HWM

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 1995, for the Aluminum Company of America (Alcoa). The registrant is incorporated in Pennsylvania and operates globally in aluminum production, processing, and non-aluminum segments. The financial statements are unaudited but have been reviewed by Coopers & Lybrand L.L.P.

Key Financial Metrics

Note: Q3 1994 comparative balance sheet data is not provided in the text; only income statement and cash flow comparisons are available.

Material Changes vs. Prior Period

• Revenue Growth: Sales and operating revenues increased 27% in Q3 1995 and 29% for the nine-month period compared to 1994, driven by higher prices for alumina, ingot, and fabricated products.
• Profitability Surge: Net income for the nine months ended September 30, 1995, was $639.6M, a massive increase from $7.2M in the prior year. The 1994 figure was significantly depressed by a $67.9M extraordinary loss on debt prepayment and a $79.7M special charge for plant closures.
• Segment Performance:
  • Alumina & Chemicals: Revenues up 31% in Q3 and 18% year-to-date.
  • Aluminum Processing: Revenues up 22% in Q3 and 29% year-to-date, with flat-rolled product revenues rising 45% due to higher prices.
  • Non-Aluminum: Revenues up 40% in Q3, largely due to the acquisition of Electro-Wire Products (EWP).
• Cost Structure: Cost of goods sold increased 19% in Q3, but as a percentage of revenue, it decreased to 73.7% for the nine-month period (down 5.6 percentage points from 1994) due to higher product prices.

Guidance, Outlook, Risks, and Unusual Items

• Unusual Items:
  • 1995 Special Charge: A $9.4M pre-tax charge in Q3 1995 included $27.8M for salaried personnel layoffs, partially offset by $18.4M in insurance settlements for environmental claims.
  • 1994 Extraordinary Loss: The prior year included a $67.9M loss from the early redemption of deep discount debentures.
• Tax Rate Adjustment: The estimated effective tax rate for 1995 was raised to 33% from 32.5%. This includes a $27.2M charge related to an increase in the Australian corporate tax rate from 33% to 36%.
• Capital Allocation: Alcoa repurchased 2.75 million shares of common stock for $185.7M during the nine-month period. Dividends were increased to $0.225 per share.
• Commodity Risks: The company utilizes futures and options contracts to hedge against price volatility for approximately 1.2 million metric tons of aluminum products.
• Environmental Contingencies: The remediation reserve balance was $339M. While $91.8M was received in insurance settlements, ongoing investigations at sites like Massena, NY, and Pt. Comfort, TX, present potential future costs that cannot be precisely estimated.
• Legal Proceedings: Active litigation includes a class action regarding discrimination at the Davenport, Iowa facility, and product liability suits related to aircraft wingspars (summary judgment granted to Alcoa, plaintiffs appealed) and the 1989 DC-10 crash (16 of 22 cases settled).

Investor Verification Checklist

• Quality of Earnings: Verify the sustainability of the 202% year-over-year revenue growth, distinguishing between volume increases and price-driven gains.
• Environmental Liabilities: Assess the adequacy of the $339M remediation reserve against ongoing investigations and potential future regulatory changes.
• Debt Servicing: Review the impact of the $1.43B long-term debt and the recent $304M borrowing by AFL for the EWP acquisition on future cash flows.
• Foreign Tax Exposure: Monitor the impact of the Australian tax rate increase on future earnings from Alcoa of Australia Limited (AofA).
• Legal Outcomes: Track the status of the appealed summary judgment in the aircraft wingspar litigation and the class action discrimination suit.