Alcoa 1998 Annual Report Download

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“One of the things others
have noted that is a very
important asset for Alcoa
is that we do what we say.”
Paul O’Neill
Chairman, Alcoa
“There is still a lot to do, but
I believe that 1998 was
a watershed year for Alcoa.”
Alain Belda
President, Alcoa
“Alcoa is years ahead of its
competitors in pursuing
the most effective business
strategy in the industry.”
Thomas Van Leeuwen
Credit Suisse First Boston
“Alcoa has this quaint notion
that when earnings go up,
shareholders should get a
direct benefit.”
David Pauly
Bloomberg
1998
Annual
Report
“Alcoa is the premier company
by a long shot, and they continue
to demonstrate their strength,
notwithstanding weakness in the
commodity market.”
James Rudolph
Fahnstock & Co.

Table of contents

  • Page 1
    ... that when earnings go up, shareholders should get a direct benefit." David Pauly Bloomberg "Alcoa is years ahead of its competitors in pursuing the most effective business strategy in the industry." Thomas Van Leeuwen Credit Suisse First Boston "Alcoa is the premier company by a long shot, and...

  • Page 2
    ... plastic bottles and closures, and electrical distribution systems for cars and trucks. • Vital statistics: 24 business units, 103,500 employees, 215 operating locations in 31 countries, $15.3 billion in revenues • Values. Alcoa's values begin with integrity, respect for our people, their safety...

  • Page 3
    ... Barnett Lafayette, Ind. Vera Kelly Davenport, Iowa Daniel Fernandez Amorebieta, Spain U.S. Transportation Packaging Distribution and Other Aluminum Ingot Alumina and Chemicals Building and Construction Australia Spain Brazil Canada Germany Others Nancy Brown Pittsburgh, Pa. Brett Marnham Wagerup...

  • Page 4
    ...revenues and 4,000 employees, and Alumax, the $3 billion sales company with 15,000 employees and 70 operating locations. Certainly, both are important additions to the Alcoa system, bringing excellent people, adding capability to serve more customers worldwide, contributing technology, product lines...

  • Page 5
    ... and control management while providing many more leadership positions in the company, sharpening responsibility and accountability, and tying our worldwide operations together with telecommunications and computers. • Setting up worldwide technology development and transfer mechanisms to insure we...

  • Page 6
    ...also to leave the Alcoa Board of Directors so that the active management won't have to worry about what the "old boy" thinks. I believe Mr. Belda and the leadership team we have created together will lead the company to levels of achievement that are unexampled in our industry and that, during their...

  • Page 7
    ...its creation has a business purpose...Trish Hall, The New York Times Alcoa moved its corporate center to a six-story aluminum and glass structure on Pittsburgh's North Shore. Its wave-form glass facade opens the entire building to the river, the city, and the southern sky. Inside is an open office...

  • Page 8
    ... bright sheet products plant in France. In the meantime, internal growth has continued in worldwide operations such as Alcoa World Alumina, Alcoa Closure Systems International, and the fiber-optics business of Alcoa Fujikura. Less profitable operations at several locations have been sold or closed...

  • Page 9
    ...after start-up, the Alcoa Wheel Products Europe forged truck wheel plant at Székesfehérvár, Hungary was operating at close to full capacity and planning an expansion for 1999. The plant supplies European demand for Alcoa's heavy-duty forged truck and bus wheels and exports to Brazil and Australia...

  • Page 10
    ...offsetting increases at other plants kept total primary aluminum production at current levels. Alcoa has had 450,000 mtpy of primary aluminum capacity idled since 1994. Safe in Jamaica Jamalco received six of the seven 1998 Jamaica Mining and Industry awards for safety performance in mining and ore...

  • Page 11
    ...: John Lloyd Cleveland, Ohio Ann Ngo Davenport, Iowa Gabriele Sala Modena, Italy The manufacturing component of the Alcoa • In Primary Metals, inventories cut by 17%. Business System is the Alcoa Production At Wenatchee,Wash., customer lead time System (APS) - an integrated approach to reduced...

