Alcoa 2003 Annual Report Download - page 36

Reconciliation of ATOI to Consolidated Net Income —The
following table reconciles segment ATOI to consolidated net income.
2003 2002 2001
ATOI $1,713 $1,478 $2,039
Impact of intersegment profiteliminations 9(6) (20)
Unallocatedamounts (net of tax):
Interest income 24 31 40
Interest expense (204) (227) (242)
Minority interests (231) (135) (208)
Corporate expense (287) (234) (261)
Special items 26 (304) (397)
Discontinued operations (49) (90) 4
Accounting changes (47) 34 —
Other (16) (127) (47)
Consolidated net income $ 938 $ 420 $ 908
Items required to reconcile segment ATOI to consolidated net income
include:
●Corporate adjustments to eliminate any remaining profit or loss
between segments;
●Theafter-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;
●Discontinued operations;
●Accounting changes for asset retirement obligations in 2003 and
goodwill in 2002; and
●Other, whichincludes 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
currency translation gains/losses.
The increase in corporate expense in 2003 compared with 2002 is
primarily due to anincreaseindeferred compensation costs. The
decrease in Other in 2003 compared with 2002 is primarily due to
an increase in the cash surrender value of employee life insurance
(which essentially offsets the increase in deferred compensation
costs), insurance settlements of past environmental matters, and
lower taxes related todifferencesbetween statutory tax rates
applied and the overallcorporate effective tax rate,andhigher
equity income, primarily Elkem. These increases were partly offset
by the unfavorable impact of a higher
LIFO benefit recognized in
2002, as wellasforeigncurrency translation losses.
34
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,
and interestrates.
Derivatives
Alcoa’s commodity and derivative activities are subject to the
management, direction, and control of the Strategic Risk Manage-
ment Committee
(SRMC) .The SRMC is composed of the chief
executive officer, the chief financial officer, and other officers and
employees that the chief executive officer selects. The
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
to cover underlying exposures. The company is not involved in
energy-trading activities, weather derivatives, or other nonexchange
commodity trading activities.
The following discussion includes sensitivity analyses for hypo-
thetical changes in the commodity price 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, 2003.
The forward curve takes into account the time value of money
andthe future expectations regarding the values of the underlying
commodities and interest rates.
Commodity Price Risks —Alcoa is the world’s leading producer
of aluminum ingot and fabricated products. As a condition of sale,
customers often require Alcoa to enter into forward-dated, 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 contracts, the aluminum price
risk associated with a portion of its fixed-price firm commitments.
At December 31, 2003, these contracts totaled approximately
454,000 mt with a fair value gain of approximately $70 ($46 after
tax). A hypothetical 10% increase (or decrease) in aluminum ingot
prices from the year-end 2003 level of $1,600 permtwouldresultin
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 risk of higher prices. To hedge a portion of this risk, Alcoa
enters into long positions using futures contracts. Alcoa follows
astable pattern of purchasing these commodities; therefore, it is
highly likely that anticipated purchases will occur. The fair value
of these contracts was a gain of approximately $73 ($39 after
tax and minority interests) at December 31, 2003. A hypothetical
25% increase (or decrease) in the market prices from year-end 2003
levels would result in an additional pretax gain (or loss) of $111
related to these positions.