HWM

Business Context and Reporting Period

This Form 10-Q covers the quarterly and six-month periods ended June 30, 1996, for the Aluminum Company of America (Alcoa). The registrant is a global producer of aluminum and related products, including alumina, bauxite, and fabricated aluminum products. The financial statements are unaudited but have been reviewed by Coopers & Lybrand L.L.P.

Key Financial Metrics

*Comparative balance sheet figures are from Dec 31, 1995, as Q2 1995 balance sheet data is not provided in the text.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 9.5% in Q2 1996 and 7.1% year-to-date compared to 1995, driven primarily by the Alumina and Chemicals segment.
• Earnings Decline: Net income decreased 40% in Q2 and 25% year-to-date. This decline is largely attributed to a $65.4M special charge (after-tax impact of $40.0M) for the closure of Alcoa Electronic Packaging (AEP) and $33.8M in after-tax losses from marking commodity contracts to market.
• Segment Performance:
  • Alumina & Chemicals: Revenues rose 23% in Q2 due to a 26% increase in alumina prices and higher shipments.
  • Aluminum Processing: Revenues were relatively flat. Flat-rolled product revenues fell 10% due to lower shipments of rigid container sheet (RCS) as customers worked off inventory. Ingot shipments rose 57%.
  • Nonaluminum: Revenues increased 26% in Q2, aided by the acquisition of Electro-Wire Products (EWP), offset by the closure of AEP.
• Cost Structure: Cost of goods sold increased 11% in Q2, rising to 75.0% of revenues (up 1.7 points from the prior year) due to lower selling prices and higher raw material costs.

Guidance, Outlook, Risks, and Unusual Items

• Unusual Items:
  • AEP Closure: A $65.4M pre-tax charge was recorded for asset write-offs related to the shutdown of ceramic packaging operations in San Diego.
  • Commodity Hedging: A $33.8M after-tax loss resulted from marking aluminum commodity contracts to market. $27.2M of this loss relates to contracts for future shipments.
• Outlook & Management Commentary:
  • Dividends: Alcoa maintains a variable dividend program. An additional 10.75 cents per share was paid in Q2 and is expected for the remaining two quarters of 1996.
  • Voluntary Separation: Incentives were offered to 3,600 U.S. employees to voluntarily leave. A significant charge to earnings is anticipated in the second half of 1996.
  • Production: AWAC announced a 350,000 mt curtailment in annual alumina production. Expansions in Brazil and Texas are expected to add 500,000 mt of capacity in late 1996.
• Risks & Contingencies:
  • Legal Proceedings: A class action antitrust suit alleging price-fixing was dismissed in July 1996, though the plaintiff has appealed. A product liability suit regarding aircraft wingspars is ongoing after a summary judgment was reversed on appeal.
  • Environmental: The remediation reserve stands at $320M. Costs are estimated to be approximately 2% of cost of goods sold. Future costs for ongoing investigations cannot be estimated with certainty.
  • Commodity Risk: The company uses futures and options to hedge metal prices. As of June 30, 1996, 408,000 mt of contracts were subject to mark-to-market accounting, creating earnings volatility.

Investor Verification Checklist

• Special Charges: Verify the final impact of the AEP closure and the timing of the anticipated charge for voluntary employee separations in H2 1996.
• Commodity Hedging: Monitor the realization of the $27.2M deferred hedging loss against future fabricated product sales margins.
• Segment Mix: Assess the sustainability of the 26% price increase in the Alumina segment versus the volume decline in the Flat-rolled products segment.
• Legal Appeals: Track the status of the Ninth Circuit appeal regarding the dismissed antitrust class action.
• Capital Allocation: Review the execution of the new $1.3 billion Revolving Credit Facility and the ongoing share repurchase program (20 million shares authorized).