxite residue disposal, and mine reclamation. Alcoa is
currently evaluating the cumulative effect impact of the application
of SFAS No. 143 on the Consolidated Financial Statements.
Effective January 1, 2003, Alcoa will adopt SFAS No. 146,
‘‘Accounting for Costs Associated with Exit or Disposal Activities.’’
SFAS No. 146 nullifies Emerging Issues Task Force (EITF) Issue
No. 94-3, ‘‘Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity,’’ under which a
liability for an exit cost was recognized at the date of an entity’s
commitment to an exit plan. SFAS No. 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized
at fair value when the liability is incurred. The provisions of this
statement will be applied to any future exit or disposal activities.
Reclassification. Certain amounts in previously issued financial statements were reclassified to conform to 2002 presentations.
See Note B for further details.
B. Discontinued Operations
and Assets Held for Sale
Effective January 1, 2002, Alcoa adopted the provisions of SFAS
No. 144, ‘‘Accounting for the Impairment or Disposal of LongLived Assets,’’ which establishes accounting and reporting
standards for the impairment and disposal of long-lived assets and
discontinued operations. During the fourth quarter of 2002, Alcoa
performed a portfolio review of its businesses and the markets
they serve. As a result of this review, Alcoa committed to a plan
to divest certain noncore businesses that do not meet internal
growth and return measures.
Certain of the businesses to be divested are classified as
discontinued operations, and a pretax impairment charge of $109
($78 after tax and minority interests) was recorded to reduce
the carrying value of these businesses to their estimated fair value
less costs to sell. The businesses classified as discontinued operations include Alcoa’s commodity automotive fasteners business,
certain fabricating businesses serving the residential building and
construction market in North America, and a packaging business
in South America. These businesses were previously included
within the Engineered Products and Packaging and Consumer
segments and have been reclassified to corporate.
Alcoa also intends to divest the protective packaging business
acquired in the July 2002 acquisition of Ivex Packaging Corporation
(Ivex), as further described in Note E. The assets and liabilities of
the protective packaging business are included within assets held
for sale and liabilities of operations held for sale on the Consolidated
Balance Sheet. The results of operations of this business are included
in discontinued operations in the Statement of Consolidated Income.
The financial information for all prior periods has been
reclassified to reflect these businesses as assets held for sale and
liabilities of operations held for sale on the Consolidated Balance
Sheet and as discontinued operations on the Statement of
Consolidated Income.
The following table details selected financial information for
the businesses included within discontinued operations.
December 31
Sales
(Loss) income from operations
Loss from impairment
Pretax (loss) income
Benefit (provision) for taxes
(Loss) income from discontinued
operations
2002
$ 355
(53)
(109)
(162)
50
2001
$362
4
—
4
(3)
2000
$277
18
—
18
(6)
$(112)
$
$ 12
1
Certain other businesses to be divested are classified as assets
held for sale due to management’s belief that Alcoa may enter into
supply agreements in connection with the sale of these businesses.
Alcoa has recorded a pretax loss of $214 ($143 after tax and minority
interests) in special items on the Statement of Consolidated Income,
representing the impairment charge to reduce these businesses
to their estimated fair value less costs to sell. The $214 charge
includes $136 for the write-down of goodwill. These businesses
to be divested principally include certain architectural products
businesses in North America, certain fabricating and packaging
operations in South America, and foil facilities in St. Louis, MO
and Russellville, AR. The operating results of these businesses are
included within the Engineering Products, Flat-Rolled Products,
and Packaging and Consumer segments. The assets and liabilities
of these businesses have been classified as assets held for sale and
liabilities of operations held for sale on the Consolidated Balance
Sheet. All prior financial information has also been reclassified to
reflect this treatment.
For all of the businesses to be divested, the fair values were
estimated utilizing accepted valuation techniques. Alcoa expects
that all of the businesses to be divested will be sold within a oneyear period. The fair values that are ultimately realized upon the
sale of the businesses to be divested may differ from the estimated
fair values used to record the loss in 2002.
The major classes of assets and liabilities of operations held for
sale in the Consolidated Balance Sheet are as follows:
December 31
Assets:
Receivables
Inventories
Properties, plants, and equipment, net
Goodwill
Other assets
Total assets held for sale
2002
2001
$146
128
274
—
27
$575
$193
146
452
136
24
$951
Liabilities:
Accounts payable and accrued expenses
Other liabilities
Total liabilities of operations held for sale
36
28
$ 64
88
34
$122
Alcoa also intends to divest its specialty chemicals and packaging
equipment businesses. These businesses are classified as held and
used at December 31, 2002 because the period required to complete
the sale is in excess of one year.
C. Special Items
During 2002, Alcoa recorded special charges of $407 ($261 after
tax and minority interests) for restructurings, consisting of charges
of $39 ($23 after tax and minority interests) in the third quarter
of 2002 and charges of $368 ($238 after tax and minority interests)
in the fourth quarter of 2002. The third quarter special charge
of $39 was primarily the result of the curtailment of aluminum
production at three smelters. Alcoa temporarily curtailed aluminum
production at its Badin, NC plant and permanently closed its
Troutdale, OR plant as well as approximately 25% of the capacity
at its Rockdale, TX facility. The remaining carrying value and
results of operations related to these facilities were not material.
The fourth quarter special charge of $368 was primarily the result
of restructuring operations for those businesses experiencing
negligible growth due to continued market declines, as well as the
decision to divest certain businesses that have failed to meet internal growth and return measures. Of the total fourth quarter special
charge of $368, $154 ($95 after tax and minority interests) was
related to the restructuring of operations of businesses serving the
aerospace, automotive, and industrial gas turbine markets, and in
the U.S. smelting system. The remaining $214 ($143 after tax and
minority interests) was related to impairment charges on businesses
to be divested, as detailed in Note B.
49
The 2002 charges were comprised of $278 for asset writedowns, consisting of $136 of goodwill on businesses to be divested,
as well as $142 for structures, machinery, and equipment; $105 for
employee termination and severance costs related to approximately
8,500 salaried and hourly employees at over 70 locations, primarily
in Mexico, Europe, and the U.S.; and charges of $31 for exit costs,
primarily for remediation and demolition costs, as well as lease
termination costs.
As of December 31, 2002, approximately 850 employees of
the 8,500 associated with the 2002 restructuring charges had been
terminated, and approximately $9 of cash payments were made
against the accrual. Additionally, of the $31 accrued for exit costs,
approximately $4 was paid in cash as of December 31, 2002. Alcoa
expects to substantially complete all actions relative to the 2002
restructuring charges by the end of 2003.
During 2002, various adjustments were recorded to the 2001
restructuring program reserves. Additional restructuring charges
of $18 were recorded for additional asset impairments and for
additional employee termination and severance costs, primarily
related to additional severance costs not accruable in 2001 for
layoffs of approximately 250 salaried and hourly employees,
primarily in Europe and Mexico. Also, reversals of 2001 restructuring reserves of $32 were recorded due to changes in estimates
of liabilities resulting from lower than expected costs associated
with certain plant shutdowns and disposals.
During 2001, Alcoa recorded charges of $565 ($355 after tax
and minority interests) as a result of a restructuring plan based on
a strategic review of the company’s primary products and fabricating businesses aimed at optimizing and aligning its manufacturing
systems with customer needs, while positioning the company
for stronger profitability. The total charge of $565 consisted of a
charge of $212 ($114 after tax and minority interests) in the second
quarter of 2001 and a charge of $353 ($241 after tax and minority
interests) in the fourth quarter of 2001. These charges consisted
of asset write-downs of $371, employee termination and severance
costs of $178 related to workforce reductions of approximately
10,400 employees, and other exit costs of $16 related to the shutdown of facilities. The second quarter charge was primarily due to
actions taken in Alcoa’s primary products businesses because of
economic and competitive conditions. These actions included the
shutdown of three facilities in the U.S. The fourth quarter charge
was primarily due to actions taken in Alcoa’s fabricating businesses.
These actions included the shutdown of 15 facilities in the U.S.
and Europe.
Asset write-downs of $371 were primarily recorded as a direct
result of the company’s decision to close certain facilities. The asset
write-downs consisted primarily of structures and machinery and
equipment, as well as related selling or disposal costs, and were
comprised of $144 related to assets that will be phased out and
$227 of assets that could be disposed of immediately. Assets to be
phased out consisted of $46 of assets in the Flat-Rolled Products
segment, $77 of assets in the Engineered Products segment, and
$21 at corporate. Assets to be disposed of consisted of $110 of
assets in the Alumina and Chemicals segment, $84 of assets in the
50
Primary Metals segment, $23 of assets in the Engineered Products
segment, $4 in the Other group, and $6 at corporate. The results
of operations related to these assets were not material. These assets
were sold or vacated in 2002.
Assets to be phased out were removed from service in 2002.
Fair values of assets were determined based on expected future
cash flows or appraised values. Expected operating cash flows
during the phaseout period were not significant and did not have
a material impact on the determination of the amount of the
write-down.
Employee termination and severance costs of $178 were
recorded as management implemented workforce reductions of
10,400 hourly and salaried employees at various manufacturing
facilities – primarily located outside of the U.S. – due to weak
market conditions and the shutdowns of several manufacturing
facilities. These workforce reductions primarily consisted of a
combination of early retirement incentives and involuntary severance programs. As of December 31, 2002, approximately 9,200
of the 10,650 employees associated with the 2001 restructuring
program had been terminated.
The $16 of exit costs were recorded for activities associated
with the shutdowns above.
Pretax restructuring charges consisted of:
Asset
writedowns
2001:
2001 restructuring charges $ 371
Cash payments
(3)
Noncash charges *
(288)
Reserve balances at
December 31, 2001
$ 80
2002:
Cash payments
$ (17)
2002 restructuring charges
278
Noncash charges in 2002
(278)
Additions to 2001
restructuring charges
9
Reversals of 2001
restructuring reserves
(10)
Reserve balances at
December 31, 2002
$ 62
Employee
termination and
severance
costs
Other
Total
$178
(32)
—
$ 16
(5)
—
$ 565
(40)
(288)
$146
$ 11
$ 237
$ (74)
105
—
$(13)
31
—
$(104)
414
(278)
9
—
18
(20)
(2)
(32)
$166
$ 27
$ 255
* Adjusted
Of the remaining reserve balances at December 31, 2002,
approximately $130 relates to the 2001 restructuring program,
consisting primarily of asset write-down costs of $60 and
employee termination and severance costs of $70. These reserves
are for ongoing site remediation work and employee layoff
costs that primarily consist of monthly payments made over
an extended period.
