ALCAN INC - 10-Q Quarterly Report

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 September 30, 2004

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 √ No ____

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

Yes √ No ____

At November 4, 2004 the registrant had 369,026,554 shares of common stock (without nominal or par value) outstanding.

TABLE OF CONTENT

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Item 4. Disclosure Controls and Procedures

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Items 2., 3., 4. and 5.

Item 6. Exhibits and Reports on Form 8-K

SIGNATURE

EXHIBIT INDEX

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 of its consolidated subsidiaries.

Item 1. Financial Statements

ALCAN INC.

INTERIM CONSOLIDATED STATEMENT OF INCOME (unaudited)

	Third Quarter		Nine Months
Periods ended September 30	2004	2003	2004	2003
(in millions of US$, except per share amounts)

Sales and operating revenues	6,243	3,529	18,573	10,283

Costs and expenses
Cost of sales and operating expenses	5,022	2,842	14,947	8,294
Depreciation and amortization	331	221	1,000	645
Selling, administrative and general expenses	407	190	1,189	531
Research and development expenses	55	34	174	95
Interest (note 11)	74	51	255	152
Other expenses (income) - net (note 10)	55	32	111	88
	5,944	3,370	17,676	9,805

Income from continuing operations before income taxes and other items	299	159	897	478
Income taxes (note 8)	136	65	327	350
Income from continuing operations before other items	163	94	570	128
Equity income	13	13	46	31
Minority interests	-	1	(26)	(12)
Income from continuing operations	176	108	590	147
Income (Loss) from discontinued operations (note 3)	(9)	(21)	14	(140)
Income before cumulative effect of accounting change	167	87	604	7
Cumulative effect of accounting change, net of income tax of $17	-	-	-	(39)
Net income (Loss)	167	87	604	(32)
Dividends on preference shares	1	2	4	5
Net income (Loss) attributable to common shareholders	166	85	600	(37)
Earnings (Loss) Per Share (note 4)
Basic:
Income from continuing operations	0.47	0.32	1.59	0.43
Income (Loss) from discontinued operations	(0.02)	(0.06)	0.04	(0.43)
Cumulative effect of accounting change	-	-	-	(0.12)
Net income (Loss) per common share - basic	0.45	0.26	1.63	(0.12)
Diluted:
Income from continuing operations	0.47	0.32	1.58	0.43
Income (loss) from discontinued operations	(0.02)	(0.06)	0.04	(0.43)
Cumulative effect of accounting change	-	-	-	(0.12)
Net income (Loss) per common share - diluted	0.45	0.26	1.62	(0.12)
Dividends per common share	0.15	0.15	0.60	0.60

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

ALCAN INC.

INTERIM CONSOLIDATED BALANCE SHEET (unaudited)


	September 30, 2004	December 31, 2003
(in millions of US$)

ASSETS

Current assets
Cash and time deposits	447	778
Trade receivables (net of allowances of $68 in 2004 and $88 in 2003)	3,617	3,128
Other receivables	890	681
Deferred income taxes	50	46
Inventories - Aluminum operating segments
- Aluminum	989	943
- Raw materials	444	398
- Other supplies	394	353
	1,827	1,694
- Packaging operating segment	419	395
- Pechiney	1,505	1,680
	3,751	3,769
Current assets held for sale (note 3)	604	712
Total current assets	9,359	9,114

Deferred charges and other assets	1,678	1,591
Deferred income taxes	869	887
Property, plant and equipment
Cost (excluding Construction work in progress)	21,317	21,882
Construction work in progress	894	645
Accumulated depreciation	(8,964)	(8,216)
	13,247	14,311

Intangible assets (net of accumulated amortization of $136 in 2004 and $86 in 2003)	1,286	1,218
Goodwill	5,433	4,686
Long-term assets held for sale (note 3)	94	141
Total assets	31,966	31,948

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

ALCAN INC.

