ALCAN INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2003

Commission file number 1-3677

ALCAN INC.

(Exact name of registrant as specified in its charter)

CANADA	Inapplicable
(State or Other Jurisdiction of	(I.R.S. Employer Identification No.)
Incorporation or Organization)

1188 Sherbrooke Street West, Montreal, Quebec, Canada H3A 3G2

(Address of Principal Executive Offices and Postal Code)

(514) 848-8000

(Registrant's Telephone Number, including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X No ____

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes X No ____

At March 31, 2003, the registrant had 321,642,094 shares of common stock (without nominal or par value) outstanding.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Item 4. Controls and Procedures

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Items 2. through 5.

Item 6 (a) - Exhibits

Item 6 (b) - Report on Form 8-K

SIGNATURE

CERTIFICATION

PART I - FINANCIAL INFORMATION In this report, all dollar amounts are stated in U.S. dollars and all quantities in metric tons, or tonnes, unless indicated otherwise. A tonne is 1,000 kilograms, or 2,204.6 pounds. The word "Company" refers to Alcan Inc. and, where applicable, one or more consolidated subsidiaries. Item 1. Financial Statements ALCAN INC.
INTERIM CONSOLIDATED STATEMENT OF INCOME
(unaudited)
Three months ended March 31
(in millions of US$, except per share amounts)	2003	2002

Sales and operating revenues	3,273	2,937
Costs and expenses
Cost of sales and operating expenses	2,585	2,331
Depreciation and amortization	231	205
Selling, administrative and general expenses	165	139
Research and development expenses	29	28
Interest (note 11)	49	50
Restructuring, impairment and other special charges (note 5)	2	14
Other expenses - net	57	7
	3,118	2,774
Income before income taxes and other items	155	163
Income taxes (note 8)	141	78
Income before other items	14	85
Equity income	-	1
Minority interests	(1)	-
Net income	13	86
Dividends on preference shares	2	1
Net income attributable to common shareholders	11	85
Net income per common share - basic and diluted (note 3)	0.04	0.26
Dividends per common share	0.15	0.15

The accompanying notes are an integral part of the interim financial statements.

ALCAN INC.

INTERIM CONSOLIDATED STATEMENT OF RETAINED EARNINGS
(unaudited)
Three months ended March 31 (in millions of US$)	2003	2002

Retained earnings - beginning of year - as reported	3,503	4,074
Accounting change - Impairment of goodwill
as at January 1, 2002 (note 2)	-	(748)
As restated	3,503	3,326
Net income	13	86
Dividends
- Common	(48)	(48)
- Preference	(2)	(1)
Retained earnings - end of period	3,466	3,363

The accompanying notes are an integral part of the interim financial statements.

ALCAN INC.

INTERIM CONSOLIDATED BALANCE SHEET (unaudited for 2003)
(in millions of US$)	March 31, 2003	December 31, 2002

ASSETS
Current assets
Cash and time deposits	111	110
Trade receivables
(net of allowances of $57 in 2003 and $59 in 2002)	1,437	1,300
Other receivables	476	553
Inventories
- Aluminum operating segments
. Aluminum	946	905
. Raw materials	376	390
. Other supplies	292	296
	1,614	1,591
- Packaging operating segment	409	396
	2,023	1,987
	4,047	3,950

Deferred charges and other assets	645	667
Property, plant and equipment
- Cost (excluding Construction work in progress)	17,891	17,798
- Construction work in progress	615	573
- Accumulated depreciation	(8,367)	(8,138)
	10,139	10,233
Intangible assets, net of accumulated amortization of $63 in 2003 and $56 in 2002	329	332
Goodwill	2,357	2,356
Total assets	17,517	17,538

The accompanying notes are an integral part of the interim financial statements.

ALCAN INC.