  • Page 12
    ... market and became the leading supplier of plastic closures. Right: One of the leading manufacturers of vinyl siding is now an aluminum company: Alcoa. New developments - Left: A boom in bottled water and sports drinks. Alcoa supplies the caps. Right: Alcoa is spearheading the emerging move...

  • Page 13
    ... Alcoa has formed seven Technology Management Review Boards (TMRB) to guide strategic technology development as part of the Alcoa Business System (ABS). Five of these teams are formed around Alcoa's core manufacturing processes of refining, smelting, ï¬,at-rolled products, extrusions, and chemicals...

  • Page 14
    ... brand of vinyl siding, Mastic.com. Extrusions for Cessna Alcoa Engineered Products, Pioneer Aluminum, and Cessna have forged agreements which guarantee that Alcoa will supply hardalloy aluminum extrusions through 2004 in support of business jet travel. Alcoa is the leading supplier of extrusions...

  • Page 15
    ... Care projects. In Drunen, Alcoa Nederland invented the means to conserve both energy and environment. They take coated aluminum bottle caps, recycle the aluminum for new caps, and recycle the coatings as energy to drive the process. And in Cleveland, an Alcoa forging plant developed new lubricants...

  • Page 16
    .... On Boeing's Team Boeing Commercial Airplane Group awarded major supply positions in a 10-year contract to Alcoa Mill Products and Alcoa Engineered Products as part of Boeing's new "lean" procurement strategy. One service provider, Thyssen, Inc., will handle the global logistics for Alcoa and...

  • Page 17
    ... passenger under the National Highway Traffic Safety Administration (NHTSA) New Car Assessment Program. Audi and Alcoa demolished the assumption that the only way to get safer was to get heavier. Instead, the A8 employs a revolutionary aluminum space frame body technology - created in partnership...

  • Page 18
    ... of closures in Japan and China, alumina chemicals in two Japanese plants, and can sheet in Moka, Japan. Alcoa and Kobe Steel have a joint-venture company in Japan marketing automotive products used by Japanese carmakers there and worldwide. In China, several joint ventures have been developed over...

  • Page 19
    ...halt can sheet production for two weeks at its Point Henry rolling mill due to the gas disruption but still managed to take care of its customers. Contingency supply arrangements plus a safety buffer stock, husbanded to meet customer needs during a planned week-long maintenance shutdown, enabled the...

  • Page 20
    ...-loop recycling of coated aluminum closures • A technology to remove sulfur and nitrogen compounds from gasoline Thanks to creative Alcoans: Above, exciting new designs in embossed cans and, left, regenerating Australia's jarrah forest. Alcoa innovators developed right, a new grade of alumina at...

  • Page 21
    ...the aerospace, defense, and communications industries. Spanish Acquisition Alcoa signed a definitive agreement with Reynolds Metals to buy Reynolds' aluminum extrusion plant in Irurzún, Spain. Included in the agreement is a distribution operation for architectural systems, which has warehouses in...

  • Page 22
    ...New York and Viernheim, Germany teamed up to develop the Series 7000 capping machine - a highperformance machine designed to meet the needs of large-scale bottling operations. The design is based on principles of the Alcoa Production System (APS) along with input from customer focus groups worldwide...

  • Page 23
    ...Alcoa Wheels During 1998, Contract Freighters, Inc., Frozen Food Express Industries and Rocor Transportation trucking companies changed their wheel specification on new truck orders from steel wheels to "Bright and Light" forged Alcoa wheels. They joined a growing number of large trucking companies...

  • Page 24
    ... Building aluminum frames at the fabled Scaglietti Works. Alcoa Automotive Structures (AAS) has worked closely with Ferrari on development of the aluminum body structure for the 360 Modena - just launched at the 1999 Geneva Auto Show. The collaboration has also been extended into manufacturing...

  • Page 25
    ... now unfolding in the case of the high-performance aluminum body structures Alcoa has helped to develop for the Audi A8, Plymouth Prowler and Ferrari 360 Modena. 1950 Air Bags Power Steering Alcoa HighPerformance Body Structures Air Conditioning Plymouth Prowler Aluminum Wheels Anti-Lock Brakes...