D. Goodwill and Other Intangible Assets
Effective January 1, 2002, Alcoa adopted SFAS No. 142, ‘‘Goodwill
and Other Intangible Assets.’’ Under this standard, goodwill and
intangibles with indefinite useful lives are no longer amortized.
This standard also requires, at a minimum, an annual assessment
of the carrying value of goodwill and intangibles with indefinite
useful lives. If the carrying value of goodwill or an intangible asset
exceeds its fair value, an impairment loss shall be recognized.
The changes in the carrying amount of goodwill for the years
ended December 31, 2002 and 2001 follow.
Balance at beginning of year
Intangible assets reclassified to goodwill
Impairment loss recognized in cumulative
effect adjustment
Additions during the period
Sale of a business
Impairment loss
Translation and other adjustments
Amortization expense
Balance at end of year
2002
$5,597
28
2001
$5,867
—
(15)
765
—
(44)
34
—
$6,365
—
237
(320)
—
(16)
(171)
$5,597
In accordance with the provisions of SFAS No. 141, ‘‘Business
Combinations,’’ Alcoa transferred $28 (after tax) of customer base
intangibles, initially recorded in the Reynolds acquisition, to
goodwill (Packaging and Consumer segment). Upon adoption of
SFAS No. 142 on January 1, 2002, Alcoa recognized a $15 charge
for the impairment of goodwill in the automotive business (Other
group) resulting from a change in the criteria for the measurement
of fair value under SFAS No. 142 from an undiscounted to a
discounted cash flow method. Goodwill increased $765 during
the period related to ten acquisitions (primarily impacting the
Engineered Products segment by $253, the Packaging and
Consumer segment by $488, and the Other group by $96) and
adjustments to preliminary purchase price allocations from prior
periods. In the fourth quarter of 2002, Alcoa recorded an impairment charge of $44 for goodwill associated with its operations
serving the telecommunications market. Alcoa’s telecommunications business experienced lower than expected operating profits
and cash flows in the second half of 2002. As a result of this trend
and the overall industry expectations, the projected operating
profits and cash flows for the telecommunications business were
reduced for the next five years. The projected decline in cash
flows resulted in the recognition of the $44 impairment loss in the
Other group. The fair value of Alcoa’s businesses was determined
based on a discounted cash flow model for purposes of testing
goodwill for impairment. The discount rate used was based on
a risk-adjusted weighted average cost of capital for each business.
See Note O for further detail on goodwill balances by segment.
Intangible assets, which are included in other assets on the
Consolidated Balance Sheet, totaled $741, net of accumulated
amortization of $361, at December 31, 2002, and $661, net of
accumulated amortization of $314, at December 31, 2001. At
December 31, 2002, $169 of the net balance of $741 represents
trade name intangibles with indefinite useful lives that are not
being amortized. The remaining intangibles relate to customer
relationships, computer software, patents, and licenses. Amortization expense for intangible assets for the years ended December 31,
2002, 2001, and 2000 was $68, $69, and $65, respectively. Amortization expense is expected to range from approximately $68 to
$47 each year between 2003 and 2007.
The effects of adopting SFAS Nos. 141 and 142 on net income
and diluted earnings per share for the years ended December 31,
2002, 2001, and 2000, follow.
Net income
Less: cumulative effect income from
accounting change for goodwill
Income excluding cumulative effect
Add: goodwill amortization
Income excluding cumulative effect
and goodwill amortization
Diluted earnings per common share:
Net income
Less: cumulative effect income from
accounting change for goodwill
Income excluding cumulative effect
Add: goodwill amortization
Income excluding cumulative effect
and goodwill amortization
2002
$420
2001
$ 908
2000
$1,484
—
908
171
—
1,484
125
$386
$1,079
$1,609
$ .49
$ 1.05
$ 1.80
—
1.05
.20
—
1.80
.15
$ 1.25
$ 1.95
(34)
386
—
(.04)
.45
—
$ .45
The impact to the segments of no longer amortizing goodwill
in 2002 was as follows: Primary $23, Flat-Rolled Products $(5),
Engineered Products $61, Packaging and Consumer $16, and Other
$32. The impact to corporate was $44.
The cumulative effect adjustment recognized on January 1,
2002, upon adoption of SFAS Nos. 141 and 142, was $34 (after tax),
consisting of income from the write-off of negative goodwill from
prior acquisitions of $49, offset by a $15 write-off for the impairment of goodwill in the automotive business resulting from a
change in the criteria for the measurement of impairments from
an undiscounted to a discounted cash flow method.
E. Acquisitions and Divestitures
During 2002, Alcoa completed 15 acquisitions at a cost of
$1,573, of which $1,253 was paid in cash. The most significant of
these transactions were the acquisitions of Ivex in July 2002 and
Fairchild Fasteners (Fairchild) in December 2002.
The Ivex transaction was valued at approximately $790,
including debt assumed of $320, and the preliminary purchase
price allocation resulted in goodwill of approximately $470. Alcoa
will divest the protective packaging business of Ivex, as this line
of business does not meet future growth plans of the company.
See Note B for additional information. Ivex is part of Alcoa’s
Packaging and Consumer segment. Alcoa paid $650 in cash for
Fairchild, and the preliminary purchase price allocation resulted
in goodwill of approximately $237. Fairchild is part of the
Engineered Products segment.
The purchase price allocations for both Ivex and Fairchild are
preliminary; the final allocation of the purchase price will be
based upon valuation and other studies, including environmental
and other contingent liabilities, that have not been completed.
Pro forma results of the company, assuming all acquisitions had
been made at the beginning of each period presented, would
not have been materially different from the results reported.
In connection with certain acquisitions made during 2002,
Alcoa could be required to make additional payments of approximately $90 from 2003 through 2006 based upon the achievement
of various financial and operating targets.
51
During 2001, Alcoa completed nine acquisitions for $159 in
cash. None of these transactions had a material impact on Alcoa’s
financial statements.
During 2000, Alcoa completed 17 acquisitions for $3,121 in cash
and approximately $4,500 in shares of Alcoa common stock, the
most significant of which were the acquisitions of Reynolds Metals
Company (Reynolds) and Cordant Technologies, Inc. (Cordant).
In May of 2000, Alcoa completed a merger with Reynolds
by issuing approximately 135 million shares of Alcoa common
stock at a value of $33.30 per share to Reynolds stockholders. The
transaction was valued at approximately $5,900, including debt
assumed of $1,297. The purchase price included the conversion of
outstanding Reynolds options to Alcoa options as well as other
direct costs of the acquisition. Goodwill of approximately $2,100
resulted from the purchase price allocation.
As part of the merger with Reynolds, Alcoa divested Reynolds’
interest in an alumina refinery in Sherwin, TX in 2000 and
Reynolds’ interests in alumina refineries in Worsley, Australia and
Stade, Germany and its aluminum smelter in Longview, WA during
2001. In accordance with the provisions of Emerging Issues Task
Force 87-11, ‘‘Allocation of Purchase Price to Assets to be Sold,’’
there were no gains or losses on sales of these assets.
In November of 2001, Alcoa contributed net assets of approximately $200 of Reynolds Aluminum Supply Company (RASCO), the
metals distribution business acquired in the Reynolds acquisition,
to a joint venture in which Alcoa retains a 50% equity interest.
In May and June of 2000, Alcoa completed the acquisitions of
Cordant and Howmet International Inc. (Howmet), a majorityowned company of Cordant. Under the agreement and tender
offer, Alcoa paid $57 for each outstanding share of Cordant
common stock and $21 for each outstanding share of Howmet
common stock. The total value of the transactions was approximately $3,300, including the assumption of debt of $826. The
purchase price includes the conversion of outstanding Cordant and
Howmet options to Alcoa options as well as other direct costs of
the acquisition. In April of 2001, Alcoa completed the sale of
Thiokol Propulsion (Thiokol), a business acquired in the Cordant
transaction, to Alliant Techsystems Inc. for net proceeds of $698 in
cash, which included a working capital adjustment, and recognized
a $55 pretax gain that was included in other income. Goodwill of
approximately $2,200 resulted from the purchase price allocation,
after considering the impact of the Thiokol sale.
The following unaudited pro forma information for the year
ended December 31, 2000 assumes that the acquisitions of Reynolds
and Cordant had occurred at the beginning of 2000. 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 among Alcoa, Reynolds, and Cordant;
and additional depreciation related to the increase in basis that
resulted from the transactions. Tax effects from the pro forma
adjustments previously noted have been included at the 35% U.S.
statutory rate.
52
(Unaudited)
Sales
Net income
Earnings per share:
Basic
Diluted
2000
$25,636
1,514
$
1.86*
1.84*
*Includes the cumulative effect adjustment of the accounting change for
revenue recognition
The pro forma results are not necessarily indicative of what
actually would have occurred if the transactions 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.
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.
For all of Alcoa’s acquisitions, operating results have been included
in the Statement of Consolidated Income since the dates of the
acquisitions.
F. Inventories
December 31
Finished goods
Work in process
Bauxite and alumina
Purchased raw materials
Operating supplies
2002
$ 754
750
341
420
176
$2,441
2001
$ 641
675
410
497
162
$2,385
Approximately 45% of total inventories at December 31, 2002 were
valued on a LIFO basis. If valued on an average-cost basis, total
inventories would have been $514 and $605 higher at the end of
2002 and 2001, respectively. During 2002 and 2000, LIFO inventory
quantities were reduced, which resulted in partial liquidations
of the LIFO bases. The impact of these liquidations increased net
income by $40 in 2002 and $31 in 2000.
