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Alcoa Annual Report 2003
Markets
Customers
Solutions

Table of contents

  • Page 1
    Alcoa Annual Report 2003 Markets Customers Solutions

  • Page 2
    ... aluminum products and components, Alcoa also makes and markets consumer brands including Reynolds Wrap®, Alcoa® wheels, and Baco® household wraps. Among its other businesses are vinyl siding, closures, fastening systems, precision castings, and electrical distribution systems for cars and trucks...

  • Page 3
    ...and laying the history. foundation for our continued leadership position for generations Reï¬,ecting this performance, in part, Alcoa's total shareto come. We are: owner return for 2003, including dividend reinvestment, was • Continuing to refine our portfolio of businesses; 70%. For comparative...

  • Page 4
    ...this program, as we have fast-growing region. We are also installing a new foil production sold the Latin America PET bottle business, our equity interest in line at Alcoa Shanghai Aluminum. Latasa, a can producer based primarily in Brazil, and the packagIn Canada, we are working with the government...

  • Page 5
    ... facing our customers; and then, a worldwide week of service focused on *Reynolds, Howmet/Huck included beginning in 2002 working with our Research and conservation and sustainability projects. **Ivex, Fairchild, Kama, and other 2002/2003 acquisitions Development and application engineering Our...

  • Page 6
    ... on which the company has been involved. Alcoa products are literally used from nose to tail, beginning with forward landing gear support structure to forgings for the horizontal and vertical stabilizers. Working closely with Airbus's design team, Alcoa Fastening Systems developed the XPL® Lockbolt...

  • Page 7
    ... features wing panels produced with Alcoa's 2324-T39 Type 2 aluminum alloy. Using this alloy in its first production application, Boeing® maximizes the 777-300ER's performance as a result of Alcoa's extensive metallics experience. The 2324-T39 Type 2 alloy provides important weight savings, which...

  • Page 8
    ... Alcoa aluminum hood and trunk lids and wheels to help improve performance. (Middle) Audi awarded Alcoa Preferred Supplier status based on the new Audi A8, which features a secondgeneration Alcoa spaceframe. (Bottom) Outstanding logistics performance for Volkswagen of Mexico earned AFL Automotive...

  • Page 9
    ...shields for the 2004 Ford F-150 to help manage heat away from critical components. Alcoa's automotive products featured on Ford trucks include closures panels, wiring harnesses and electrical distribution systems, and aluminum wheels. Ford, F-Series and F-150 are trademarks of Ford Motor Company. 7

  • Page 10
    ... TQM awards. (Middle) Johnstown America's new 89-foot Aluminum Vehicle Carrier saves money for customers because it lasts longer, weighs less, and protects cargo better. (Bottom) Truck and trailer manufacturers worldwide rely on Alcoa Fastening Systems for solutions that cut costs, boost performance...

  • Page 11
    ..., the Port Authority began specifying Dura-Bright wheels on all new buses in order to save time, money, and look great. Now, bus and transit systems throughout the world - along with trucking ï¬,eets, owner/operators, truck manufacturers, and motor home owners - are beginning to reap the benefits...

  • Page 12
    ...®, to name a few, Alcoa solutions include aluminum, vinyl, and state-of-the-art composites for use in siding, trim, curtain walls for office buildings, architectural systems, and new products for gutter protection...meaning we are helping to improve structures from millions of homes to millions of...

  • Page 13
    ... at the center of the world stage. For part of the roofing of the massive project, they tapped Alcoa Europe Building and Construction for its experience, expertise, and its ability to deliver, in short lead times, Reynolux® , a unique prepainted product from Alcoa that uses coil-coating techniques...

  • Page 14
    ... helped win new customers in the dairy market for Alcoa Closure Systems International. (Middle) DuPont™ recognized Alcoa's Sure-Peel™ Cohesive Lidding, a new product for single-serve packaging that is more reliable and easier to use. (Bottom) In Canada, where the Reynolds® brand name enjoys...

  • Page 15
    ... When it comes to Nestlé® - the world's largest food company, based in Vevey, Switzerland - Alcoa businesses, from Southern Graphic Systems and Alcoa Flexible Packaging to Alcoa Aluminio in South America and Alcoa Closure Systems International, work closely together to ensure Nestlé's vast array...

