What drove Alcoa's 1998 revenue and earnings growth?

Revenue grew 15% to $15.34 billion, mainly from higher volumes tied to the Alumax and Inespal acquisitions, and from record aluminum shipments of 3.95 million metric tons. Net income rose 6% to $853 million. Lower aluminum and alumina prices and higher debt-related costs partly offset these gains. Operating improvements also helped, with cost of goods sold rising less than revenue.

How did the Alumax acquisition change Alcoa's financial position?

Alcoa paid about $3.8 billion for Alumax: roughly $1.5 billion in cash, $1.3 billion in stock, and about $1.0 billion of assumed debt. The deal added about $1.4 billion of goodwill and increased total assets to $17.46 billion from $13.07 billion. It also raised long-term debt to $2.88 billion and debt as a percent of invested capital to 31.7%. Pro forma unaudited figures show 1998 net sales of $16.77 billion had the deal closed at the start of the year.

Is Alcoa's dividend sustainable, and how does the variable dividend work?

The base dividend was $0.50 per share in 1998 and was raised 50% to $0.75 for 1999, paid quarterly at 20.125 cents. The variable dividend paid $0.25 in 1998 and is set to pay 30% of annual earnings above $2.25 per share, with the threshold also raised 50%. Cash from operations of $2.20 billion covered 1998 capital spending, dividends and buybacks, but higher debt levels are a consideration for future payouts.

What are the main financial risks disclosed in the filing?

Alcoa is net short metal in the U.S. and hedges with futures and options. A hypothetical 10% change in the LME ingot price (base $1,244 per metric ton) would move pre-tax earnings by about $110 million on those hedges, though offsetting changes in underlying purchases would largely neutralize this. A 10% move in forward exchange rates would affect pre-tax results by about $135 million. Environmental exposure includes Superfund matters at Massena, New York and Point Comfort, Texas, where costs cannot yet be fully estimated. Management also flagged a potentially material impact from SFAS No. 133 when adopted in 2000.

HWM 10-K FY1998 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 12, 1999. Cited figures are marked; the original filing is the authoritative source.

This is Alcoa Inc.'s (formerly Aluminum Company of America, renamed January 1, 1999) annual report on Form 10-K for fiscal 1998, filed in March 1999.

The filing covers the world's largest producer of primary aluminum, fabricated aluminum, and alumina. The prompt labels the filer Howmet Aerospace (HWM), but the document is Alcoa's FY1998 10-K. Howmet was Alcoa's later aerospace spin-off name, so the analysis below reflects Alcoa's 1998 results.

1998 was a transformational year: Alcoa completed the roughly $3.8 billion^a acquisition of Alumax in July 1998 and the Inespal acquisition in February 1998. Sales rose 15% to $15.34 billion, and aluminum shipments grew 34% to 3.95 million metric tons. Net income rose 6% to $853 million, and diluted EPS was $2.42 after the two-for-one stock split declared January 8, 1999.

Return on equity held at 16.3%^b. Management attributed the gains to higher volumes, the acquisitions, and operating improvements, partly offset by lower aluminum and alumina prices and higher interest expense. The balance sheet grew substantially.

Total assets rose to $17.46 billion^c from $13.07 billion, and long-term debt nearly doubled to $2.88 billion. Debt as a percentage of invested capital increased to 31.7% from 25.0%, reflecting the acquisition financing. Cash from operations rose 16% to $2.20 billion, which covered capital expenditures of $932 million and dividends.

The company repurchased $365 million^d of stock and raised its base quarterly dividend 50% for 1999, with a variable dividend component tied to earnings above $2.25 per share. Investors should note several risks: the aluminum price exposure is significant, with a hypothetical 10% move in LME ingot prices affecting pre-tax earnings by about $110 million on hedged positions.

Environmental remediation liabilities total $217 million, and the company disclosed material pending Superfund matters at Massena, New York and Point Comfort, Texas. Management also expects SFAS No. 133 on derivatives, effective in 2000, to have a material impact on its financial statements.

02—Key points

Key Highlights

Revenue rose 15% to $15.34 billion in 1998 (from $13.32 billion), driven by the Alumax and Inespal acquisitions and record aluminum shipments of 3.95 million metric tons, up 34%.
Net income increased 6% to $853 million, and diluted EPS was $2.42 (split-adjusted), with return on average shareholders' equity at 16.3%.
The Alumax acquisition (about $3.8 billion, July 1998) added over 70 plants in 22 states, Canada, Western Europe and Mexico, and expanded the company's aluminum smelting and extrusion capacity.
Average realized ingot price fell to 67 cents per pound from 75 cents, reflecting weaker aluminum and alumina pricing, though acquired businesses offset much of the impact.
Total debt increased sharply: long-term debt rose to $2.88 billion from $1.46 billion, and debt as a percent of invested capital reached 31.7% versus 25.0% in 1997.
Dividends increased for 1999: the base quarterly dividend rose to 20.125 cents, and total 1998 dividends were $0.75 per share including a $0.25 variable payment; a $1.1 billion cost reduction target is set for January 2001.
Risk items include significant aluminum price exposure, environmental remediation liabilities of $217 million (Massena and Point Comfort sites), and expected material earnings impact from SFAS No. 133 adoption in 2000.

03—Questions

Frequently Asked Questions

What drove Alcoa's 1998 revenue and earnings growth?
Revenue grew 15% to $15.34 billion, mainly from higher volumes tied to the Alumax and Inespal acquisitions, and from record aluminum shipments of 3.95 million metric tons. Net income rose 6% to $853 million. Lower aluminum and alumina prices and higher debt-related costs partly offset these gains. Operating improvements also helped, with cost of goods sold rising less than revenue.
How did the Alumax acquisition change Alcoa's financial position?
Alcoa paid about $3.8 billion for Alumax: roughly $1.5 billion in cash, $1.3 billion in stock, and about $1.0 billion of assumed debt. The deal added about $1.4 billion of goodwill and increased total assets to $17.46 billion from $13.07 billion. It also raised long-term debt to $2.88 billion and debt as a percent of invested capital to 31.7%. Pro forma unaudited figures show 1998 net sales of $16.77 billion had the deal closed at the start of the year.
Is Alcoa's dividend sustainable, and how does the variable dividend work?
The base dividend was $0.50 per share in 1998 and was raised 50% to $0.75 for 1999, paid quarterly at 20.125 cents. The variable dividend paid $0.25 in 1998 and is set to pay 30% of annual earnings above $2.25 per share, with the threshold also raised 50%. Cash from operations of $2.20 billion covered 1998 capital spending, dividends and buybacks, but higher debt levels are a consideration for future payouts.
What are the main financial risks disclosed in the filing?
Alcoa is net short metal in the U.S. and hedges with futures and options. A hypothetical 10% change in the LME ingot price (base $1,244 per metric ton) would move pre-tax earnings by about $110 million on those hedges, though offsetting changes in underlying purchases would largely neutralize this. A 10% move in forward exchange rates would affect pre-tax results by about $135 million. Environmental exposure includes Superfund matters at Massena, New York and Point Comfort, Texas, where costs cannot yet be fully estimated. Management also flagged a potentially material impact from SFAS No. 133 when adopted in 2000.

04—Continue

← View all 10-K filings