INTERIM CONSOLIDATED BALANCE SHEET (cont'd) (unaudited)


	September 30, 2004	December 31, 2003
(in millions of US$)

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
Payables and accrued liabilities	5,253	4,964
Short-term borrowings	1,025	1,764
Debt maturing within one year	544	341
Deferred income taxes	76	86
Current liabilities of operations held for sale (note 3)	614	436
Total current liabilities	7,512	7,591

Debt not maturing within one year	7,509	7,437
Deferred credits and other liabilities	4,240	4,099
Deferred income taxes	1,307	1,702
Long-term liabilities of operations held for sale (note 3)	321	323
Minority interests	329	519

Shareholders' equity
Redeemable non-retractable preference shares	160	160
Common shareholders' equity
Common shares	6,615	6,461
Additional paid-in capital	117	128
Retained earnings	3,708	3,331
Common shares held by a subsidiary	(56)	(56)
Accumulated other comprehensive income	204	253
	10,588	10,117
	10,748	10,277

Commitments and contingencies (note 12)

Total liabilities and shareholders' equity	31,966	31,948

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

ALCAN INC.

INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)

	Third Quarter		Nine Months
Periods ended September 30	2004	2003	2004		2003
(in millions of US$)

OPERATING ACTIVITIES

Net income (Loss)	167	87	604	(32)
Loss (Income) from discontinued operations	9	21	(14)	140
Income from continuing operations	176	108	590	108
Adjustments to determine cash from operating activities:
Cumulative effect of accounting change	-	-	-	39
Depreciation and amortization	331	221	1,000	645
Deferred income taxes	(17)	13	(3)	87
Equity income, net of dividends	(13)	(10)	(29)	(12)
Asset impairment provisions	10	5	19	17
Loss (Gain) on sale of businesses and investments - net	(6)	14	(48)	(37)
Stock option compensation	3	5	7	9
Change in operating working capital
Change in receivables	41	10	(503)	68
Change in inventories	(19)	125	42	64
Change in payables and accrued liabilities	18	2	254	(28)
Change in deferred charges, other assets, deferred credits and other liabilities - net	123	59	19	217
Other - net	65	(2)	104	19
Cash from operating activities in continuing operations	712	550	1,452	1,196


Cash from (used for) operating activities in discontinued operations	32	5	43	(7)

Cash from operating activities	744	555	1,495	1,189

FINANCING ACTIVITIES

Proceeds from issuance of new debt	745	2	1,463	505
Debt repayments	(1,017)	(191)	(1,471)	(532)
Short-term borrowings - net	(14)	13	(394)	(94)
Pechiney financing costs	-	(19)	-	(19)
Common shares issued*	19	9	52	17
Dividends - Alcan shareholders (including preference)	(57)	(50)	(170)	(150)
- Minority interests	(2)	(1)	(5)	(11)
Cash used for financing activities in continuing operations	(326)	(237)	(525)	(284)


Cash from (used for) financing activities in discontinued operations	(28)	(2)	(55)	15

Cash used for financing activities	(354)	(239)	(580)	(269)

* Excludes the non-cash impact of common shares issued in exchange for Pechiney securities. See note 14 - Sales and Acquisitions of Businesses.

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

ALCAN INC.

INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS (cont'd) (unaudited)

	Third Quarter		Nine Months
Periods ended September 30	2004	2003	2004	2003
(in millions of US$)

INVESTMENT ACTIVITIES

Purchase of property, plant and equipment	(277)	(230)	(815)	(547)
Business acquisitions and purchase of investments	(37)	(82)	(460)	(400)

Net proceeds from disposal of business, investments and other assets	14	(9)	35	44
Cash used for investment activities in continuing operations	(300)	(321)	(1,240)	(903)


Cash from (used for) investment activities in discontinued operations	(4)	(3)	12	(9)

Cash used for investment activities	(304)	(324)	(1,228)	(912)

Effect of exchange rate changes on cash and time deposits	10	1	(18)	5
Increase (Decrease) in cash and time deposits	96	(7)	(331)	13

Cash and time deposits - beginning of period	351	118	778	98
Cash and time deposits - end of period in continuing operations	447	111	447	111
Cash and time deposits - end of period in discontinued operations	-	-	-	-
Cash and time deposits - end of period	447	111	447	111

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

ALCAN INC.