  • Page 16
    ... upgrade plan for Pinjarra in Western Australia. Through our various ownership stakes, that amounts to 860,000 metric tons per year of additional, low-cost alumina capacity. Because of the lead times necessary to build or expand a smelter, along with our stringent sustainability and capital outlay...

  • Page 17
    ... and Lower Costs Alcoa Worldwide 9 Refineries 28 Smelters Key Future expansion opportunity Refinery Smelter Stand-alone bauxite mine Aluminum Expansion • Australia • Bahrain • Brazil • Brunei • Canada • China • Iceland Alumina Expansion • Australia • Jamaica • Suriname 15

  • Page 18
    ... operations, comprising businesses in six countries. The acquisition enables Alcoa to build on the South American operations' historically strong financial performance and better integrate them with global businesses. construction market. Warrick now is supplying aluminum to Alcoa Home Exteriors...

  • Page 19
    ... Continues The U.S. Air Force awarded Alcoa a $35.5 million contract for continuation of the Advanced Aluminum Aerostructures Initiative. The program, begun in 2001, aims to apply Alcoa's design methodologies for low-cost aluminum structures to aerospace platforms. An Alcoa-led team, which includes...

  • Page 20
    ... at Alcoa Technical Center developed a proprietary, patent-pending Dura-Flange® wheel product for enhancing the rim ï¬,ange wear resistance of aluminum wheels. This is a major step in the aluminum vs. steel wheel market because the new treatment makes it possible for truck owners and operators to...

  • Page 21
    ..., Alcoa Engineered Products' Cressona (PA)plant increased productivity on two semiautomated pack lines by 87% and enhanced safety. A combination of work ï¬,ow redesign, standardized work, and equipment improvements reduced the volume of aluminum extrusions packed manually, reducing packaging costs...

  • Page 22
    ..., employees, customers, suppliers, and the communities in which we operate. Alcoa's commitment to sustainability has a long history and is evident every day - from the way we live our Values, to our publicly stated 2020 environmental goals to reduce emissions, increase safety and improve health...

  • Page 23
    Financial and Corporate Data 22 Trends in Alcoa's Major Markets 24 Selected Financial Data 25 Management's Discussion and Analysis 41 Management's Report 41 Report of Independent Auditors 42 Consolidated Financial Statements 46 Notes to Financial Statements 63 Supplemental Financial Information 64 ...

  • Page 24
    ... that sell products to this market: Flat-Rolled Products, Engineered Products, Other • Alcoa revenues in this market come from a range of products for automotive applications; from chassis, suspension and drivetrain components to crash management systems to body structures, forged and cast wheels...

  • Page 25
    ... Alcoa segments that sell products to this market: Flat-Rolled Products, Engineered Products, Other • 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...

  • Page 26
    ... items, the adoption of new accounting standards, goodwill impairment, and discontinued operations. Significant items impacting the results for 2001 included: special items, gains on asset sales, and various charges to cost of goods sold and selling, general administrative, and other expenses...

  • Page 27
    ... electrical distribution systems for cars and trucks. Alcoa's products are used worldwide in aircraft, automobiles, commercial transportation, packaging, consumer products, building and construction, and industrial applications. Alcoa is a global company operating in 41 countries. North America is...

  • Page 28
    ... per share, in 2001. The decline in income from continuing operations was 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...

  • Page 29
    ... in the form of ongoing aluminum or other significant supply contracts. At the end of 2003, businesses classified as assets held for sale included Alcoa's specialty chemicals business, certain architectural products businesses in North America, an extrusion facility in Europe, certain extrusion...

  • Page 30
    ... restructuring program from 8,500 to 6,700 employees); and $45 of charges for additional layoff costs associated with approximately 1,600 hourly and salaried employees located primarily in Europe, the U.S., and Brazil, as the company continued to focus on cost reductions in businesses that continued...

  • Page 31
    ... as $183 for structures, machinery, and equipment; employee termination and severance costs of $105 related to approximately 6,700 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...

  • Page 32
    ... Statements for further information. 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...

  • Page 33
    ... 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...