G. Properties, Plants, and Equipment, at Cost
December 31
Land and land rights, including mines
Structures
Machinery and equipment
Less: accumulated depreciation and depletion
Construction work in progress
2002
424
5,360
16,144
21,928
11,009
10,919
1,192
$12,111
$
2001
372
5,159
15,305
20,836
10,344
10,492
1,038
$11,530
$
H. Other Assets
December 31
Investments, principally equity investments
Intangibles, net of accumulated amortization
of $361 in 2002 and $314 in 2001
Noncurrent receivables
Deferred income taxes
Prepaid pension benefit
Deferred charges and other
2002
$1,485
2001
$1,384
741
74
1,014
133
999
$4,446
661
42
445
502
794
$3,828
I. Other Noncurrent Liabilities
and Deferred Credits
December 31
Deferred alumina sales revenue
Environmental remediation
Deferred credits
Accrued pension benefit liability
Other noncurrent liabilities
2002
$ 195
368
194
1,547
574
$2,878
2001
$ 204
357
278
568
561
$1,968
2002
2001
$ 665
—
21
$ 220
57
21
500
200
500
500
800
150
1,000
1,000
1,000
600
250
300
500
200
500
500
—
150
1,000
1,000
1,000
—
250
300
323
341
212
224
144
244
41
8,450
85
$8,365
165
39
19
6,486
102
$6,384
J. Debt
December 31
Commercial paper, variable rate,
(1.4% and 1.9% average rates)
6.625% Notes, due 2002
9% Bonds, due 2003
Floating-rate notes, due 2004
(2.1% and 2.2% average rates)
6.125% Bonds, due 2005
7.25% Notes, due 2005
5.875% Notes, due 2006
4.25% Notes, due 2007
6.625% Notes, due 2008
7.375% Notes, due 2010
6.5% Notes, due 2011
6% Notes, due 2012
5.375% Notes, due 2013
6.5% Bonds, due 2018
6.75% Bonds, due 2028
Tax-exempt revenue bonds ranging from
2.9% to 7.3%, due 2003–2033
Medium-term notes, due 2003–2013
(7.9% and 8.0% average rates)
Alcoa Aluminio
7.5% Export notes, due 2008
Fair value adjustments
Other
Less: amount due within one year
The amount of long-term debt maturing in each of the next five
years is $85 in 2003, $596 in 2004, $1,453 in 2005, $596 in 2006,
and $899 in 2007.
In August 2002, Alcoa issued $1,400 of notes. Of these notes,
$800 mature in 2007 and carry a coupon rate of 4.25%, and $600
mature in 2013 and carry a coupon rate of 5.375%. The proceeds
from these borrowings were used to fund the acquisition of Ivex
and to refinance commercial paper.
In May 2001, Alcoa issued $1,500 of notes. Of these notes,
$1,000 mature in 2011 and carry a coupon rate of 6.5%, and $500
mature in 2006 and carry a coupon rate of 5.875%. In December
2001, Alcoa issued $1,500 of notes. This issue consisted of $1,000
of notes that mature in 2012 and carry a coupon rate of 6%,
and $500 of floating-rate notes that mature in 2004. The proceeds
from these borrowings were used to refinance debt, primarily
commercial paper, and for general corporate purposes.
In April 2002, Alcoa refinanced its $2,000 revolving-credit
agreement that expired in April 2002 into a revolving-credit
agreement that expires in April 2003. Alcoa also has a $1,000
revolving-credit facility that expires in August 2003 and a $1,000
revolving-credit facility that expires in April 2005. Under these
agreements, a certain ratio of indebtedness to consolidated net
worth must be maintained. Commercial paper of $665 and $220
at December 31, 2002 and 2001, respectively, was classified as
long-term debt because it is backed by the revolving-credit facility.
There were no amounts outstanding under the revolving-credit
facilities at December 31, 2002. The interest rate on these facilities,
if drawn upon, is Libor plus 19 basis points, which is subject to
adjustment if Alcoa’s credit rating changes, to a maximum interest
rate of Libor plus 40 basis points.
Aluminio’s export notes are collateralized by receivables due
under an export contract. Certain financial ratios must be
maintained, including the maintenance of a minimum debt service
ratio as well as a certain level of tangible net worth of Aluminio
and its subsidiaries. During 2002, the notes were amended to
exclude the effects of foreign currency changes from the tangible
net worth calculation.
The fair value adjustments result from changes in the carrying
amount of certain fixed-rate debt that was designated as a fair
value hedge. Of the $244 in 2002, $80 relates to outstanding
hedges and $164 relates to hedges on outstanding debt that were
settled early. These adjustments will be recognized as reductions of
interest expense over the remaining maturity of the related hedged
debt (through 2011). For additional information about interest rate
swaps, see Note V.
Short-term borrowings of $37 and $162 at December 31, 2002
and 2001, respectively, consisted of bank and other borrowings.
The weighted average interest rate on short-term borrowings was
5.3% in 2002 and 2.5% in 2001.
K. Minority Interests
The following table summarizes the minority shareholders’ interests
in the equity of consolidated subsidiaries.
December 31
Alcoa of Australia
Alcoa Aluminio
Alcoa World Alumina and Chemicals
Alcoa Fujikura Ltd.
Other majority-owned companies
2002
$ 510
124
208
269
182
$1,293
2001
$ 431
222
175
277
208
$1,313
L. Commitments and Contingencies
Various lawsuits, claims, and proceedings have been or may be
instituted or asserted against Alcoa, including those pertaining to
environmental, product liability, and safety and health matters.
While the amounts claimed 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,
53
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 a participant in several hydroelectric construction
projects in Brazil for purposes of increasing its energy self-suffiDate
completed
2002
Completed projects
Machadinho
Aluminio committed to taking a share of the output of
the completed project for 30 years at cost (including cost of
financing the project). In the event that other participants in this
project fail to fulfill their financial responsibilities, Aluminio may
Committed projects
Barra Grande
Serra do Facão
Pai-Querê
Santa Isabel
Estreito
Scheduled
completion date
2005
2006
2007
to be determined
2008
Share of
output
42.20%
39.50%
35.00%
20.00%
19.08%
These projects were committed to during 2001 and 2002, and
the Barra Grande project commenced construction in 2002. The
plans for financing these projects have not yet been finalized. It
is anticipated that a portion of the project costs will be financed
with third parties. Aluminio may be required to provide guarantees
of project financing or commit to additional investments as these
projects progress. The future of the Santa Isabel project is subject
to receiving appropriate regulatory licenses.
Aluminio accounts for the Machadinho and Barra Grande
hydroelectric projects on the equity method. Its total investment
was $88 and $108 at December 31, 2002 and 2001, respectively.
There have been no significant investments made in any of the
other projects.
Alcoa of Australia (AofA) is party to a number of natural gas
and electricity contracts that expire between 2003 and 2020. 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 delivered. Commitments related to these contracts total
$194 in 2003, $201 in 2004, $213 in 2005, $205 in 2006, $177
in 2007, and $2,391 thereafter. Expenditures under these contracts
totaled $178 in 2002, $179 in 2001, and $188 in 2000.
Alcoa has standby letters of credit related to environmental,
insurance, and other activities. The total amount committed
under these letters of credit, which expire at various dates in 2003
through 2005, was $168 at December 31, 2002.
M. Other Income, Net
December 31
Equity income
Interest income
Foreign exchange losses
Gains on sales of assets
Other income
2002
$ 72
46
(30)
52
39
$179
54
2001
$118
61
(11)
114
26
$308
2000
$115
61
(82)
14
46
$154
ciency and providing a long-term, low-cost source of power for
its facilities.
The completed and committed hydroelectric construction
projects that Aluminio participates in are outlined in the
following tables.
Investment
participation
27.23%
Share of
output
22.62%
Debt
guarantee
through 2013
$95
Debt
guarantee
35.53%
be required to fund a portion of the deficiency. In accordance
with the agreement, if Aluminio funds any such deficiency, its
participation and share of the output from the project will increase
proportionately.
Investment
participation
42.20%
39.50%
35.00%
20.00%
19.08%
Total estimated
project costs
$359
$149
$180
$460
$511
Aluminio’s share
of project costs
$151
$ 59
$ 63
$ 92
$ 97
Performance
bond guarantee
$5
$3
$2
$7
$8
N. Cash Flow Information
Cash payments for interest and income taxes follow.
Interest
Income taxes
2002
$329
583
2001
$418
548
2000
$388
419
The details of cash payments related to acquisitions follow.
Fair value of assets acquired
Liabilities assumed
Stock options issued
Stock issued
Cash paid
Less: cash acquired
Net cash paid for acquisitions
2002
$1,944
(666)
—
—
1,278
25
$1,253
2001
$184
(24)
—
—
160
1
$159
2000
$14,991
(7,075)
(182)
(4,502)
3,232
111
$ 3,121
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 income (ATOI) of each segment. Nonoperating
items such as interest income, interest expense, foreign exchange
gains/losses, the effects of LIFO inventory accounting, minority
interests, special items, discontinued operations, and accounting
changes are excluded from segment ATOI. In addition, certain
expenses, such as corporate general administrative expenses, and
depreciation and amortization on corporate assets, are not included
in segment ATOI. 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, assets held for sale, and other amounts.
The accounting policies of the segments are the same as those
described in the Summary of Significant Accounting Policies
(Note A). Transactions among segments are established based on
negotiation among the parties. Differences between segment totals
and Alcoa’s consolidated totals for line items not reconciled are
primarily due to corporate allocations.
Segment information
2002
Sales:
Third-party sales
Intersegment sales
Total sales
Profit and loss:
Equity income (loss)
Depreciation, depletion, and amortization
Income taxes
After-tax operating income (loss)
Alumina and
Chemicals
Primary
Metals
Alcoa’s products are used primarily by packaging, consumer
products, transportation (including aerospace, automotive, truck
trailer, rail and shipping), building and construction, and industrial
customers worldwide. Total exports from the U.S. from continuing
operations were $1,609 in 2002 compared with $2,050 in 2001
and $1,686 in 2000.
Alcoa’s reportable segments, as reclassified for discontinued
operations and assets held for sale, follow.