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2004

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

1. ACCOUNTING POLICIES

Basis of Presentation

Alcan had historically prepared and filed its financial statements in accordance with Canadian generally accepted accounting principles (GAAP) with a reconciliation to United States (U.S.) GAAP. On January 1, 2004, the Company adopted U.S. GAAP as its primary reporting standard for presentation of its consolidated financial statements and restated historical consolidated financial data, as described and presented in the Form 8-K filed with the U.S. Securities and Exchange Commission on June 14, 2004 (Form 8-K).

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 as contained in the Form 8-K, except for the recently adopted accounting policies described in note 2 - Accounting Changes below. The interim financial statements do not include all of the financial statement disclosures included in the annual financial statements prepared in accordance with U.S. GAAP and therefore should be read in conjunction with the Company's Form 8-K.

In the opinion of management of the Company, the unaudited interim consolidated financial statements reflect all adjustments, which consist only of normal and recurring adjustments, necessary to present fairly the financial position and the results of operations and cash flows in accordance with U.S. GAAP, applied on a consistent basis. The results reported in these interim consolidated financial statements are not necessarily indicative of the results that may be expected for the entire year.

Pechiney - Basis of Presentation

On December 15, 2003, Alcan acquired Pechiney. Pechiney refers to Pechiney, a French société anonyme, and where applicable, its consolidated subsidiaries. The interim consolidated financial statements as at and for the quarter and nine months ended September 30, 2004 include the operations of Pechiney. The financial statements as at December 31, 2003 include only the balance sheet of Pechiney. The interim consolidated financial statements for the quarter and nine months ended September 30, 2003 do not include the operations of Pechiney.

2. ACCOUNTING CHANGES

Asset Retirement Obligations

Effective January 1, 2003, the Company retroactively adopted Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations. Under SFAS No. 143, the Company recognized additional liabilities, at fair value, of approximately $107 as at January 1, 2003, for existing legal asset retirement obligations. Such liabilities are adjusted for accretion costs and revisions in estimated cash flows. 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 is 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. An after-tax charge of $39 for the cumulative effect of accounting change was recorded as a result of the new standard, relating primarily to costs for spent potlining disposal for pots currently in operation.


2.	ACCOUNTING CHANGES (cont'd)

	Stock Options and Other Stock-Based Compensation Effective January 1, 2004, the Company adopted the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Under the retroactive restatement method selected by the Company as described in SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, compensation cost recognized in the statement of income for the quarter and nine months ended September 30, 2004 is the same as that which would have been recognized had the fair value method of SFAS No. 123 been applied from its original effective date. All prior periods presented have been restated to reflect compensation cost as if the fair value method had been applied from the original effective date of January 1, 1996 of SFAS No. 123. The impact of the adoption of the fair value method of accounting for stock-based compensation was an increase in stock-based compensation expense of $3 and $7 for the quarter and nine months ended September 30, 2004 respectively (2003: $5 and $9). The impact as at September 30, 2004 was an increase in additional paid-in capital of $45 ($48 as at December 31, 2003), an increase in common shares of $45 ($35 as at December 31, 2003), and a decrease in retained earnings of $90 ($83 as at December 31, 2003). The earnings per common share impact of the adoption of the recognition provisions of SFAS 123 is a reduction of $0.01 and $0.02 per share for the quarter and nine months ended September 30, 2004, respectively (2003: $0.01 and $0.03). Consolidation of Variable Interest Entities Effective January 1, 2004, the Company adopted the provisions of FASB Interpretation No. (FIN) 46, Consolidation of Variable Interest Entities. During the third quarter of 2004, the Company determined that it was the primary beneficiary of Logan Aluminum Inc. (Logan), a variable interest entity. As a result, the consolidated balance sheet includes the assets and liabilities of Logan. Logan manages a tolling arrangement for Alcan and an unrelated party. At September 30, 2004, assets of $38 and liabilities of $38 related to Logan that were previously not recorded on the consolidated balance sheet have been recorded by the Company. Prior periods were not restated. The Company's investment, plus any unfunded pension liability, related to Logan totalled approximately $37 as at September 30, 2004, representing the Company's maximum exposure to loss. Creditors of Logan do not have recourse to the general credit of the Company as a result of including it in the Company's financial statements.

