Alcoa 1999 Annual Report Download

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1999 Annual Report
To Alcoa Shareholders:
Alcoa begins the 21st century with
an unprecedented show of strength.
In 1999 we posted record revenues,
earnings, and growth and topped
the Dow’s 30 companies by a wide
margin with a total return for
shareholders of 126%… (continued on page 2)
a

Table of contents

  • Page 1
    a 1999 Annual Report To Alcoa Shareholders: Alcoa begins the 21st century with an unprecedented show of strength. In 1999 we posted record revenues, earnings, and growth and topped the Dow's 30 companies by a wide margin with a total return for shareholders of 126%...(continued on page 2)

  • Page 2
    ...and closures, and electrical distribution systems for cars and trucks. • Vital statistics: 25 business units, 107,700 p.26 M arket Trends employees, 228 operating locations in 32 countries, $16.3 billion in revenues. • The Alcoa Production System is our worldwide standard in manufacturing. Its...

  • Page 3
    ... paid Book value Total assets Capital expenditures Cash ï¬,ow from operations Return on average shareholders' equity Debt as a percent of invested capital Interest coverage ratio Current assets / liabilities ratio Price/earnings (P/E) ratio Shipments of aluminum products (000 metric tons) Number of...

  • Page 4
    ... Chief Executive Officer (right) with Paul O'Neill, Chairman of the Board a larger, more versatile operating base capable of integrating Statistical Snapshot Revenues 1999 Compared with 1998 6% 19% 24% 50% 126% Income from Operations Earnings Safety Improvement Market Cap total value of Alcoa...

  • Page 5
    ... extrusion plant in Spain from Reynolds. In July we purchased the other 50% of A-CMI, a joint venture with Hayes Lemmerz that produces cast automotive structural parts in the U.S. and Norway. In October we acquired the San Antonio, Texas rolling operations of ACX, a Coors facility, to support Alcoa...

  • Page 6
    ... amassed considerable experience in taking a system integration approach to the use of management tools, production process controls, quality systems, technology, and human resource development. We have synthesized this knowledge in what we call the Alcoa Business System (ABS) - a clear set of pro...

  • Page 7
    ... to roll out. Related to these efficiencies, we have been working to align Alcoa's technology development with our product and market priorities, allocating research resources to the most significant short-term and long-term opportunities. These research and development efforts support ABS both...

  • Page 8
    ... the Alcoa managers who pursue our ambitious safety goals day in, day out, year-round. Their goal is zero workplace injuries. On the environmental front, we continue to operate benchmark mine rehabilitation programs in Brazil, Australia, Jamaica and the U.S., many of which have been internationally...

  • Page 9
    ... the future will be bedrock requirements in support of fast growing customers. Globalization has redrawn the battle lines between aluminum companies and among competing materials and technologies. Alcoa is ready. Customers Financial Strength Integrated Systems Profitable Growth People Values 7

  • Page 10
    growing with GROWING CUSTOMERS Among growing customers and markets for Alcoa: (counterclockwise from top) aerospace, automotive, packaging, alumina and chemicals, building and construction. 8

  • Page 11
    Alcoa means to be the preferred supplier in each of its markets, providing value exceeding anything available from other sources. This is why the Alcoa Production System is based on producing for use, not for inventory. For an Alcoa customer, this means getting exactly what you want, when you want ...

  • Page 12
    ... improvement developed at one Alcoa location and apply it across the organization. Leveraged productivity. The Alcoa Business System (ABS) is the means we've evolved to integrate best-practice knowledge, technology, and customer service - to lock in these systematic gains as a way of life. After...

  • Page 13
    Reforestation at work Portland, Australia unï¬,inching VALUES Alcoa's partnerships and acquisitions have a remarkable track record, partly because they are based on mutual respect and kept promises. Values are at the core of our due diligence process. Employees and host communities recognize and ...

  • Page 14
    ...White Operator Continuous cold mill Alcoa, Tennessee personal COMMITMENT We are committed to empowering the remarkable potential of a worldwide talent pool - people who can accomplish anything they set their minds to. This means freely sharing information and welcoming the involvement of employee...

  • Page 15
    ... the profitable growth to come. Over the past five years, Alcoa has invested in growth with capital improvements and major acquisitions. Assets have grown, and so have productivity and rate of return. Result: a larger, stronger Alcoa with ample resources to capitalize on future opportunities. 13

  • Page 16
    ... Alcoa Europe. (above) Alcoa directors get a firsthand look at the quality of litho sheet rolled at the plant in Alicante, Spain. Bill Christopher, president of Alcoa Forged Products, and Plant Manager Robert Sitzwohl (r) show senior Alcoa managers the new Diamond Bright finish of forged wheels...