INTERIM CONSOLIDATED BALANCE SHEET (cont'd) (unaudited for 2003)
(in millions of US$)	March 31, 2003	December 31, 2002

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Payables and accrued liabilities	2,360	2,337
Short-term borrowings	352	385
Debt maturing within one year	334	295
	3,046	3,017
Debt not maturing within one year	3,105	3,187
Deferred credits and other liabilities	1,454	1,419
Deferred income taxes	1,166	1,140
Minority interests	135	150

Shareholders' equity
Redeemable non-retractable preference shares	160	160
Common shareholders' equity
- Common shares	4,708	4,703
- Retained earnings	3,466	3,503
- Deferred translation adjustments	277	259
	8,451	8,465
	8,611	8,625
Commitments and contingencies (note 10)
Total liabilities and shareholders' equity	17,517	17,538

The accompanying notes are an integral part of the interim financial statements.

ALCAN INC.

INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)
Three months ended March 31 (in millions of US$)
	2003	2002

OPERATING ACTIVITIES
Net income	13	86
Adjustments to determine cash from operating activities:
Depreciation and amortization	231	205
Deferred income taxes	24	3
Change in operating working capital:
- Change in receivables	(43)	6
- Change in inventories	(23)	32
- Change in payables	15	(92)
- Total change in operating working capital	(51)	(54)

Change in deferred charges, other assets, deferred credits and other liabilities - net	72	24
Other - net	5	(6)
Cash from operating activities	294	258

The accompanying notes are an integral part of the interim financial statements.

ALCAN INC.

INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS (cont'd) (unaudited)
Three months ended March 31 (in millions of US$)
	2003	2002

FINANCING ACTIVITIES
New debt	3	131
Debt repayments	(85)	(171)
	(82)	(40)
Short-term borrowings - net	(26)	(127)
Common shares issued	5	6
Dividends
· Alcan shareholders (including preference)	(50)	(49)
· Minority interests	(9)	(1)
Cash used for financing activities	(162)	(211)
INVESTMENT ACTIVITIES
Property, plant and equipment	(134)	(107)
Business acquisitions	(5)	-
	(139)	(107)
Net proceeds from disposal of businesses, investments and other assets	7	36
Cash used for investment activities	(132)	(71)
Effect of exchange rate changes on cash and time deposits	1	1
Increase (decrease) in cash and time deposits	1	(23)
Cash and time deposits - beginning of period	110	119
Cash and time deposits - end of period	111	96

The accompanying notes are an integral part of the interim financial statements.

ALCAN INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2003

(Unaudited)

(in millions of US$, except per share amounts)

1. ACCOUNTING POLICIES

The unaudited interim consolidated financial statements are based upon accounting policies and methods of their application consistent with those used and described in the Company's annual financial statements, except for the recently adopted accounting policies described below. The interim financial statements do not include all of the financial statement disclosures included in the annual financial statements prepared in accordance with Canadian generally accepted accounting principles (GAAP) and therefore should be read in conjunction with the most recent annual financial statements.

Recently Adopted Accounting Policies

Impairment of Long-lived Assets

On January 1, 2003, the Company prospectively adopted the Canadian Institute of Chartered Accountants (CICA) section 3063, Impairment of Long-lived Assets. Under this standard, an impairment loss is recognized when the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. No significant impairment losses for long-lived assets were recorded in the first quarter of 2003.

Disposal of Long-lived Assets and Discontinued Operations

On January 1, 2003, the Company prospectively adopted the CICA section 3475, Disposal of Long-lived Assets and Discontinued Operations. Under this standard, a long-lived asset to be disposed of by sale is measured at the lower of its carrying amount or fair value less cost to sell and is not amortized while classified as held for sale. For a long-lived asset to be disposed of other than by sale, such as by abandonment, before the end of its previously estimated useful life, depreciation estimates are revised to reflect the use of the asset over its shortened useful life. Also, the standard requires that the results of operations of a component of an enterprise that has been disposed of either by sale or abandonment be reported as discontinued operations. A component of an enterprise comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the enterprise. There were no disposal activities relating to long-lived assets initiated by the Company in the first quarter of 2003.

1. ACCOUNTING POLICIES (cont'd)

Guarantees

On January 1, 2003, the Company adopted the CICA accounting guideline AcG-14, disclosure of guarantees, which addresses disclosure requirements for a guarantor that issues a guarantee. See note 10 - Commitments and contingencies.