  • Page 34
    ...products serve the aerospace, automotive, commercial transportation, industrial gas turbine, building and construction, and distributor markets (mainly used in the production of machinery and equipment) and are sold directly to customers and through distributors. Third-party sales for the Engineered...

  • Page 35
    ... products operations, Alcoa Home Exteriors; and automotive parts businesses. 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...

  • Page 36
    ...) in aluminum ingot prices from the year-end 2003 level of $1,600 per mt would result in an additional pretax gain (or loss) of $56 related to these positions. Alcoa purchases natural gas, fuel oil, and electricity to meet its production requirements. These purchases expose the company to the...

  • Page 37
    ... estimated. In June 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...

  • Page 38
    ... to pay down debt was provided from proceeds from the sales of operations required to be divested from the Reynolds merger and from the sale of Thiokol. In addition, $1,452 was used for common stock repurchases. Liquidity and Capital Resources Alcoa takes a disciplined approach to cash management...

  • Page 39
    ... due to the purchase of additional shares in the Norwegian metals producer, Elkem. Cash paid for investments of $270 in 2001 was 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...

  • Page 40
    ... the application of the DCF model to forecast operating cash ï¬,ows, 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...

  • Page 41
    ... Operating leases (1) Estimated pension funding Postretirement benefit payments Layoff and impairment payments (3) Deferred revenue arrangements Financing activities: Long-term debt (4) Dividends to shareholders (5) Investing activities: Capital projects (6) Other: Standby letters of credit...

  • Page 42
    Obligations for Investing Activities The company typically spends approximately $1,000 - $1,400annually for capital expenditures, primarily related to facility expansion, health and safety, and environmental control. Alcoa expects annual capital expenditures in the future will be within this range. ...

  • Page 43
    ...host countries in which the company operates and potentially conï¬,icting outside business interests of its employees. The company maintains a systematic program to assess compliance with these policies. Report of Independent Auditors To the Shareholders and Board of Directors of Alcoa Inc.: In our...

  • Page 44
    ... of Consolidated Income (in millions, except per-share amounts) For the year ended December 31 2003 Alcoa and subsidiaries 2002 2001 Sales (A and P) Cost of goods sold Selling, general administrative, and other expenses Research and development expenses Provision for depreciation, depletion, and...

  • Page 45
    ... and Contingencies (M) Shareholders' Equity Preferred stock (Q) Common stock (Q) Additional capital Retained earnings Treasury stock, at cost Accumulated other comprehensive loss T otal shareholders' equity Total Liabilities and Equity The accompanying notes are an integral part of the consolidated...

  • Page 46
    ... 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 (used for) provided from financing activities Investing Activities Capital expenditures...

  • Page 47
    ... reclassified to income 45 Net unrecognized gains on derivatives 105 Comprehensive loss $ (42) Cash dividends: Preferred @ $3.75 per share Common @ $.60 per share Treasury shares purchased Stock issued: compensation plans Balance at end of 2002 Comprehensive income - 2003: Net income - 2003 $ 938...

  • Page 48
    ... the application of the DCF model to forecast operating cash ï¬,ows, 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...

  • Page 49
    ... economic and management indicators. Acquisitions. Alcoa's acquisitions are accounted for using the purchase method. The purchase price is 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...

  • Page 50
    ... for sale included Alcoa's specialty chemicals business, certain architectural products businesses in North America, an extrusion facility in Europe, certain extrusion facilities in Latin America, and foil facilities in St. Louis, MO and Russellville, AR. These businesses are expected to be sold by...

  • Page 51
    ... hourly and salaried employees (located primarily in Europe, the U.S., and Brazil), as the company continued to focus on cost reductions in businesses that continued to be impacted by market declines; $20 of charges recognized in 2003 related to a reduction in the estimated fair values of businesses...

  • Page 52
    ... 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 part of the 2002 restructuring program, Alcoa temporarily curtailed aluminum production at...

  • Page 53
    ... the purchase price will be based upon valuations. In October of 2003, Alcoa expanded its aluminum alliance with Kobe Steel Ltd. (Kobe) in Japan on the joint development of aluminum products for the automotive market. As part of this arrangement and due to changes in the business environment, Alcoa...