  • Page 26
    ... pace of our performance," said O'Neill. "We must integrate and leverage our global franchise while working with customers to maximize the value we bring to the marketplace." $1.1 BILLION IM PR O V EM EN T Light truck wheels ready for shipment from an Alcoa Forged Products plant in Cleveland - one...

  • Page 27
    ... 38 Management's Report 38 Independent Accountant's Report 38 Audit Committee Report 39 Consolidated Financial Statements 43 Notes to Financial Statements 53 Supplemental Financial Information 54 11-Year Financial Data 56 Worldwide Operations 60 Directors and Officers 61 Glossary 62 Business Units...

  • Page 28
    ... America & Mexico U.S. & Canada Sources: Alcoa, Canadean, CCI, Kaal, IMES Source: American Metal Market • In North America, from 1996 to 1999, aluminum use in brakes, drivelines, chassis and suspensions rose 46%, in steering systems 47% and closure panels 65% (Drucker Research Co.). Commercial...

  • Page 29
    ... in Australia, North and South America, and now Europe with a plant at San Ciprián, Spain. Worldwide Alumina Capacity and Production millions of metric tons • Alcoa's revenues in this market are from an array of fabricated aluminum products for commercial and residential applications, and vinyl...

  • Page 30
    ...Alcoa's average realized price per pound for aluminum ingot Average U.S. market price per pound for aluminum ingot (Metals Week) Cash dividends...1994 is a gain of $300.2 related to the Alcoa/ WMC transaction. †The extraordinary loss relates to the early retirement of debentures. ‡ All per-share ...

  • Page 31
    ... In 1998, Alcoa adopted SFAS 131, ''Disclosures about Segments of an Enterprise and Related Information.'' Alcoa's operations consist of four worldwide segments: Alumina and chemicals, Primary metals, Flat-rolled products and Engineered products. Alcoa's management reporting system measures...

  • Page 32
    ... alumina. The alumina is then sold to internal and external customers worldwide or is processed into industrial chemical products. Approximately two-thirds of the third-party sales from this segment are derived from alumina. In 1998, thirdparty sales of alumina fell 14% from 1997, as realized prices...

  • Page 33
    ... can manufacturers rose 2.2% from 1997. RCS sales in 1997 were down 4% from the previous year, primarily due to the 1996 sale of Alcoa of Australia's (AofA) rolled products division, which resulted in a 29,500 mt loss of ship- This segment includes hard and soft alloy extrusions, aluminum forgings...

  • Page 34
    ... sales of forged automotive wheels, driven by strong demand for sport utility vehicles and light trucks. Shipments in 1997 rose 21% from 1996, generating an 18% increase in revenues. Engineered products' 1998 ATOI rose 84% over the comparable 1997 period. The increase was due to acquired companies...

  • Page 35
    ... in these forward-looking statements. Commodity Price Risks - Alcoa is a leading global producer of aluminum ingot and aluminum fabricated products. As a condition of sale, customers often require Alcoa to commit to fixed-price contracts that sometimes extend a number of years into the future...

  • Page 36
    ... of contracts being rolled forward. In addition to the above noted aluminum positions, Alcoa had 29,000 mt and 259,000 mt of futures and options contracts outstanding at year-end 1998 and 1997, respectively, that cover long-term, fixed-price commitments to supply customers with metal from internal...

  • Page 37
    .... About 20% of this balance relates to Alcoa's Massena, New York plant site and 16% relates to Alcoa's Pt. Comfort, Texas plant site. Remediation expenses charged to the reserve were $63 in 1998, $64 in 1997 and $72 in 1996. These include expenditures currently mandated, as well as those not...

  • Page 38
    ...% related to capacity expansion, including alumina production in Australia and automotive sheet production in the U.S. Also included are costs of new and expanded facilities for environmental control in ongoing operations totaling $105 in 1998, $94 in 1997 and $68 in 1996. Alcoa used $1,463 in 1998...

  • Page 39
    .... Alcoa's Year 2000 program utilizes on-site verification of Year 2000 efforts at its various operating locations. Using audit-like techniques, the Year 2000 Global Program Office and the company's internal auditors verify that business and resource units have followed the prescribed processes and...

  • Page 40
    ... 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...