Recently Issued Accounting Policies

Asset Retirement Obligations

The CICA issued section 3110, Asset Retirement Obligations, which will be effective for the Company's fiscal year beginning on January 1, 2004. This standard establishes accounting standards for the recognition, measurement and disclosure of liabilities and the associated asset retirement cost for legal obligations associated with the retirement of a tangible long-lived asset. Under this standard, a liability would generally be recognized for such an obligation at its fair value when incurred and a corresponding asset retirement cost would be added to the carrying amount of the related asset.

2. ACCOUNTING CHANGE

Goodwill and Other Intangible Assets

On January 1, 2002, the Company adopted the CICA standard concerning goodwill and other intangible assets. Under this standard, goodwill and other intangible assets with an indefinite life are no longer amortized but are carried at the lower of carrying value and fair value. Goodwill and other intangible assets with an indefinite life are tested for impairment on an annual basis. An impairment of $748 was identified in the goodwill balance as at January 1, 2002, and was charged to opening retained earnings in 2002 upon adoption of the accounting standard. Any further impairment arising subsequent to January 1, 2002, will be taken as a charge against income. As a result of the new standard, the Company no longer amortizes goodwill.

3. NET INCOME PER COMMON SHARE - BASIC AND DILUTED

Basic and diluted net income per common share are based on the weighted average number of shares outstanding during the period. The treasury stock method for calculating the dilutive impact of stock options is used. The following table outlines the calculation of basic and diluted net income per common share.



Three months ended March 31
	2003	2002
Numerator for basic and diluted net income per common share:
Net income attributable to common shareholders	11	85
Denominator (number of common shares in millions):
Denominator for basic net income per common
share - weighted average of outstanding shares	322	321
Effect of dilutive stock options	-	2
Denominator for diluted net income per common
share - adjusted weighted average of outstanding shares	322	323
Net income per common share - basic and diluted	0.04	0.26

In the first quarter, options to purchase 6,231,283 common shares (2002: 353,000) at a weighted average price of CAN$48.79 per share (2002: CAN$64.25) were outstanding during the period but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average price of the common shares.

As at March 31, 2003, there were 321,642,094 (2002 : 321,104,209) common shares outstanding.

4. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

Differences relate principally to accounting for foreign currency translation, derivatives, post-retirement benefits, "available-for-sale" securities, asset retirement obligations and goodwill impairment identified as at January 1, 2002. Refer to the Company's 2002 Annual Report for an explanation of these differences.

On January 1, 2003, the Company adopted, in certain circumstances, the optional hedge accounting provisions contained in the FASB Statements Nos. 133 and 138, Accounting for Derivative Instruments and Hedging Activities. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm c ommitment, an available-for-sale security, or a foreign-currency denominated forecasted transaction. Under this statement, when the Company elects to apply hedge accounting, it is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Those methods must be consistent with the Company's approach to managing risk.

4. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (cont'd)

Recently Adopted Accounting Standards

On January 1, 2003, the Company adopted the FASB Statement No. 143, Accounting for Asset Retirement Obligations. This statement establishes accounting standards for the recognition, measurement and disclosure of liabilities for legal obligations associated with the retirement of a tangible long-lived asset that result from its acquisition, construction, development or normal operation. Under this standard, a liability is generally recognized for such an obligation at its fair value when incurred and a corresponding asset retirement cost is added to the carrying amount of the related asset. In subsequent periods, the carrying amount of the liability is adjusted to reflect the passage of time and any changes in the timing or amount of the underlying future cash flows. The asset retirement cost is amortized to expense over the asset's useful life.

Under the FASB Statement No. 143, the Company recognized, for U.S. GAAP reporting only, additional liabilities, at fair value, of approximately $106 as at January 1, 2003, for existing legal asset retirement obligations. Such liabilities are adjusted for accretion costs. The related asset retirement costs are capitalized as increases to the carrying amount of the associated long-lived assets and accumulated depreciation on these capitalized costs recognized. These liabilities consist primarily of environmental remediation costs, resulting from normal operations, associated with certain bauxite residue disposal sites at its alumina refineries and the disposal of certain of its spent potlining associated with smelter facilities.