  • Page 54
    ...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...

  • Page 55
    ... related hedged debt (through 2013). For additional information on interest rate swaps, see Note W. L. 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...

  • Page 56
    ..., vinyl siding, consumer products, food service and ï¬,exible packaging products, plastic closures, fiber-optic cables, and electrical distribution systems for cars and trucks. Alcoa's segments are organized by product on a worldwide basis. Alcoa's management reporting system evaluates performance...

  • Page 57
    ... due to corporate allocations. Alcoa's products are used worldwide in packaging, consumer products, transportation (including aerospace, automotive, truck trailer, rail and shipping), building and construction, and industrial applications. T otal exports from the U.S. from continuing operations were...

  • Page 58
    ... industry; the residential building products operations, Alcoa Home Exteriors; and automotive parts businesses. The following reconciles segment information to consolidated totals. 2003 Sales: Total sales Elimination of intersegment sales Consolidated sales Net income: ATOI 2002 $24,063...

  • Page 59
    ... to stock option awards, the company has granted stock awards and performance share awards that vest in three years from the date of grant. The transactions for shares under options were: (shares in millions) 2003 Outstanding, beginning of year: Number of options Weighted average exercise price...

  • Page 60
    ... benefits. All U.S. salaried and certain hourly employees hired after January 1, 2002 will not have postretirement health care benefits. Alcoa uses a December 31 measurement date for the majority of its plans. December 31 Depreciation Employee benefits Loss provisions Deferred income/expense Tax...

  • Page 61
    ... of year Actual return on plan assets Acquisitions Employer contributions Participants' contributions Benefits paid Administrative expenses Exchange rate Fair value of plan assets at end of year Funded status Unrecognized net actuarial loss Unrecognized net prior service cost (benefit) Net amount...

  • Page 62
    ...its pension plans in 2004. Alcoa also sponsors a number of defined contribution pension plans. Expenses were $107 in 2003, $101 in 2002, and $103 in 2001. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point change...

  • Page 63
    ... 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 ï¬,oating-rate debt and to manage overall financing costs. The company has entered into pay...

  • Page 64
    ... 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...

  • Page 65
    ... information. * After special charges reï¬,ecting income of $25 in the fourth quarter (Note D) First 2002 Sales Income (loss) from continuing operations Loss from discontinued operations (B) Cumulative effect of accounting change (E) Net income (loss)* Earnings (loss) per share: Basic: Income (loss...

  • Page 66
    ... (dollars per share) Diluted earnings 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...

  • Page 67
    2000 $22,755 17,201 1,096 193 1,203 - - 427 154 934 381 1,474 15 (5) 1,484 .77 .71 2 416 (658) 12,...152 437 233 778 13 - 791 .81 .83 2 160 1,840 6,555 (1,128) 13,643 1,213 1,609 4,445 1.11 1.10 .225 6.23 15.06 9.22 83,600 712,072 6,407 673 1,909 2,582 1,905 2,428 1,506 2,037 $887 72,000 1994 $ 9,816...

  • Page 68
    ..., 66, chairman and chief executive officer of Moxahela Enterprises, LLC, a venture capital firm, since 2001. He was chairman and chief executive officer of TRW Inc., a global company serving the automotive, space, and information systems markets, 1988-2001. Director of Alcoa since 1991. Judith...

  • Page 69
    ... 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 Denis A. Demblowski Assistant General Counsel Ronald D. Dickel Vice...

  • Page 70
    ...Investor Relations at 390 Park Avenue, New York, NY 10022-4608, call 1 212 836 2674, or email [email protected]. Other Publications For more information on Alcoa Foundation and Alcoa community investments, visit www.alcoa.com under ''community.'' For Alcoa's Sustainable Development report...

  • Page 71
    ... aspires to be the best company in the world. 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...

  • Page 72
    ... through nearly 200,000 hours of giving, working, teaching, healing, conserving, building and, in many other ways, bringing our Values to life. (Clockwise, from top) Painting in Pinjarra, Australia; Mentoring in Pittsburgh, USA; Health care in Ditabiki, Suriname; Planting trees in Itajubá, Brazil