Flat-Rolled
Products
Engineered
Products
Packaging
and
Consumer
Other
Total
$1,743
955
$2,698
$3,174
2,655*
$5,829
$4,640
68
$4,708
$5,018
34
$5,052
$2,882
—
$2,882
$2,806
—
$2,806
$20,263
3,712
$23,975
$
$
$
$
—
214
50
107
$
17
130
101
198
$
$
89
134
869
3,143
1
139
130
315
44
300
266
650
(4)
192
87
220
4
82
17
(9)
62
1,057
651
1,481
Assets:
Capital expenditures
Equity investments
Goodwill
Total assets
$ 161
170
24
2,852
$ 248
411
910
7,166
$ 227
50
153
3,266
$ 199
—
2,465
6,164
$
$
$
2001
Sales:
Third-party sales
Intersegment sales
Total sales
$1,908
1,021
$2,929
$3,432
2,849*
$6,281
$4,999
64
$5,063
$5,765
35
$5,800
$2,691
—
$2,691
$3,702
—
$3,702
$22,497
3,969
$26,466
$
$
$
$
—
250
111
173
$
28
136
79
184
$
16
113
—
47
$
94
128
331
2,340
84
317
271
1,883
Profit and loss:
Equity income (loss)
Depreciation, depletion, and amortization
Income taxes
After-tax operating income
1
144
184
471
52
327
434
905
(2)
191
94
262
66
177
307
1,876
990
942
4,728
24,467
95
1,161
902
2,042
Assets:
Capital expenditures
Equity investments
Goodwill
Total assets
$ 129
170
35
2,797
$ 209
319
929
7,122
$ 221
47
143
3,368
$ 252
—
2,178
5,523
$
$
$
2000
Sales:
Third-party sales
Intersegment sales
Total sales
$2,108
1,104
$3,212
$3,756
3,395*
$7,151
$5,446
97
$5,543
$5,199
62
$5,261
$2,079
—
$2,079
$4,071
—
$4,071
$22,659
4,658
$27,317
$
$
$
$
1
213
124
198
$
$
32
127
93
164
$
$ 232
274
956
7,700
$ 185
90
164
3,570
$ 231
6
2,129
5,727
$
$ 100
139
699
3,376
$
Profit and loss:
Equity income
Depreciation, depletion, and amortization
Income taxes
After-tax operating income
Assets:
Capital expenditures
Equity investments
Goodwill
Total assets
3
163
279
585
$ 154
176
39
2,924
50
311
505
1,000
6
188
126
299
—
105
70
131
96
1
310
2,274
*Intersegment sales have been adjusted from amounts previously reported to reflect the elimination of intrasegment sales.
These adjustments had no impact on ATOI.
55
989
981
3,887
23,033
92
1,107
1,197
2,377
998
686
4,297
25,571
Alumina and Chemicals. This segment consists of Alcoa’s
worldwide alumina and chemicals system that includes the mining
of bauxite, which is then refined into alumina. Alumina is sold
directly to internal and external smelter customers worldwide or
is processed into industrial chemical products. Alcoa’s alumina
operations in Australia are a significant component of this segment.
Approximately three-quarters of the third-party sales from this
segment are derived from alumina.
Primary Metals. This segment consists of Alcoa’s worldwide
smelter system. Primary Metals receives alumina primarily from the
Alumina and Chemicals segment and produces aluminum ingot to
be used by Alcoa’s fabricating businesses, as well as sold to external
customers, aluminum traders, and commodity markets. Results
from the sale of aluminum powder, scrap, and excess power are
also included in this segment, as well as the results from aluminum
derivative contracts. The sale of ingot represents approximately
90% of this segment’s third-party sales.
Flat-Rolled Products. 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 sheet and plate used in the
transportation and distributor markets. Approximately 60% of
the third-party sales in this segment are derived from sheet and
plate, and foil used in industrial markets, while the remaining 40%
of third-party sales consists of RCS.
Engineered Products. This segment includes hard- and softalloy extrusions, including architectural extrusions, super-alloy
castings, steel and aluminum fasteners, aluminum forgings, and
wheels. These products serve the transportation, building and
construction, and distributor markets.
Packaging and Consumer. This segment includes consumer
products, foodservice, flexible packaging, and packaging graphics
design, as well as closures and packaging machinery. The principal
products in this segment include aluminum foil; plastic wraps
and bags; metal and plastic beverage and food closures; flexible
packaging; prepress services; and thermoformed plastic containers
and extruded plastic sheet and film. Consumer products are
marketed under brands including Reynolds Wrap姞, Diamond姞,
Baco姞, and Cut-Rite姞 wax paper.
Other. This group includes other Alcoa businesses that are not
included in the segments previously mentioned. This group
includes Alcoa Fujikura Ltd., which produces electrical components
for the automotive industry along with fiber-optic cable and
provides services to the telecommunications industry; residential
building products operations, Alcoa Home Exteriors (formerly
Alcoa Building Products); automotive parts businesses; Thiokol,
a producer of solid rocket propulsion systems (Thiokol was
sold in April 2001); and Reynolds’ metal distribution business,
RASCO (In November 2001, the net assets of RASCO were contributed to a joint venture, Integris Metals, Inc., in which Alcoa retains
a 50% equity interest. Effective January 1, 2002, equity income
from Integris is included in corporate.).
56
The following reconciles segment information to consolidated
totals.
2002
Sales:
Total sales
Elimination of intersegment sales
Consolidated sales
Net income:
Total after-tax operating income
Impact of intersegment profit
eliminations
Unallocated amounts (net of tax):
Interest income
Interest expense
Minority interests
Corporate expense
Special items
Discontinued operations
Accounting changes
Other
Consolidated net income
Assets:
Total assets
Elimination of intersegment
receivables
Unallocated amounts:
Cash, cash equivalents, and
short-term investments
Deferred tax assets
Corporate goodwill
Corporate fixed assets
LIFO reserve
Operations to be divested from
Reynolds acquisition
Assets held for sale
Other
Consolidated assets
2001
2000
$23,975
(3,712)
$20,263
$26,466
(3,969)
$22,497
$27,317
(4,658)
$22,659
$ 1,481
$ 2,042
$ 2,377
$
(6)
(20)
30
(227)
(135)
(234)
(286)
(112)
34
(125)
420
40
(242)
(208)
(261)
(397)
1
—
(47)
908
$24,467
$
$23,033
24
40
(278)
(381)
(227)
—
12
(5)
(78)
$ 1,484
$25,571
(285)
(309)
(530)
413
1,482
1,637
593
(514)
527
854
1,710
513
(605)
371
744
1,570
414
(658)
—
575
1,442
$29,810
—
951
1,681
$28,355
1,473
998
1,738
$31,691
Geographic information for revenues, based on country of
origin, and long-lived assets follows.
Revenues:
U.S.
Australia
Spain
United Kingdom
Brazil
Germany
Other
Long-lived assets:
U.S.
Canada
Australia
United Kingdom
Brazil
Germany
Other
2002
2001
2000
$12,884
1,250
999
742
676
656
3,056
$20,263
$14,667
1,350
1,011
899
707
720
3,143
$22,497
$15,215
1,690
1,146
379
880
713
2,636
$22,659
$12,637
2,701
1,543
752
340
246
1,925
$20,144
$12,113
2,782
1,345
682
520
194
1,411
$19,047
$13,941
2,837
1,458
378
603
213
1,281
$20,711
P. Preferred and Common Stock
Preferred Stock. Alcoa has two classes of preferred stock. Serial
preferred stock has 557,740 shares authorized and 546,024 shares
outstanding, 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 1.8 billion shares authorized at a
par value of $1 per share. As of December 31, 2002, 107.2 million
shares of common stock were reserved for issuance under the
long-term stock incentive plans.
Stock options under the company’s stock incentive plans have
been and may be granted, generally at not less than market prices
on the dates of grant. The stock option program includes a reload
or stock continuation ownership feature. Stock options granted
have a maximum term of ten years. Vesting periods are one year
from the date of grant and six months for options granted under
the reload feature. Beginning in 2003, new option grants will
vest one-third in each of three years from the date of the grant
and the reload feature of new options will be subject to cancellation or modification.
The transactions for shares under options were: (shares in
millions)
2002
2001
2000
73.5
$32.02
74.8
$29.29
53.0
$22.15
—
—
15.2
$25.09
17.3
$36.10
28.9
$36.19
31.3
$37.87
(7.1)
$26.77
(29.0)
$29.03
(24.3)
$22.03
(2.1)
$37.50
(1.2)
$32.50
(.4)
$34.90
81.6
$33.19
73.5
$32.02
74.8
$29.29
Exercisable, end of year:
Number of options
Weighted average exercise price
68.8
$32.68
58.6
$31.88
44.6
$23.42
Shares reserved for future options
25.6
21.0
15.8
Outstanding, beginning of year:
Number of options
Weighted average exercise price
Options assumed from acquisitions:
Number of options
Weighted average exercise price
Granted:
Number of options
Weighted average exercise price
Exercised:
Number of options
Weighted average exercise price
Expired or forfeited:
Number of options
Weighted average exercise price
Outstanding, end of year:
Number of options
Weighted average exercise price
$
—
—
$
The following tables summarize certain stock option information
at December 31, 2002: (shares in millions)
Options Outstanding
Range of
exercise price
$ 0.125
$ 4.38 – $12.15
$12.16 – $19.93
$19.94 – $27.71
$27.72 – $35.49
$35.50 – $45.59
Total
Number
0.1
1.6
4.7
9.8
20.0
45.4
81.6
Weighted average
remaining life
employment career
2.54
3.08
4.34
6.28
6.64
5.99
Weighted average
exercise price
$0.125
10.27
16.95
22.28
31.68
38.76
$33.19
Number
0.1
1.6
4.7
9.8
20.0
32.6
68.8
Weighted average
exercisable price
$0.125
10.27
16.95
22.28
31.68
39.81
$32.68
Options Exercisable
Range of
exercise price
$ 0.125
$ 4.38 – $12.15
$12.16 – $19.93
$19.94 – $27.71
$27.72 – $35.49
$35.50 – $45.59
Total
Q. 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 equivalents outstanding.
The information used to compute basic and diluted EPS on
income from continuing operations follows. (shares in millions)
Income from continuing operations
Less: preferred stock dividends
Income from continuing operations
available to common shareholders
Average shares outstanding — basic
Effect of dilutive securities:
Shares issuable upon exercise of
dilutive stock options
Average shares outstanding — diluted
2002
$498
2
2001
$907
2
2000
$1,477
2
$496
845.4
$905
858.0
$1,475
814.2
4.4
849.8
8.6
866.6
9.0
823.2
Options to purchase 68 million shares of common stock at an
average exercise price of $36 per share were outstanding as of
December 31, 2002 but were not included in the computation
of diluted EPS because the option exercise price was greater than
the average market price of the common shares.