  • Page 17
    Alcoa board members review operations at the Lauralco primary aluminum facility in Quebec. News99 continues Alcoa Director Henry Schacht and wife Nancy tour the Fusina, Italy plant, which produces sheet and plate as well as primary aluminum. Bill Gregory (l), APS manager at Hernando, Miss., ...

  • Page 18
    ... to Join Alcoa In a special meeting February 11, 2000, shareholders of Reynolds Metals Company voted to approve a merger agreement announced earlier by the two companies. Alcoa will acquire all outstanding shares of Reynolds in a tax free stock-for-stock transaction. Reynolds shareholders will...

  • Page 19
    ... shipping costs and improves response time during peak demand periods. After expanding European and South American operations, CSI opened new facilities in Ensenada, Mexico and San José, Costa Rica in early 1999. Now, construction work has begun on a new plastic closures manufacturing facility...

  • Page 20
    ...Ciprián facilities are located. Business Review Weekly in Australia, polling CEOs and CFOs of the nation's largest companies, named Alcoa World Alumina-Australia to the "Most Admired" list, including first place rankings for growth potential and for commitment to community, environment and ethical...

  • Page 21
    ... AFL locations are approaching 30 million work hours without a single lost workday case. Driveshafts are Booming Alcoa Engineered Products received new contracts for 400,000 aluminum driveshafts for shipment in 1999. The driveshafts are for use on BMW's 5-series luxury vehicles, General Motors' GMT...

  • Page 22
    ...: E-Purchasing. The Alcoa Mall is up and running as a streamlined business-to-business e-commerce system for procurement of many goods and services bought by the company. It employs the Ariba Operating Resource Management System, which will provide a company-wide process to handle many low-value...

  • Page 23
    ...imported from China. A Wheel Plant for Brazil Alcoa Aluminio plans to build a 72,000-unit-per-year aluminum wheel plant in Brazil. Currently, Aluminio imports forged aluminum wheels from the Alcoa wheel plant in Hungary for truck and bus manufacturers in Brazil. The new plant, located in Pernambuco...

  • Page 24
    ... control Alcoa Automotive Modena, Italy A Neighborhood Partnership In 1999, Alcoa Foundation launched Allegheny Works, an initiative to improve literacy and job training in Pittsburgh's Northside community, where Alcoa's corporate center is located. Thirteen grants totaling $200,000 were awarded...

  • Page 25
    ...arm of the Alcoa Business System - continues to roll out across the company's worldwide network of operations, improving production efficiencies, job satisfaction, and responsiveness to customer needs. Following are a few recent examples of the results: Cressona, Pa. Extrusion plant metal inventory...

  • Page 26
    ... in extrusion technology was spearheaded by Alcoa Europe and its Central Die Shop with support from the Alcoa system and collaboration with a European technical university . Objective: eliminate costly, time-consuming press trials for extrusion dies. The new system can simulate the extrusion process...

  • Page 27
    ... Review 39 Management's Report 39 Audit Committee Report 39 Independent Accountant's Report 40 Consolidated Financial Statements 44 Notes to Financial Statements 55 Supplemental Financial Information 56 11-Year Financial Data 58 Worldwide Operations 62 Directors and Officers 64 Business Units 65...

  • Page 28
    ...) • North American auto production currently uses some 3.8 billion pounds of aluminum per year, of which close to 80% is in the form of castings. (Ducker) In 1999 Alcoa formed a new business, Alcoa Automotive Castings, to strengthen its position for global growth in cast components. • Worldwide...

  • Page 29
    ... 1999 Alcoa World Alumina and Chemicals sold about 53% of consolidated alumina production to third parties. • European steel producers are operating at maximum capacity, and some are forecasting production records for 2000. Alcoa Industrial Chemicals' alumina refractory products used to line steel...

  • Page 30
    ...1999 1998 1997 1996 1995 Sales Net income* Earnings per common share Basic Diluted Alcoa's average realized price per pound for aluminum ingot Average U.S. market price per pound for aluminum ingot (Metals Week) Cash dividends paid per common share T otal assets Long-term debt (noncurrent) $16...

  • Page 31
    ... positive factors were lower overall aluminum and alumina prices and the impact of higher debt levels. 95 96 97 98 99 Segment Information 18.5 18.1 16.3 Alcoa's operations consist of four worldwide segments: Alumina and Chemicals, Primary Metals, Flat-Rolled Products, and Engineered Products...

  • Page 32
    ... focus of this segment is Alcoa's worldwide smelter system. Primary Metals receives alumina from the Alumina and Chemicals segment and produces aluminum ingot to be used by Alcoa's fabricating businesses, as well as sold to outside customers. Other products produced and sold by this segment include...

