Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 1998, for the Aluminum Company of America (Alcoa). Alcoa is a leading global producer of aluminum ingot and fabricated products, operating through segments including Alumina and Chemicals, Aluminum Processing, and Nonaluminum Products. The filing includes unaudited condensed consolidated financial statements reviewed by Coopers & Lybrand L.L.P.
Key Financial Metrics
| Metric | Q1 1998 | Q1 1997 |
|---|---|---|
| Revenues | $3,445.1 million | $3,231.1 million |
| Net Income | $209.9 million | $159.1 million |
| Basic EPS | $1.25 | $0.92 |
| Diluted EPS | $1.24 | $0.91 |
| Cash from Operations | $238.5 million | $245.4 million |
| Cost of Goods Sold Margin | 76.0% | 77.0% |
| Total Assets | $14,173.1 million | $13,070.6 million (Dec 31, 1997) |
| Total Liabilities | $8,274.1 million | $7,211.5 million (Dec 31, 1997) |
| Short-term Borrowings | $544.7 million | $347.7 million (Dec 31, 1997) |
| Long-term Debt | $1,811.0 million | $1,457.2 million (Dec 31, 1997) |
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 7% to $3,445.1 million, driven by an 8% increase in aluminum shipments and higher prices in flat-rolled products.
- Profitability: Net income rose 32% to $209.9 million. The 1997 comparison period included a $4.6 million pre-tax gain from special items (asset sales), whereas 1998 had no such special items.
- Segment Performance:
- Flat-rolled products: Revenues surged 20% due to higher shipments/prices and the acquisition of Inespal.
- Alumina: Revenues were flat despite an 8% drop in realized prices, offset by higher shipment volumes.
- Nonaluminum: Revenues increased 1%, aided by automotive electrical components, despite divestitures of non-core businesses.
- Acquisitions: Alcoa completed the acquisition of Inespal, S.A. (Spain) in February 1998 for approximately $150 million cash and $260 million assumed debt. Inespal contributed significantly to flat-rolled and ingot shipments.
- Cost Structure: Cost of goods sold as a percentage of revenue improved to 76.0% from 77.0%, reflecting cost improvements despite higher volumes and material costs.
Guidance, Outlook, Risks, and Unusual Items
- Strategic Acquisitions: On March 9, 1998, Alcoa announced an agreement to acquire Alumax Inc. for approximately $3.8 billion (cash and stock). The transaction is subject to antitrust review and shareholder approval. The combined entity is projected to have 1998 revenues of $17,000 million.
- Capital Markets: In January 1998, Alcoa issued $300 million of 6.75% bonds due in 2028. The company also repurchased 297,500 shares of common stock for $20.4 million.
- Dividends: Dividends paid per share increased to $0.375 (including a 12.5 cent bonus dividend) compared to $0.225 in the prior year.
- Commodity and Financial Risks:
- Price Volatility: Alcoa uses futures and options to hedge aluminum, gas, and copper price risks. Mark-to-market losses on LME contracts resulted in an after-tax loss of $19.8 million in Q1 1998.
- Foreign Currency: Significant exposure to currency fluctuations is managed via forward contracts and options.
- Environmental Liabilities: The remediation reserve balance was $230 million. Ongoing investigations at various sites make it impossible to estimate potential costs with certainty for certain matters.
- Legal Proceedings: Five putative class actions were filed in Delaware challenging the proposed Alumax acquisition, alleging inadequate price and lack of market checks. Plaintiffs seek to enjoin the acquisition or force an auction.
Investor Verification Checklist
- Alumax Acquisition Status: Verify the progress of antitrust reviews and shareholder approval for the $3.8 billion Alumax deal, given the pending litigation.
- Inespal Integration: Assess the operational and financial integration of the Inespal acquisition and its impact on European flat-rolled product margins.
- Commodity Hedging Impact: Monitor the mark-to-market volatility on LME contracts and its effect on quarterly earnings.
- Environmental Reserves: Review updates on the $230 million remediation reserve, particularly regarding the Massena, N.Y., and Pt. Comfort, Texas, sites.
- Debt Servicing: Confirm the impact of the new $300 million bond issuance and increased short-term borrowings on future interest expense.