57
R. Income Taxes
The components of net deferred tax assets and liabilities follow.
The components of income from continuing operations before
taxes on income were:
2002
Deferred Deferred
tax
tax
December 31
assets liabilities
Depreciation
$ —
$1,499
Employee benefits
1,484
—
Loss provisions
373
—
Deferred income/expense
365
157
Tax loss carryforwards
334
—
Tax credit carryforwards
176
—
Other
293
279
3,025
1,935
Valuation allowance
(179)
—
$2,846
$1,935
2002
$ (383)
1,308
$ 925
U.S.
Foreign
2001
$ (24)
1,661
$1,637
2000
$ 798
1,996
$2,794
The provision for taxes on income from continuing operations
consisted of:
Current:
U.S. federal*
Foreign
State and local
Deferred:
U.S. federal*
Foreign
State and local
Total
2002
2001
2000
$ 95
358
17
470
$ (20)
521
45
546
$212
568
21
801
(204)
11
15
(178)
$ 292
(32)
3
5
(24)
$522
90
42
3
135
$936
*Includes U.S. taxes related to foreign income
The exercise of employee stock options generated a tax benefit
of $34 in 2002, $90 in 2001, and $108 in 2000. 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 for continuing operations follows.
U.S. federal statutory rate
Taxes on foreign income
State taxes net of federal benefit
Minority interests
Permanent differences on asset
disposals
Goodwill impairment and
amortization
Adjustments to prior years’ accruals
Other
Effective tax rate
58
2002
35.0%
(5.9)
2.4
1.4
2001
35.0%
(8.4)
1.1
1.8
2000
35.0%
(3.5)
.5
.1
1.8
(1.4)
—
1.1
(3.8)
(.5)
31.5%
2.4
1.5
(.1)
31.9%
1.2
.3
(.1)
33.5%
2001
Deferred Deferred
tax
tax
assets liabilities
$ —
$1,744
1,071
—
405
—
279
132
329
—
219
—
293
251
2,596
2,127
(201)
—
$2,395
$2,127
Of the total deferred tax assets associated with the tax loss
carryforwards, $79 expires over the next ten years, $85 over the
next 20 years, and $170 is unlimited. Of the tax credit carryforwards,
$144 is unlimited with the balance expiring over the next ten years.
A substantial portion of the valuation allowance relates to the loss
carryforwards because the ability to generate sufficient foreign
taxable income in future years is uncertain. Approximately $52 of
the valuation allowance relates to acquired companies for which
subsequently recognized benefits will reduce goodwill.
The cumulative amount of Alcoa’s share of undistributed
earnings for which no deferred taxes have been provided was $5,893
at December 31, 2002. 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.
S. 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. All U.S. salaried
and certain hourly employees hired after January 1, 2002 will not
have postretirement health care benefits.
The table below reflects the status of Alcoa’s pension and postretirement benefit plans.
Pension benefits
2002
2001
Postretirement benefits
2002
2001
December 31
Change in benefit obligation
Benefit obligation at beginning of year
Service cost
Interest cost
Amendments
Actuarial losses
Acquisitions (principally Ivex and Fairchild)
Divestitures (principally Thiokol in 2001)
Benefits paid
Exchange rate
Benefit obligation at end of year
$ 8,488
176
593
20
677
7
(1)
(656)
56
$ 9,360
$8,270
162
578
136
634
—
(664)
(585)
(43)
$8,488
$ 3,177
25
224
(52)
608
18
—
(339)
—
$ 3,661
$ 2,924
25
220
76
369
—
(159)
(278)
—
$ 3,177
Change in plan assets
Fair value of plan assets at beginning of year
Actual return on plan assets
Acquisitions (principally Ivex and Fairchild)
Employer contributions
Participants’ contributions
Divestitures (principally Thiokol in 2001)
Transfer to defined contribution pension plan
Benefits paid
Administrative expenses
Exchange rate
Fair value of plan assets at end of year
$ 8,434
(376)
1
59
18
—
—
(634)
(21)
50
$ 7,531
$9,790
65
—
37
11
(783)
(49)
(574)
(17)
(46)
$8,434
$
$
Funded status
Unrecognized net actuarial loss (gain)
Unrecognized net prior service cost (credit)
Net amount recognized
$(1,829)
1,803
126
$ 100
$
(54)
(8)
138
$ 76
$(3,542)
843
(7)
$(2,706)
$(3,054)
221
11
$(2,822)
Amounts recognized in the Consolidated Balance Sheet consist of:
Prepaid benefit
Accrued benefit liability
Intangible asset
Accumulated other comprehensive loss
Net amount recognized
$ 133
(1,547)
102
1,412
$ 100
$ 502
(568)
50
92
$ 76
$
—
(2,706)
—
—
$(2,706)
$
—
(2,822)
—
—
$(2,822)
$
123
(4)
—
—
—
—
—
—
—
—
119
$
155
1
—
—
—
(33)
—
—
—
—
123
The components of net periodic benefit costs are reflected below.
December 31
Components of net periodic
benefit costs (income)
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service
cost (benefit)
Recognized actuarial loss (gain)
Amortization of transition obligation
Net periodic benefit costs (income)
2002
Pension benefits
2001
2000
2002
Postretirement benefits
2001
2000
$ 176
593
(776)
$ 162
578
(781)
$ 162
502
(666)
$ 25
224
(11)
$ 25
220
(11)
$ 25
177
(11)
38
4
—
$ 35
34
(26)
—
$ (33)
35
(18)
2
$ 17
(32)
5
—
$211
(33)
(2)
—
$199
(34)
(2)
—
$155
59
The aggregate benefit obligation and fair value of plan assets for
the pension plans with benefit obligations in excess of plan assets
were $9,121 and $7,310, respectively, as of December 31, 2002,
and $1,921 and $1,362, respectively, as of December 31, 2001. The
aggregate pension accumulated benefit obligation and fair value of
plan assets with accumulated benefit obligations in excess of plan
assets were $8,712 and $7,300, respectively, as of December 31,
2002, and $1,708 and $1,284, respectively, as of December 31, 2001.
Weighted average assumptions used in the accounting for
Alcoa’s plans follow.
Discount rate, at year-end
Expected long-term return on
plan assets
Rate of compensation increase
2002
6.75%
2001
7.25%
2000
7.75%
9.50
5.00
9.50
5.00
9.00
5.00
Effective January 1, 2003, the expected long-term return on plan
assets was changed to 9.0%.
For measurement purposes, an 11% annual rate of increase in
the per capita cost of covered health care benefits was assumed for
2003. The rate was assumed to decrease gradually to 5% by 2008
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-percentagepoint change in these assumed rates would have the following
effects:
1%
increase
Effect on total of service and interest cost
components
Effect on postretirement benefit obligations
$ 15
212
1%
decrease
$ (13)
(189)
Alcoa also sponsors a number of defined contribution pension
plans. Expenses were $101 in 2002, $103 in 2001, and $80 in 2000.
T. Lease Expense
Certain equipment, warehousing and office space, and oceangoing
vessels are under operating lease agreements. Total expense from
continuing operations for all leases was $212 in 2002, $197 in 2001,
and $151 in 2000. Under long-term operating leases, minimum
annual rentals are $134 in 2003, $112 in 2004, $91 in 2005, $74 in
2006, $60 in 2007, and a total of $223 for 2008 and thereafter.
U. Interest Cost Components
2002
$350
22
$372
Amount charged to expense
Amount capitalized
60
2001
$371
22
$393
2000
$427
20
$447
V. Other Financial Instruments and Derivatives
Other Financial Instruments. The carrying values and fair
values of Alcoa’s financial instruments at December 31 follow.
2002
Carrying
Fair
value
value
Cash and cash equivalents $ 344
$ 344
Short-term investments
69
69
Noncurrent receivables
74
74
Available-for-sale
investments
135
135
Short-term debt
122
122
Long-term debt
8,365
8,935
2001
Carrying
Fair
value
value
$ 512
$ 512
15
15
42
42
159
264
6,384
159
264
6,531
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.
Noncurrent Receivables. The fair value of noncurrent
receivables is based on anticipated cash flows which approximates
carrying value.
Available-for-Sale Investments. The fair value of investments is
based on readily available market values. Investments in marketable
equity securities are classified as ‘‘available for sale’’ and are carried
at fair 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.
Derivatives. Alcoa holds or purchases derivative financial instruments for purposes other than trading. Details of the fair values of
the significant instruments follow.
Aluminum
Interest rates
Foreign currency
Other commodities, principally natural gas
2002
$(14)
80
57
51
2001
$ (65)
34
(132)
(30)
Fair Value Hedges
Aluminum. Customers often require Alcoa to enter into long-term,
fixed-price commitments. These commitments expose Alcoa
to the risk of fluctuating aluminum prices between the time the
order is committed and the time that the order is shipped. Alcoa’s
commodity risk management policy is to manage, through the
use of futures and option contracts, the aluminum price risk associated with a portion of its fixed-price firm commitments. These
contracts cover known exposures, generally within three years.
Interest Rates. Alcoa uses interest rate swaps to help maintain
a strategic balance between fixed- and floating-rate debt and to
manage overall financing costs. The company has entered into pay
floating, receive fixed interest rate swaps to effectively convert the
interest rate from fixed to floating on $1,950 of debt, through 2010.
For additional information about interest rate swaps (including
settlements that occurred during 2002) and their effect on debt
and interest expense, see Note J.
Currencies. During 2002, Aluminio entered into cross-currency
interest rate swaps that effectively convert its U.S. dollar denominated debt into Brazilian reais debt at local interest rates.
Hedges of these existing assets, liabilities, and firm commitments
qualify as ‘‘fair value’’ hedges. As a result, the fair values of derivatives and changes in the fair values of the underlying hedged items
are reported in the Consolidated Balance Sheet. Changes in the fair
values of these derivatives and underlying hedged items generally
offset and are recorded each period in sales, cost of goods sold,
interest expense, or other income, consistent with the underlying
hedged item. There were no transactions that ceased to qualify as
a fair value hedge in 2002.