  • Page 41
    ... amounts) For the year ended December 31 1998 Alcoa and subsidiaries 1997 1996 Revenues Sales (O) Other income, principally interest Costs and Expenses Cost of goods sold Selling, general administrative and other expenses Research and development expenses Provision for depreciation, depletion...

  • Page 42
    ...(T) Short-term investments (T) Receivables from customers, less allowances: 1998 - $61.4; 1997 - $36.6 Other receivables Inventories (E) Deferred income taxes Prepaid expenses and other current assets Total current assets Properties, plants and equipment (F) Goodwill, net of accumulated amortization...

  • Page 43
    ... long-term alumina supply contract Reduction in deferred hedging gains Net change in noncurrent assets and liabilities Cash from operations Financing Activities Net additions (reduction) to short-term borrowings Common stock issued and treasury stock sold Repurchase of common stock Dividends paid to...

  • Page 44
    ...dividends: Preferred @ $3.75 per share Common @ $.75 per share Treasury shares purchased Stock issued: Alumax acquisition Stock issued: compensation plans Stock issued: two-for-one split (B) Balance at end of 1998 Total shareholders... notes are an integral part of the financial statements. 42

  • Page 45
    ... and Commodity Contracts. Alcoa enters into long-term contracts to supply fabricated products to a number of its customers. To hedge the market risk of changing prices for purchases or sales of metal, Alcoa uses commodity futures and options contracts. Gains and losses related to transactions...

  • Page 46
    ...'s businesses. The acquisition included an alumina refinery, three aluminum smelters, three aluminum rolling facilities, two extrusion plants and an administrative center. In 1996, Alcoa made various acquisitions totaling $302. They include the purchase of Alumix, Italy's state-owned integrated...

  • Page 47
    ...$200 of term debt due in 2005. Alcoa also issued $1,100 of commercial paper, a portion of which has since been repaid. The proceeds from these borrowings were used to fund acquisitions and for general corporate purposes. In 1998, Alcoa entered into a new $2.0 billion revolving-credit facility, which...

  • Page 48
    ..., 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 46 preferred stock has 557,740 shares authorized, with a par value of $100 per share and an annual $3.75...

  • Page 49
    ... Alumina and Chemicals. This segment's activities include the mining of bauxite, which is then refined into alumina. The alumina is then sold to internal and external customers worldwide, or processed into industrial chemical products. The alumina operations of Alcoa World Alumina and Chemicals...

  • Page 50
    ... Alcoa's worldwide smelter system. Primary metals receives alumina from the alumina and chemicals segment and produces aluminum ingot to be used by other Alcoa segments, as well as sold to outside customers. Flat-Rolled Products. This segment's primary business is the production and sale of aluminum...

  • Page 51
    ..., based on country of origin, and long-lived assets follows: 1998 Revenues: United States Australia Spain Brazil Canada Germany Other Long-lived assets: United States Australia Brazil Canada Germany Other $ 8,728.4 1,469.7 965.0 934.4 573.6 553.5 2,115.2 $15,339.8 $ 6,725.6 1,441.3 967.1 890.2 212...

  • Page 52
    ...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...

  • Page 53
    ... banks. The market risk exposure is essentially limited to risk related to currency rate movements. Unrealized losses on these contracts at December 31, 1998 and 1997 were $36.0 and $84.9, respectively. The table below reï¬,ects the various types of foreign exchange contracts Alcoa uses to manage...

  • Page 54
    ...following discussion provides additional details regarding the current status of these two sites. Massena/Grasse River. Sediments and fish in the Grasse River adjacent to Alcoa's Massena, New York plant site contain varying levels of polychlorinated biphenyl (PCB). Alcoa has been identified by the...

  • Page 55
    ...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. Quarterly Data (unaudited) (dollars in millions, except per-share amounts) 1998 Sales Income from operations Net...

  • Page 56
    ... declared .75 16.36 Book value (based on year-end outstanding shares) 40 5⁄8 Price range: High Low 29 Shareholders (number) 119,000 349,114 Average shares outstanding (thousands) Operating Data Alumina shipments 7,130 (thousands of metric tons) Aluminum product shipments: Primary 1,367 2,584...