  • Page 33
    ... impact of acquired companies and the results of internal hedging. Lower operating costs in 1998 helped ease the decline, muting the impact of lower prices. III. Flat-Rolled Products Third-party aluminum shipments (mt) Third-party sales Intersegment sales Total sales After-tax operating income 1999...

  • Page 34
    ..., as higher costs for labor and services reduced margins. Mill products ATOI rose, as acquisitions and higher prices for products used in the transportation market offset losses related to the production and sale of computer memory disks. IV. Engineered Products Third-party aluminum shipments (mt...

  • Page 35
    ...Alcoa's aluminum and plastic closures operations, residential building products operations and aluminum automotive engineering and parts businesses are included in this group. Third-party sales from this group were up 1% from 1998, as higher sales of automotive electrical components, the acquisition...

  • Page 36
    .... Selling and General Administrative Expenses - S&GA expenses increased 9%, or $68, to $851 in 1999. The higher level of these costs in 1999 was due to acquisitions; Alcoa owned Alumax for 12 months in 1999 versus six months in 1998. In addition, higher personnel costs related to pay for performance...

  • Page 37
    ... the time that the order ships. In the U.S., Alcoa is net metal short and is subject to the risk of higher aluminum prices for the anticipated metal purchases required to fulfill the long-term customer contracts noted above. T o hedge this risk, Alcoa enters into long positions, principally using...

  • Page 38
    ... 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 may select from time to time. SRMC reports to the board of...

  • Page 39
    ... with any degree of accuracy the potential costs for certain of these matters. For example, there are issues related to Alcoa's Massena, New York, and Pt. Comfort, Texas plant sites that allege natural resource damage or off-site contaminated sediments, where investigations are ongoing. Based...

  • Page 40
    ..., 27% 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 $91 in 1999, $105 in 1998 and $94 in 1997 . Alcoa used $1,463 in...

  • Page 41
    ... of the company's internal controls, and the overall quality of Alcoa's financial reporting. Henry B. Schacht Chairman, Audit Committee 600 Grant St., Pittsburgh, Pa. January 10, 2000, except for Note V, for which the date is February 11, 2000. Alain J. P. Belda President and Chief Executive Of...

  • Page 42
    ...) For the year ended December 31 1999 Alcoa and subsidiaries 1998 1997 Revenues Sales (O) Other income Costs and Expenses Cost of goods sold Selling, general administrative and other expenses Research and development expenses Provision for depreciation, depletion and amortization Special items...

  • Page 43
    ... liabilities (L) Shareholders' Equity Preferred stock (N) Common stock (N) 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 financial...

  • Page 44
    ... 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 shareholders Dividends paid and return of capital to minority interests Net change in commercial paper Additions to long...

  • Page 45
    ...adjustments Comprehensive income Cash 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 Balance at end of 1998 Comprehensive income - 1999: Net income - 1999 Other...

  • Page 46
    ... future net cash ï¬,ows is less than book value. See Note H for additional information. Revenue Recognition. Alcoa recognizes revenue when title passes to the customer. Environmental Expenditures. Expenditures for current operations are expensed or capitalized, as appropriate. Expenditures relating...

  • Page 47
    ... Standards. A Statement of Position (SOP) was issued by the American Institute of CPAs in April 1998. The SOP, ''Reporting on the Costs of Start-up Activities,'' requires that costs incurred to open a new facility, introduce a new product, commence a new operation or other similar activities be...

  • Page 48
    ... shares of Alcoa common stock for each share of Reynolds. The value of the transaction is approximately $4,800. The combined company will have annual revenues of $21,000, approximately 127 ,000 employees and will operate over 300 locations in 37 countries around the world. The acquisition is subject...

  • Page 49
    ...these borrowings were used to fund acquisitions and for general corporate purposes. In 1998, Alcoa entered into a new $2 billion revolving-credit facility, which expires in equal amounts in August 2000 and August 2003. Under this agreement, certain levels of consolidated net worth must be maintained...

  • Page 50
    ... in 1997 . 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...

  • Page 51
    ... products. The alumina operations of Alcoa World Alumina and Chemicals (AWAC) comprise the majority of this segment. Primary Metals. This group's focus is Alcoa's worldwide smelter system. Primary Metals receives alumina from the Alumina and Chemicals segment and produces aluminum ingot to be used...

  • Page 52
    ... electrical components for the automotive industry along with telecommunication products. In addition, Alcoa's aluminum and plastic closure operations and Alcoa's residential building products operations are included in this group. Flat-rolled products Engineered products Other Total $1,842 925...

