Alcoa 2003 Annual Report Download - page 53

on January 1, 2002, Alcoa recognized a $15 charge for the impair-
ment of goodwill in the automotive business (Other group) resulting
from a change inthecriteria for the measurement of fair value
under
SFAS No. 142 from an undiscounted to a discounted cash flow
method. Goodwill increased $765 during the period related to ten
acquisitions (primarily impacting the Engineered Products segment
by $253, the Packaging and Consumer segment by $488, and the
Other group by $96) and adjustments to preliminary purchase price
allocations from prior periods. In the fourth quarter of 2002, Alcoa
recorded an impairment charge of $44 for goodwill associated
with its operations serving the telecommunications market. Alcoa’s
telecommunications business experienced lower than expected
operating profits and cash flows in the second half of 2002. As a
result of this trendand theoverall industry expectations, the
projected operating profits and cash flows for the telecommunications
business were reduced for the next five years. The projected decline
in cash flows resulted in the recognition of the $44 impairment
loss in the Other group. The fair value of Alcoa’s businesses was
determined based on a
DCF model for purposes of testing goodwill
for impairment. The discount rate used was based on a risk-adjusted
weighted average cost of capitalforeachbusiness. See Note P for
further details on goodwill balances by segment.
Intangible assets,which areincluded in other assets on the
Consolidated Balance Sheet, totaled $812, net of accumulated amor-
tization of $363, at December 31, 2003, and $742, net of accumu-
lated amortization of $349, at December31,2002.AtDecember 31,
2003 and 2002, $192 of the net balance of intangibles represents
trade name intangibles with indefinite useful lives that are not being
amortized. The remaining intangibles relate to customer relation-
ships, computer software, patents, and licenses. Amortization
expense for intangible assets for the years ended December 31, 2003,
2002, and 2001 was $84, $67, and $68, respectively. Amortization
expense is expected to range from approximately $85 to $70 each
year between 2004and2008.Theincrease in intangibles and
amortization expense in 2003 is primarily due to the implementa-
tion of an enterprise business solution within Alcoa to drive
common systems amongallbusinesses.
The effects of adopting
SFAS Nos. 141 and 142 o n n e t i n c ome and
diluted earnings per share for theyearsended December 31, 2003,
2002, and 2001 follow.
2003 2002 2001
Net income $ 938 $420 $ 908
Less: cumulative effect income from
accounting change for goodwill —(34) —
Income excluding cumulative effect 938 386 908
Add: goodwill amortization —— 171
Income excluding cumulative effect
and goodwill amortization $ 938 $386 $1,079
Diluted earnings per common share:
Net income $1.08 $ .49 $ 1.05
Less: cumulative effect income from
accounting change for goodwill —(.04) —
Income excluding cumulative effect 1.08 .45 1.05
Add: goodwill amortization —— .20
Income excluding cumulative effect
and goodwill amortization $1.08 $ .45 $ 1.25
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The impact to the segments of no longer amortizing goodwill
in 2002 was asfollows:Primary $23, Flat-Rolled Products $(5),
Engineered Products $61, Packaging and Consumer $16, and Other
$32. The impact to corporate was $44.
The cumulative effect adjustment recognized on January 1,
2002, upon adoption of
SFAS Nos. 141 and 142 , w a s $34 (after tax),
consisting of income from the write-off of negative goodwill from
prior acquisitions of $49, offset by a $15 write-off for the impair-
ment of goodwill in the automotive business resulting from a
change in the criteria for the measurement of impairments from
an undiscounted toadiscountedcashflowmethod.
F. Acquisitions and Divestitures
In Augustof2003, Alcoa acquired the remaining 40.9% shareholding
in Alcoa Aluminio (Aluminio) held by Camargo Correa Group
(Camargo Group) since 1984. Alcoa issued to the Camargo Group
17.8 mil lion share s ofAlcoa common stock, with a fair value of
approximately $410, in exchange for the Camargo Group’s holdings.
The agreement also provides for contingent payments over the
next five years based on the performance of the South American
operations. The maximum amount of contingent payments is $235.
The contingent payments will be reduced by appreciation on the
Alcoa shares issued in the transaction, as specified in the agreement.
The preliminary purchase price allocation resulted in goodwill of
approximately $50. The final allocation of 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 and Kobe discontinued their association in three can sheet
joint ventures: KAAL Australia, KAAL Japan, and KAAL Asia.
Based onterms of the agreement, Alcoa acquired from Kobe the
remaining 50% interest in KAAL Australia, as well as the remaining
20% interest in KAAL Asia. In turn, Kobepurchased a 47% interest
in KAAL Japan from Alcoa. These transactions, which were
recorded at fair value, resulted in net cash proceeds to Alcoa of $9
and recognition of a gain of $17. Also, Alcoa and Kobe amended
an existing aluminum supply agreement related to the KAAL Japan
operations, which resulted in an acceleration of the deliveryterm
of the agreement to two years.
In October of 2003, Alcoa completed the sale of its Latin America
PET business to Amcor PET Packaging for $75, subject to working
capital adjustments. Alcoa also sold investments for approximately
$129,comprisedprimarily of itsinterestinLatasa, a Latin America
aluminum can business.