  • Page 57
    ...,764 6,660 655 1,896 2,551 1,905 2,428 1,531 2,067 $612 60,200 7.9 9.9 9.3 1993 $ 9,055.9 93.0 7,187.0 603.6 130.4 692.6 150.8 87.8 (10.3) 105.6 201.4 (196.6) - 4.8 .56 .53 2.1 140.2 1,609.6 6,506.8 (1,710.9) 11,596.9 1,432.5 1,389.2 3,583.8 .01 .01 .40 9.98 19 5⁄8 14 3⁄4 55,300 350,692 5,962...

  • Page 58
    Closures, Machinery Packaging Machinery Castings, Forgings Can Reclamation Primary Aluminum Alumina Chemicals Electrical Products Building Products Alcoa Worldwide Operations Auto Components, Assemblies Auto Body Structure Design Aerospace Components Extrusions, Tube Bauxite Mining ...

  • Page 59
    ... S.A. Alcoa Inespal, S.A. Extrusion de Aluminio, S.A. Operations listings continue on next page. Valls Aerospace Components Auto Components, Assemblies Alumina Chemicals Can Reclamation Castings, Forgings Closures, Machinery Auto Body Structure Design Building Products Electrical Products Alumina...

  • Page 60
    ... Systems (UK) Limited Alumax Extrusions Limited Kawneer U.K. Limited United States Alcoa â- Alcoa Alumina & Chemicals, LLC Alcoa Automotive Structures, Inc. Alcoa Brite Products, Inc. Alcoa Building Products, Inc. Dalton, Ga.; Fort Meade, Fla. Alcoa Center, Pa.; Northwood, Ohio South...

  • Page 61
    ... Tifton, Ga. Valencia Aerospace Components Alumina Chemicals Auto Body Structure Design Alumina Auto Components, Assemblies Can Reclamation Castings, Forgings Closures, Machinery Building Products Electrical Products Bauxite Mining Packaging Machinery Foil Products Sheet, Plate Extrusions, Tube...

  • Page 62
    ... and a consultant at the New York City Human Resources Administration. Director since 1988. Janet F . Duderstadt Counsel and Assistant Secretary Earnest J. Edwards Senior Vice President and Controller Marina v.N. Whitman, 63, professor of Business Administration and Public Policy, University of...

  • Page 63
    ...stacking and handling. London Metal Exchange (LME) The international trading body that facilitates the worldwide open market buying and selling of metals. Magnesium A light, silvery, moderately hard metallic element used in processing metals and chemicals, and in alloying aluminum to give it desired...

  • Page 64
    ...Pittsburgh, Pennsylvania Strategic, commercial and operational leadership of Alcoa's global bauxite and alumina activities Alcoa Europe Extrusions and End Products Ricardo E. Belda, Vice President and President, Alcoa Nederland B.V. Milan, Italy Aluminum extrusions, window systems, and end products...

  • Page 65
    ...of information about Alcoa - its values, dimensions, business units, products, processes, and financial performance - at our website: www.alcoa.com. Rated for content, speed, navigation and design, it was ranked in the top five among Dow Jones Industrial companies by the Dow Jones Business Directory...

  • Page 66
    ..., or other shareholder account matters may contact Alcoa's stock transfer agent, registrar and dividend disbursing agent: First Chicago Trust Company Shareholder Services Group P. O. Box 2500 Jersey City, NJ 07303-2500 Telephone Response Center: 1-800-317-4445 Outside U.S. and Canada: 1-201-324-0313...

  • Page 67
    ...plans 50 Postretirement benefits 50 Preferred stock 42, 46 Pretax profit on revenues 54 Price/earnings (P/E) ratio 1 Primary metals segment 30, 47 Properties, plants and equipment 45 Publications 63 Q Quarterly data 53, 64 R Realized prices for aluminum ingot 28, 30*, 31 Research and development...

  • Page 68
    "Our safety performance was already at a world leading level when we started working on it 11 years ago. Since then, we've improved it by 85%." Paul O'Neill Chairman, Alcoa "The Alcoa Business System and Alcoa Production System...provide the company with the platform and infrastructure to sustain ...