As a result of the new standard, as at January 1, 2003, Property, plant and equipment - cost has been increased by $140, Property, plant and equipment - accumulated depreciation has been increased by $90, Deferred credits and other liabilities have been increased by $106, Deferred income taxes have been reduced by $17 and an after-tax charge of $39 recorded in Net income for the cumulative effect of accounting change. The cumulative effect of accounting change related primarily to costs for spent potlining disposal for pots currently in operation. Net income for the year ended December 31, 2002 would not have been materially different if this standard had been adopted effective January 1, 2002. For the three months ended March 31, 2003, net income was reduced by $10 due to the adoption of the standard, resulting principally from higher balance sheet translation exchange losses of $8 relating to Deferred credits and other liabilities.

The following is a reconciliation of the aggregate carrying amount of liabilities for asset retirement obligations and the pro forma impact for the year ended December 31, 2002, as if the standard had been adopted effective January 1, 2002.

		(pro forma)
For the period ended	March 31, 2003	December 31, 2002

Balance - beginning of period	389	363
Liabilities incurred	3	12
Liabilities settled	(4)	(12)
Accretion expense	5	17
Exchange	27	9
Balance - end of period	420	389

On January 1, 2003, the Company prospectively adopted the FASB Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This standard requires that a liability associated with an exit or disposal activity be recognized when the liability is incurred rather than at the date of the Company's commitment to an exit plan.

4. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (cont'd)

Recently Adopted Accounting Standards (cont'd)

On January 1, 2003, the Company adopted the recognition and measurement provisions of the FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The provisions are applied on a prospective basis to guarantees issued or modified after December 31, 2002. There were no significant guarantees issued or modified after December 31, 2002.

Recently Issued Accounting Standards

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, which applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which the Company holds a variable interest that it acquired before February 1, 2003. This Interpretation requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. An entity that holds a significant variable interest but is not the primary beneficiary is subject to specific disclosure requirements. The Company is studying this Interpretation and has not yet determined its impact.


Reconciliation of Canadian and U.S. GAAP


Three months ended March 31 (in millions of US$, except per share amounts)	2003	2002

Net income - as reported	13	86

Difference due to:
- Valuation of derivatives	16	99
- Asset retirement obligations	(11)	-
- Deferred tax effect on the above	(4)	(32)

Net income from continuing operations before
cumulative effect of accounting changes - U.S. GAAP	14	153

Cumulative effect of accounting changes - - net of taxes
- Impairment of goodwill	-	(748)
- Asset retirement obligations	(39)	-

Loss - U.S. GAAP	(25)	(595)

Dividends on preference shares	2	1

Loss attributable to common
shareholders - U.S. GAAP	(27)	(596)

Loss per common share
- basic and diluted - U.S. GAAP	(0.08)	(1.86)

Net income attributable to common shareholders
from continuing operations before cumulative effect of
accounting changes - U.S GAAP	12	152

Net income from continuing operations before
cumulative effect of accounting changes per common
share - basic and diluted - U.S. GAAP	0.04	0.47

4. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (cont'd)


Reconciliation of Canadian and U.S. GAAP (cont'd)
	March 31, 2003		December 31, 2002
	As reported	U.S. GAAP	As reported	U.S. GAAP

Other receivables	476	485	553	553

Inventories	2,023	2,028	1,987	1,983

Deferred charges and other assets	645	650	667	664

Property, plant and equipment
- Cost (excluding Construction work in progress)	17,891	18,031	17,798	17,798
- Accumulated depreciation	(8,367)	(8,458)	(8,138)	(8,138)

Intangible assets, net of accumulated amortization	329	472	332	475

Payables and accrued liabilities	2,360	2,361	2,337	2,354

Deferred credits and other liabilities	1,454	2,187	1,419	2,029

Deferred income taxes	1,166	1,001	1,140	983

Retained earnings	3,466	3,462	3,503	3,537

Deferred translation adjustments	277	223	259	205 &