Cash Flow Hedges
Currencies. Alcoa is subject to exposure from fluctuations in
foreign currencies. Foreign currency exchange contracts are used
to hedge the variability in cash flows from the forecasted payment
or receipt of currencies other than the functional currency. Alcoa’s
foreign currency contracts were principally used to purchase
Australian dollars, Brazilian reais, and Canadian dollars. The U.S.
dollar notional amount of all foreign currency contracts was $798
and $1,409 as of December 31, 2002 and 2001, respectively.
Commodities. Alcoa may elect to sell forward a portion of its
anticipated primary aluminum and alumina production. In addition,
Alcoa anticipates the continued requirement to purchase aluminum
and other commodities such as natural gas, fuel oil, and electricity
for its operations. Alcoa enters into futures and options contracts
to reduce volatility in the price of these commodities.
For these cash flow hedge transactions, the fair values of the
derivatives are recorded on the Consolidated Balance Sheet.
The effective portions of the changes in the fair values of these
derivatives are recorded in other comprehensive income and are
reclassified to sales, cost of goods sold, or interest expense in
the period in which earnings are impacted by the hedged items
or in the period that the transaction no longer qualifies as a cash
flow hedge. There were no material transactions that ceased to
qualify as a cash flow hedge in 2002. These contracts cover periods
commensurate with known or expected exposures, generally
within three years. Assuming market rates remain constant with
the rates at December 31, 2002, $22 of the $105 gain included
in other comprehensive income is expected to be recognized in
earnings over the next 12 months.
Other
Certain contracts are used to offset a portion of the impact
of exchange and interest rate changes on foreign currency
denominated debt. The fair value of these contracts was a gain
of approximately $33 (pretax) at December 31, 2002. Changes
in the fair value of these contracts are included in other income
on the Statement of Consolidated Income and offset a portion
of the impact of the exchange differences on the debt.
Alcoa is exposed to credit loss in the event of nonperformance
by counterparties on the above instruments, as well as credit
or performance risk with respect to its hedged customers’ commitments. Although nonperformance is possible, Alcoa does not
anticipate nonperformance by any of these parties. Contracts
are with creditworthy counterparties and are further supported
by cash, treasury bills, or irrevocable letters of credit issued by
carefully chosen banks. In addition, various master netting
arrangements are in place with counterparties to facilitate settlement of gains and losses on these contracts.
For further information on Alcoa’s hedging and derivatives
activities, see Note A.
W. Environmental Matters
Alcoa participates in environmental assessments and cleanups
at a number of locations. These include approximately 28 owned
or operating facilities and adjoining properties, approximately
38 previously owned or operated facilities and adjoining properties,
and approximately 72 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.
The following discussion provides additional details regarding
the current status of Alcoa’s significant sites where the final
outcome cannot be determined or the potential costs in the future
cannot be estimated.
Massena, New York. Alcoa has been conducting investigations
and studies of the Grasse River, adjacent to Alcoa’s Massena, NY
plant site, under order from the U.S. Environmental Protection
Agency (EPA) issued under the Comprehensive Environmental
Response, Compensation, and Liability Act, also known as Superfund. Sediments and fish in the river contain varying levels of
polychlorinated biphenyl (PCB).
During 2000 and 2001, Alcoa completed certain studies and
investigations on the river, including pilot tests of sediment-capping
techniques, and other remediation technologies. In February 2002,
Alcoa submitted a final Analysis of Alternatives Report based on
these evaluations and included additional remedial alternatives
required by the EPA. The range of costs associated with the remedial
alternatives evaluated in the 2002 report is between $2 and $525.
Alcoa believes that rational, scientific analysis supports a remedy
involving the containment of sediments in place via natural or
man-made processes. Based on the current assessment of the EPA
decision-making process, Alcoa has concluded that the selection of
the $2 alternative, based on natural recovery only, is remote. Alcoa
continues to believe that alternatives involving the largest amounts
61
of sediment removal should not be selected for the Grasse River
remedy. Therefore, Alcoa believes that the alternatives that should
reasonably be considered for selection range from engineered
capping and natural recovery of $30 to a combination of moderate
dredging, capping, and natural recovery of $90. Accordingly, Alcoa
has adjusted the reserve for the Grasse River to $30, representing
the low end of the range of possible alternatives, as no one of the
alternatives is more likely to be selected than any other. The EPA’s
ultimate selection of a remedy could result in additional liability.
However, as the process continues, it allows for input that can
influence the scope and cost of the remedy that will be selected by
the EPA in its issuance of the formal Record of Decision (ROD).
Alcoa may be required to record a subsequent reserve adjustment
at the time the ROD is issued.
Sherwin, Texas. In connection with the sale of the Sherwin
alumina refinery in Texas, which was required to be divested as
part of the Reynolds merger in 2000, Alcoa has agreed to retain
responsibility for the remediation of then existing environmental
conditions, as well as a pro rata share of the final closure of the
active waste disposal areas, which remain in use. Alcoa’s share of
the closure costs is proportional to the total period of operation
of the active waste disposal areas. Alcoa estimated its liability for
the active disposal areas by making certain assumptions about
the period of operation, the amount of material placed in the area
prior to closure, and the appropriate technology, engineering, and
regulatory status applicable to final closure. The most probable cost
for remediation has been reserved. It is reasonably possible that
an additional liability, not expected to exceed $75, may be incurred
if actual experience varies from the original assumptions used.
62
Based on the foregoing, it is possible that Alcoa’s results of
operations, in a particular period, could be materially affected
by matters relating to these sites. However, based on facts currently
available, management believes that adequate reserves have been
provided and 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 2002 and
2001 was $436 and $431 (of which $68 and $74 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. Of the 2002 reserve balance, approximately 33% relates to the Massena, NY and Sherwin, TX sites.
Remediation expenses charged to the reserve were $50 in 2002,
$72 in 2001, and $77 in 2000. These include expenditures
currently mandated, as well as those not required by any regulatory
authority or third party. In 2002, the reserve balance was increased
by $55 primarily to cover anticipated future environmental expenditures at various sites, including Massena, and for acquisitions
made. In 2001, the reserve balance was increased by $56 primarily
as a result of acquisitions and the shutdown of the company’s
magnesium plant in Addy, WA.
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.
Supplemental Financial Information
Quarterly Data (unaudited)
(dollars in millions, except per-share amounts)
First
2002
Sales
Income (loss) from continuing operations
Loss from discontinued operations (B)
Cumulative effect of accounting change
Net income (loss)*
Earnings (loss) per share:
Basic:
Income (loss) from continuing operations
Loss from discontinued operations
Cumulative effect of accounting change
Net income (loss)
Diluted:
Income (loss) from continuing operations
Loss from discontinued operations
Cumulative effect of accounting change
Net income (loss)
Second
Third
Fourth
$4,900
184
—
34
218
$5,158
237
(5)
—
232
$5,144
202
(9)
—
193
.22
—
.04
.26
.28
(.01)
—
.27
.24
(.01)
—
.23
(.15)
(.12)
—
(.27)
.59
(.13)
.04
.50
.22
—
.04
.26
.28
(.01)
—
.27
.24
(.01)
—
.23
(.15)
(.12)
—
(.27)
.58
(.13)
.04
.49
$5,061
(125)
(98)
—
(223) †
Year
$20,263
498
(112)
34
420
* After special charges of $23 in the third quarter, and special charges of $238 and impairment of goodwill of $20
in the fourth quarter (Notes C and D)
† The 2002 fourth quarter includes a credit of $20 related to changes in the LIFO index.
2001
Sales
Income (loss) from continuing operations
Income (loss) from discontinued operations (B)
Net income (loss)*
Earnings (loss) per share:
Basic:
Income (loss) from continuing operations
Income (loss) from discontinued operations
Net income (loss)
Diluted:
Income (loss) from continuing operations
Income (loss) from discontinued operations
Net income (loss)
First
Second
Third
$6,085
402
2
404
$5,894
306
1
307
$5,418
337
2
339
.47
—
.47
.36
—
.36
.40
—
.40
(.17)
—
(.17)
1.06
—
1.06
.46
—
.46
.35
—
.35
.39
—
.39
(.17)
—
(.17)
1.05
—
1.05
* After special charges of $114 in the second quarter and $241 in the fourth quarter (Note C)
† The 2001 fourth quarter includes a credit of $22 related to changes in the LIFO index.
Number of Employees (unaudited)
U.S.
Other Americas
Europe
Pacific
2002
53,500
38,200
28,300
7,000
127,000
2001
56,500
38,700
27,700
6,100
129,000
2000
61,600
46,500
27,400
6,500
142,000
63
Fourth
$5,100
(138)
(4)
(142) †
Year
$22,497
907
1
908
11-Year Summary of Financial and Other Data
(dollars in millions, except per-share amounts and ingot prices)
The financial information for all periods has been reclassified to reflect assets held for sale and discontinued operations.
