Alcoa 2003 Annual Report Download - page 38

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, whichwas required to be divested as part of theReynolds
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 inuse.Alcoa’sshareoftheclosure 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 theappropriate
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.
Basedonthe 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 2003 was $395,
of which$65 wasclassifiedasacurrent liability, and reflects the
most probable costs to remediate identified environmental conditions
for which costs can be reasonably estimated. Of the 2003 reserve
balance, approximately 31% relates to the Massena, NY and Sherwin,
TX plant sites. Remediation expenses charged to the reserve were
$32 in 2003, $50in2002,and$72in2001.Theseincludeexpendi-
tures currently mandated, as well as those not required by any
regulatory authority or third party.In2003,thereserve balance
was reduced by approximately $9, primarily for adjustments based
on recent assessments ofremainingworkrequired at certain sites.
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
Alcoa takes a disciplined approach to cash management and
strengthening its balance sheet, as it undertook aggressive capital
controls, management of working capital, and continued focus
on its divestiture plan in 2003. These actions helped the company
to retire more than $1,000 of debt during the year. Disciplined
capital spending resulted in a 32% reduction in capital expenditures
in 2003 compared with 2002. Stronger earnings during 2003,
as well as proceeds from an advance payment against a long-term
36
aluminum supply contract contributed to a 32% increase in cash
from operations in 2003 compared with 2002. These increases, as
well as progress on the divestiture program with the sales of the
Latin America
PET business andAlcoa’s equity interest in Latasa in
2003, facilitated payments of debt, which aided in a reduction in the
debt-to-capital ratio from 43.1% in 2002 to 35.1% in 2003.
Cash provided from operations and from the divestiture plan is
anticipated tobeadequate to cover dividends,debtrepayments,capital
expenditures, and other business needs over the next 12 months.
Cash from Operations
Cash from operations was $2,430 in2003compared with $1,839 in
2002. The increase of $591, or 32%, was primarily due to higher
earnings after adjustments for noncash items, as well as proceeds
of $440 from an advance payment against a long-term aluminum
supply contract. Partially offsetting these increases were higher
working capital requirements, primarily attributed to an increase
in accounts receivable due to higher sales. Cash from operations
of $1,839 in 2002 decreased $572, or 24%, compared with $2,411
in 2001. The decrease was primarily due to a decline in earnings.
See the Results of Operations discussion for further details.
Cash from Operations
millions of dollars
99
2,381
00
2,851
01
2,411
02
1,839
03
2,430
Financing Activities
Cash used for financing activities was $1,713 in 2003 compared with
cash provided from financing activities of $593 in 2002, resulting in
achangeof$2,306,primarily due to borrowing activities. Net cash
used to pay down short-term borrowings, commercial paper, and
long-term debt was $1,088 in 2003 compared with net cash provided
from borrowing activities of $1,468 in 2002, primarily used to fund
the acquisitions of Ivex and Fairchild. In August 2002, Alcoa issued
$1,400 of notes. Of these notes, $800 maturein2007andcarrya
coupon rate of 4.25%, and $600 mature in 2013 and carry a coupon
rate of 5.375%.
Cash used for financing activities was $3,127 in 2001. Net cash
used to pay down short-term borrowings, commercial paper, and
long-term debt was $1,458 in 2001. Cash used to pay downdebtwas
provided from proceeds from the sales of operations required to
be divested from theReynolds merger and from the sale of Thiokol.
In addition, $1,452 was used for common stock repurchases.