  • Page 53
    ... taxes related to foreign income (172) 11 In the 1999 fourth quarter, Australia reduced its corporate income 805 tax rate from 36% to 34% for 2000 and 30% for 2001. $16,609 (378) $11,900 In 1999, the exercise of employee stock options generated a tax benefit of $145. This amount was credited to...

  • Page 54
    ... 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...

  • Page 55
    ... for the health care plan. A one percentage point 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 $ 11 120 1% decrease $ (8) (102) Alcoa also sponsors a number of de...

  • Page 56
    ... 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 U.S. Environmental Protection Agency (EPA) as potentially responsible...

  • Page 57
    ...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) 1999 Sales Income from operations Net income...

  • Page 58
    ... Data (dollars in millions, except per-share amounts and ingot prices) 1999 For the year ended December 31 Sales $16,323 124 Other income Cost of goods sold 12,536 851 Selling, general administrative and other expenses 128 Research and development expenses Depreciation and depletion 888 - Special...

  • Page 59
    1996 $13,061 67 10,084 717 165 747 199 134 361 721 (206) - 515 .73 .71 2 232 1,908 7,078 (1,223) 13,450 1,690 1,611 4,463 1.47 1.46 .665 12.77 33 1⁄8 24 9⁄16 88,300 348,667 6,406 901 1,940 2,841 2,101 2,642 1,708 2,240 $996 76,800 8.2 11.6 11.0 1995 $12,500 155 9,477 718 141 713 16 120 446 1,...

  • Page 60
    Closures, Machinery Packaging Machinery Alumina Chemicals Castings, Forgings Can Reclamation Primary Aluminum Electrical Products Alcoa Worldwide Operations Aerospace Components Auto Components Building Products Auto Engineering Extrusions, Tube Bauxite Mining Sheet, Plate Wire, ...

  • Page 61
    ... Closures, Machinery Packaging Machinery Alumina Chemicals Castings, Forgings Can Reclamation Primary Aluminum Electrical Products Auto Components Building Products Auto Engineering Extrusions, Tube Bauxite Mining Sheet, Plate Wire, Rod, Bar â- â- â- Foil Products Alumina...

  • Page 62
    Closures, Machinery Packaging Machinery Alumina Chemicals Can Reclamation Extrusions, Tube Bauxite Mining continued Castings, Forgings Primary Aluminum Electrical Products Alcoa Worldwide Operations Aerospace Components Auto Components Building Products Auto Engineering Sheet, Plate...

  • Page 63
    ... Tifton, Ga. Valencia Aerospace Components Alumina Chemicals Alumina Auto Components Auto Engineering Can Reclamation Packaging Machinery Closures, Machinery Primary Aluminum Castings, Forgings Electrical Products Building Products Foil Products Bauxite Mining Extrusions, Tube Sheet...

  • Page 64
    ... projects and studies and a consultant for the New York City Human Resources Administration. Director since 1988. Franklin A. Thomas, 65, consultant, TFF Study Group, a nonprofit institution assisting development in South Africa, since 1996; president of The Ford Foundation 1979-1996; president and...

  • Page 65
    ... Counsel Joseph C. Muscari Vice President - Environment, Health & Safety, Audit and Compliance Russell C. Wisor Vice President - Government Affairs L. Patrick Hassey Vice President - Alcoa and President, Alcoa Europe William J. O'Rourke, Jr. Vice President - Alcoa Business Support Services...

  • Page 66
    ...Center, Pennsylvania Design and manufacture of high-performance, light-weight aluminum automotive materials and components Alcoa Europe, Kawneer Michel Marc Lavite, President Brussels, Belgium Aluminum architectural systems for the building and construction industry Alcoa World Alumina - Australia...

  • Page 67
    ... on Alcoa's environmental, health and safety performance, write Alcoa EHS Department at the corporate center address. 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...

  • Page 68
    ..., or 2,204.6 pounds. Micromill Alcoa Micromill technology uses fully continuous casting and rolling processes to produce aluminum sheet with reduced capital investment, lower operating costs, and - for some products - superior metallurgical properties. Mill products Metal that has been fabricated...

  • Page 69
    ... 43 Shares outstanding 43, 65 Shipments of aluminum products 30, 31, 32*, 33, 56 Special items 33, 46 Stock information 65 See also Common stock Stock options 44, 48 Stock split 45 Stock transfer agents 65 B Balance sheet 41 Board of directors 62 Book value 56 Business units 64 G Geographic area...

  • Page 70
    ... or missed delivery in over a thousand frames. Automotive leaders know that aluminum is a key to the future, and Alcoa offers the total solution to tapping aluminum's full potential. For innovations using any form of aluminum fabrication - castings, extrusions, sheet, forgings - Alcoa can provide...