For the year ended December 31
Sales
Cost of goods sold
Selling, general administrative, and other expenses
Research and development expenses
Depreciation, depletion, and amortization
Impairment of goodwill
Special items — expense (income)
Interest expense
Other income, net
Taxes on income
Less: Minority interests’ share
Income (loss) from continuing operations
(Loss) income from discontinued operations
Cumulative effect of accounting change*
Net income (loss)
Alcoa’s average realized price per pound for aluminum ingot
LME average 3-month price per pound for aluminum ingot
Dividends Declared Preferred stock
Common stock
Financial Position
Working capital
Properties, plants, and equipment, net
Other assets (liabilities), net
Total assets
Long-term debt (noncurrent)
Minority interests
Shareholders’ equity
Common Share Data Basic earnings (loss) per share †
(dollars per share)
Diluted earnings (loss) per share †
Dividends declared
Book value (based on year-end outstanding shares)
Price range: High
Low
Shareholders (number)
Average shares outstanding (thousands)
Operating Data
Alumina shipments
(thousands of metric tons) Aluminum product shipments:
Primary
Fabricated and finished products
Total
Primary aluminum capacity:
Consolidated
Total, including affiliates’ and others’ share of joint ventures
Primary aluminum production:
Consolidated
Total, including affiliates’ and others’ share of joint ventures
Other Statistics
Capital expenditures
Number of employees
Pretax profit on sales (%)
Return on average shareholders’ equity (%)
Return on average invested capital (%)
Operating Results
2002
$20,263
16,247
1,147
214
1,108
44
407
350
179
292
135
498
(112)
34
420
.66
.62
2
507
1,852
12,111
5,622
29,810
8,365
1,293
9,927
.50
.49
.600
11.69
39.75
17.62
273,000
845,439
7,486
2001
$22,497
17,539
1,256
203
1,234
—
565
371
308
522
208
907
1
—
908
.72
.66
2
516
1,564
11,530
5,217
28,355
6,384
1,313
10,614
1.06
1.05
.600
12.46
45.71
27.36
266,800
857,990
7,217
1,912
3,296
5,208
1,776
3,184
4,960
2,032
3,326
5,358
3,948
4,851
4,165
5,069
4,219
5,141
3,500
4,318
$1,263
127,000
4.6
4.1
4.1
3,488
4,257
$1,170
129,000
7.3
8.3
7.5
3,539
4,395
$1,102
142,000
12.3
16.8
15.0
* Reflects the cumulative effect of the accounting change for goodwill in 2002, revenue recognition in 2000, and
postretirement benefits and income taxes in 1992
† Represents earnings per share on net income
64
2000
$22,659
17,111
1,088
194
1,199
—
—
427
154
936
381
1,477
12
(5)
1,484
.77
.71
2
416
(602)
12,372
6,148
31,691
4,982
1,514
11,422
1.82
1.80
.500
13.13
43.63
23.13
265,300
814,229
7,472
1999
$16,133
12,383
831
128
882
—
—
195
124
548
242
1,048
6
—
1,054
.67
.63
2
296
1,614
8,729
85
17,066
2,652
1,458
6,318
1.43
1.41
.403
8.51
41.69
17.97
185,000
733,888
7,054
1998
$15,259
11,864
779
128
840
—
—
198
150
514
238
848
5
—
853
.67
.63
2
263
1,566
8,889
(53)
17,463
2,870
1,476
6,056
1.22
1.21
.375
8.18
20.31
14.50
119,000
698,228
7,130
1997
$13,319
10,275
682
143
735
—
(96)
141
163
529
268
805
—
—
805
.75
.73
2
169
1,848
6,457
(989)
13,071
1,457
1,440
4,419
1.17
1.15
.244
6.49
22.41
16.06
95,800
688,904
7,223
1996
$13,061
10,084
717
165
747
—
199
134
67
361
206
515
—
—
515
.73
.70
2
232
1,801
6,807
(845)
13,450
1,690
1,611
4,463
.74
.73
.333
6.39
16.56
12.28
88,300
697,334
6,406
1995
$12,500
9,477
718
141
713
—
16
120
155
446
233
791
—
—
791
.81
.83
2
160
2,010
6,764
(1,504)
13,643
1,216
1,609
4,445
1.11
1.10
.225
6.23
15.06
9.22
83,600
712,072
6,407
1994
$ 9,904
7,945
640
126
671
—
80
107
379
179
160
375
—
—
375
.64
.68
2
142
1,562
6,588
(1,434)
12,353
1,030
1,688
3,999
.53
.52
.200
5.52
11.28
8.03
55,200
711,528
6,660
1993
$ 9,056
7,264
633
130
692
—
151
88
93
(10)
196
5
—
—
5
.56
.53
2
140
1,587
6,449
(1,630)
11,597
1,433
1,389
3,584
.01
.01
.200
4.99
9.81
7.38
55,300
701,384
5,962
1992
$ 9,491
7,415
623
212
683
—
252
105
21
106
144
(28)
—
(1,111)
(1,139)
.59
.58
2
137
1,077
6,373
(1,685)
11,023
855
1,306
3,604
(1.68)
(1.67)
.200
5.18
10.09
7.63
55,200
683,792
5,468
1,411
3,012
4,423
1,367
2,559
3,926
920
2,036
2,956
901
1,940
2,841
673
1,909
2,582
655
1,896
2,551
841
1,739
2,580
1,023
1,774
2,797
3,182
4,024
3,159
3,984
2,108
2,652
2,101
2,642
1,905
2,428
1,905
2,428
1,905
2,428
1,905
2,428
2,851
3,695
$917
107,700
11.4
17.2
13.8
2,471
3,158
$931
103,500
10.5
16.3
13.8
1,725
2,254
$913
81,600
11.9
18.1
15.5
1,708
2,240
$996
76,800
8.2
11.6
11.0
1,506
2,037
$887
72,000
11.6
18.5
15.9
1,531
2,067
$612
60,200
7.9
9.9
9.3
1,770
2,315
$757
63,400
2.1
.1
4.3
1,903
2,446
$789
63,600
3.1
(26.7)
(14.0)
65
Directors
Sir Ronald Hampel, 70, former chairman of United Business
Media, a U.K.-based media company, from 1999-2002; chairman of
Imperial Chemical Industries plc (ICI) 1995-1999, and a director
1985-1999; deputy chairman and chief executive officer 1993-1995;
chief operating officer 1991-1993. Director of Alcoa since 1995.
Alain J. P. Belda, 59, chairman of the board of Alcoa since January
2001, and chief executive officer since May 1999. Elected president
and chief operating officer in January 1997, vice chairman in 1995,
and executive vice president in 1994. President of Alcoa Aluminio
S.A. from 1979 to 1994; president – Latin America in 1991. Director
of Alcoa since 1998.
Kathryn S. Fuller, 56, president of the World Wildlife Fund U.S.
(WWF), an independent organization dedicated to the conservation
of nature, since 1989; various positions with the organization since
1982 including executive vice president, general counsel, and director
of WWF’s public policy and wildlife trade monitoring programs;
prior to WWF, chief, Wildlife and Marine Resources Section, U.S.
Department of Justice. Director of Alcoa since 2002.
Carlos Ghosn, 48, president and chief executive officer, Nissan
Motor Company, Ltd., since 2001. Mr. Ghosn previously served
as chief operating officer of Nissan Motor Company, Ltd. from
1999. From 1996 to 1999 he was executive vice president of Renault
S.A., and from 1979 to 1996 he served in various capacities with
Compagnie Générale des Éstablissements Michelin, including
chairman, president, and chief executive officer of Michelin North
America, Inc. from 1990 to 1996. Director of Alcoa since 2002.
Joseph T. Gorman, 65, former chairman and chief executive officer
of TRW Inc., a global company serving the automotive, space, and
information systems markets, from 1988-2001; president and chief
operating officer 1985-1988; president 1985-1991; executive vice
president 1980-1985; vice president and general counsel 1976-1980.
Director of Alcoa since 1991.
Judith M. Gueron, 61, president of Manpower Demonstration
Research Corporation (MDRC), a nonprofit research organization,
since 1986; executive vice president for research and evaluation
1978-1986; prior to MDRC, director of special projects and studies
and a consultant for the New York City Human Resources
Administration. Director of Alcoa since 1988.
Alain J. P. Belda
Joseph T. Gorman
Carlos Ghosn
Franklin A. Thomas
Henry B. Schacht
John P. Mulroney, 67, executive director of the Opera Company
of Philadelphia since 1999; former president and chief operating
officer of Rohm and Haas Company, a specialty chemicals
manufacturer, from 1986-1998. Director of Alcoa since 1987.
Henry B. Schacht, 68, was chairman of Lucent Technologies Inc.,
a communications systems and services company, from October
2000 to February 2003 and its chief executive officer from October
2000 to January 2002. He has been on unpaid leave from Warburg
Pincus, where he served in various roles, including managing
director and partner since 2000, and senior advisor in 1999.
Mr. Schacht previously served as chief executive officer of Lucent
Technologies Inc. from February 1996 to October 1997, chairman
from 1996 to 1998, and senior advisor from February 1998 to
February 1999. Mr. Schacht was chairman of Cummins Inc. from
1977 to 1995 and its chief executive officer from 1973 to 1994.
Director of Alcoa since 1994.
Franklin A. Thomas, 68, consultant, TFF Study Group, a nonprofit
institution assisting development in South Africa, since 1996;
chairman, September 11 Fund since 2001; president and chief
executive officer of The Ford Foundation 1979-1996; president
and chief executive officer of Bedford Stuyvesant Restoration
Corporation 1967-1977. Director of Alcoa since 1977.
Ernesto Zedillo, 51, director, Yale Center for the Study of
Globalization. Dr. Zedillo is the former president of Mexico;
elected in 1994 and served until 2000; held various positions in the
Mexican federal government since late 1987 including secretary of
education, secretary of economic programming and budget, and
undersecretary of planning and budget control. Prior to his work
with the Mexican government, deputy director of the Bank of
Mexico. Director of Alcoa since 2002.
Sir Ronald Hampel
Judith M. Gueron
Kathryn S. Fuller
John P. Mulroney
Ernesto Zedillo
Board
Committees
Officers
Audit Committee
Alain J. P. Belda
Chairman and
Chief Executive Officer
Rudolph P. Huber
Vice President and Chief
Information Officer
Robert T. Alexander
Vice President – Alcoa and
Chairman, Alcoa Fujikura, Ltd.
Robert S. Hughes, II
Chairman’s Counsel
Joseph T. Gorman
Judith M. Gueron
Henry B. Schacht – Chair
Ernesto Zedillo
Compensation and
Benefits Committee
Carlos Ghosn
Joseph T. Gorman – Chair
Sir Ronald Hampel – Chair of
Subcommittee – Investment
Management
John P. Mulroney
Franklin A. Thomas
Executive Committee
Alain J. P. Belda – Chair
Joseph T. Gorman
Henry B. Schacht
Franklin A. Thomas
Governance and
Nominating Committee
Kathryn S. Fuller
Sir Ronald Hampel
John P. Mulroney – Chair
Franklin A. Thomas
Public Issues Committee
Kathryn S. Fuller
Carlos Ghosn
Judith M. Gueron – Chair
Henry B. Schacht
Ernesto Zedillo
For information on Alcoa’s
corporate governance program,
go to www.alcoa.com
(As of February 20, 2003)
Ricardo E. Belda
Executive Vice President –
Alcoa and Group President,
Alcoa Europe
Julie A. Caponi
Assistant Controller
William F. Christopher
Executive Vice President –
Alcoa and Group President,
Alcoa Aerospace, Automotive,
and Commercial Transportation
Michael Coleman
Vice President – ABS and
Quality and President,
Alcoa Rigid Packaging
Dale C. Perdue
Assistant General Counsel
Cynthia E. Holloway
Assistant Treasurer
A. Hamish Petrie
Vice President – People and
Communications
G. John Pizzey
Executive Vice President –
Alcoa and Group President,
Alcoa Primary Products
William B. Plummer
Vice President and Treasurer
Barbara S. Jeremiah
Executive Vice President –
Corporate Development
Russell W. Porter, Jr.
Vice President and Deputy
General Counsel
Richard B. Kelson
Executive Vice President and
Chief Financial Officer
Lawrence R. Purtell
Executive Vice President
and General Counsel;
Chief Compliance Officer
Denise H. Kluthe
Assistant Controller
William E. Leahey, Jr.
Executive Vice President –
Alcoa and Group President,
Alcoa Packaging, Consumer,
Construction & Distribution
Bernt Reitan
Vice President – Alcoa and
President, Primary Metals
Ricardo B. M. Sayao
Assistant Treasurer
Mario Longhi Filho
Vice President – Alcoa and
President, Howmet Castings
Richard L. (Jake) Siewert, Jr.
Vice President – Global
Communications and Public
Strategy
John W. Collins III
Executive Vice President –
Science and Technology
Charles D. McLane, Jr.
Vice President – Alcoa Business
Support Services and Controller
Donna C. Dabney
Secretary and Assistant
General Counsel
Thomas J. Meek
Assistant General Counsel
Paul D. Thomas
Vice President – Alcoa and
Group President, North
American Fabricated Products
Colleen P. Miller
Assistant Secretary
Kurt R. Waldo
Assistant General Counsel
L. Richard Milner
Vice President – Alcoa and
President, Alcoa Automotive
Robert G. Wennemer
Vice President – Pension Fund
Investments and Analysis
Joseph C. Muscari
Executive Vice President –
Alcoa and Group President,
Asia and Latin America
John M. Wilson
Vice President and
Deputy General Counsel
Judith L. Nocito
Assistant Secretary
Russell C. Wisor
Vice President –
Government Affairs
Denis A. Demblowski
Assistant General Counsel
Ronald D. Dickel
Vice President – Tax
Janet F. Duderstadt
Assistant Secretary
Franklin L. Feder
Vice President – Analysis
and Planning
Veronica M. Hagen
Vice President – Alcoa and
President, Alcoa Engineered
Products
Trademarks in this report:
⬎ Alcoa姞, the Alcoa corporate
symbol, Alco-Lok姠, Alfil姞, Alumax姞,
AS-Lok姞, Baco姞, BacoFoil姞,
BacoFoil姞Release姠, Baker’s Choice姞,
BuzzBolt姠/BuzzNut姠, Cut-Rite姞,
Diamond姞, Dura-Bright姞, GS-Lok姞,
Huckbolt姞, Huck-Spin姞, Ivex姞,
Mastic姞, PS-Lok姞, Quest3姞,
Reynobond姞, Reynolds姞, Reynolds
Plastic Wrap姠, Reynolds Wrap姞,
Brenda A. Hart
Assistant Secretary
Reynolds Wrap姞Release姞,
Reynolux姞, Seal-MAX姠, 1600
Curtain Wall姠, U-Spin姠, and
Wing-Lok姞 are Alcoa trademarks.
⬎ Airbus A380姞, ASM International姞, C-17 Globemaster III姞,
Detonator姠, Fridge Pack姠,
and Harley-Davidson姞, are nonAlcoa trademarks.
William J. O’Rourke, Jr.
Vice President – Environment,
Health, and Safety and Audit
Editor: Kevin Lowery
Special thanks to Alcoa employees
The Financials: Mary Zik
worldwide who helped make this
Contributors: Brad Fisher, Mary
annual report possible.
Ellen Gubanic, Ella Kuperminc,
Joyce Saltzman
Printed in USA 0302
Design: Arnold Saks Associates
Form A07-15006
Financial typography:
䊚 2003 Alcoa
Hamilton Phototype
4 A portion of this annual report is
Printing: St. Ives Case-Hoyt
printed on recycled paper; the entire
report is printed with soy-based,
low-VOC inks.
67
Shareholder Information
Annual Meeting
The annual meeting of shareholders will be at 9:30 a.m. Friday,
April 11, 2003 at the Westin Convention Center Pittsburgh.
Company News
Visit www.alcoa.com for Securities and Exchange Commission
filings, quarterly earnings reports, and other company news.
This information is also available toll-free 24 hours a day by
calling 1 800 522 6757 (in the U.S. and Canada) or 1 402 572 4993
(all other calls). Reports may be requested by voice, fax, or mail.
Copies of the annual report and Forms 10-K and 10-Q may
be requested at no cost at www.alcoa.com, by calling the toll-free
numbers, or by writing to Corporate Communications at the
corporate center address.
(SEC)
Investor Information
Security analysts and investors may write to Director –
Investor Relations at 390 Park Avenue, New York, NY 10022-4608,
call 1 212 836 2674, or E-mail [email protected]
Direct Deposit of Dividends
Shareholders may have their quarterly dividends deposited directly
to their checking, savings, or money market accounts at any
financial institution that participates in the Automated Clearing
House (ACH) system.
Shareholder Services
Shareholders with questions on account balances; dividend
checks, reinvestment, or direct deposit; address changes; lost or
misplaced stock certificates; or other shareholder account matters
may contact Alcoa’s stock transfer agent, registrar, and dividend
disbursing agent:
Equiserve Trust Company, N.A.
P.O. Box 43069
Providence, RI 02940-3069
Telephone Response Center:
1 800 317 4445
Outside U.S. and Canada:
1 781 575 2724
Internet address: www.equiserve.com
Telecommunications Device for the Deaf (TDD): 1 800 952 9245
For shareholder questions on other matters related to Alcoa, write
to Donna Dabney, Office of the Secretary, at the corporate center
headquarters address or call 1 412 553 4707.
Stock Listing
Other Publications
For more information on Alcoa Foundation and its programs
and other community investments, visit www.alcoa.com under
‘‘community.’’
For a report on Alcoa’s environmental, health, and safety
performance, write Alcoa EHS Department at the corporate center
address or go to www.alcoa.com
Dividends
Alcoa’s objective is to pay common stock dividends at rates
competitive with other investments of equal risk and consistent
with the need to reinvest earnings for long-term growth. To
support this objective, in January 2002, the Board of Directors
approved a 20% increase in the base quarterly dividend from
12.5 cents per common share to 15 cents per common share.
Base quarterly dividends are paid to shareholders of record at
each quarterly distribution date.
The Board also approved eliminating the variable dividend
that was equal to 30% of Alcoa’s annual earnings over $1.50 per
basic share. Basic earnings per share for 2001 did not meet the
$1.50 threshold, so there would have been no variable dividend
paid in 2002.
Common: New York Stock Exchange and exchanges in Australia,
Belgium, Germany, Switzerland, and the United Kingdom
Preferred: American Stock Exchange
Ticker symbol: AA
Quarterly Common Stock Information
Quarter
First
Second
Third
Fourth
Year
High
$39.75
39.09
33.80
26.37
$39.75
2002
Low Dividend
$33.34
$.15
30.17
.15
18.35
.15
17.62
.15
$17.62
$.60
High
$39.58
45.71
42.00
40.50
$45.71
2001
Low Dividend
$30.63
$.15
33.75
.15
27.36
.15
29.82
.15
$27.36
$.60
Common Share Data
2002
2001
2000
1999
1998
Estimated number
of shareholders*
273,000
266,800
265,300
185,000
119,000
Average shares
outstanding (000)
845,439
857,990
814,229
733,888
698,228
* These estimates include shareholders who own stock registered in their
own names and those who own stock through banks and brokers.
Dividend Reinvestment
The company offers a Dividend Reinvestment and Stock Purchase
Plan for shareholders of Alcoa common and preferred stock.
The plan allows shareholders to reinvest all or part of their
quarterly dividends in shares of Alcoa common stock. Shareholders
also may purchase additional shares under the plan with cash
contributions. The company pays brokerage commissions and
fees on these stock purchases.
68
Corporate Center
Alcoa
201 Isabella St. at 7th St. Bridge
Pittsburgh, PA 15212-5858
Telephone: 1 412 553 4545
Fax: 1 412 553 4498
Internet: www.alcoa.com
Alcoa Inc. is incorporated
in the Commonwealth
of Pennsylvania.
Vision
Alcoa aspires to
be the best company
in the world.
Values
Integrity
Alcoa’s foundation is our integrity. We are open, honest and trustworthy
in dealing with customers, suppliers, coworkers, shareholders and the
communities where we have an impact.
Environment, Health and Safety
We work safely in a manner that protects and promotes the health and
well-being of the individual and the environment.
Customer
We support our customers’ success by creating exceptional value
through innovative product and service solutions.
Excellence
We relentlessly pursue excellence in everything we do, every day.
People
We work in an inclusive environment that embraces change, new ideas,
respect for the individual and equal opportunity to succeed.
Profitability
We earn sustainable financial results that enable profitable growth
and superior shareholder value.
Accountability
We are accountable – individually and in teams – for our behaviors,
actions and results.
We live our Values and measure our success by
the success of our customers, shareholders,
communities and people.
Inspiring Future Generations
From the first manned flight at Kitty Hawk
to the lunar landing at the Sea of Tranquility
and beyond, Alcoa solutions have helped
shape every major advance in aviation. Alcoa
metal went into the crankcase of the Wright
Brothers’ Flyer and into the propeller that
pulled Lindbergh’s Spirit of St. Louis across
the Atlantic. And we helped make commercial flight profitable with weight-saving alloys
for the DC3. Alcoa’s tradition of innovation
has helped break the sound barrier, put a man
on the moon, and make space travel possible.
As part of its commitment to communities,
Alcoa will support and encourage a number of
community, education, and Web-based initiatives to underscore the celebration of the 100th
anniversary of the Wright Brothers’ first flight
in 1903. These initiatives will help inspire
future generations to reach new frontiers.
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