3.	DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE

	In the second quarter of 2003, the Company committed to a plan to sell certain non-strategic Packaging operations, as the businesses are not part of its core operations. These businesses are classified as held for sale and are included in discontinued operations. In the fourth quarter of 2003, the Company recorded the sale of Fibrenyle, in the U.K., for proceeds of $29. In the second quarter of 2004, the Company recorded the sale of the Boxal Group and Suner Cartons, for proceeds of $6 and $19, respectively. The Boxal Group comprises three manufacturing facilities in France, the Netherlands and Switzerland as well as a sales office in Germany. Suner Cartons comprises a facility in Spain. As of June 30, 2004, the Company has sold all of the assets of the non-strategic packaging businesses previously classified as held for sale in the second quarter of 2003. On December 31, 2003, the Company classified the aluminum rolling mill in Ravenswood, West Virginia, as held for sale. Ravenswood was acquired through the acquisition of Pechiney. In December 2003, the Company classified in discontinued operations its extrusions operations in Milan, Italy (Engineered Products). These operations had been classified as held and used until their sale in December 2003. In the first quarter of 2004, the Company committed to a plan to sell certain non-strategic assets in the Engineered Products operating segment that are not part of its core operations. The Company is actively pursuing potential purchasers and expects the sale to be completed in the first quarter of 2005. These assets are classified as held for sale and are included in discontinued operations. In the second quarter of 2004, the Company classified in discontinued operations its copper and ores and concentrates trading businesses previously reported in Pechiney World Trade. On October 8, 2004, the Company announced that it had reached an agreement to sell certain assets of its ores and concentrates trading division to its current management team. The Company is pursuing potential purchasers for the remaining trading businesses and expects the sales to be completed by the end of 2004.


3.	DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE (cont'd)

	Fair values were determined based on either discounted cash f

1.	ACCOUNTING POLICIES

	Basis of Presentation Alcan had historically prepared and filed its financial statements in accordance with Canadian generally accepted accounting principles (GAAP) with a reconciliation to United States (U.S.) GAAP. On January 1, 2004, the Company adopted U.S. GAAP as its primary reporting standard for presentation of its consolidated financial statements and restated historical consolidated financial data, as described and presented in the Form 8-K filed with the U.S. Securities and Exchange Commission on June 14, 2004 (Form 8-K). 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 as contained in the Form 8-K, except for the recently adopted accounting policies described in note 2 - Accounting Changes below. The interim financial statements do not include all of the financial statement disclosures included in the annual financial statements prepared in accordance with U.S. GAAP and therefore should be read in conjunction with the Company's Form 8-K. In the opinion of management of the Company, the unaudited interim consolidated financial statements reflect all adjustments, which consist only of normal and recurring adjustments, necessary to present fairly the financial position and the results of operations and cash flows in accordance with U.S. GAAP, applied on a consistent basis. The results reported in these interim consolidated financial statements are not necessarily indicative of the results that may be expected for the entire year. Pechiney - Basis of Presentation On December 15, 2003, Alcan acquired Pechiney. Pechiney refers to Pechiney, a French société anonyme, and where applicable, its consolidated subsidiaries. The interim consolidated financial statements as at and for the quarter and nine months ended September 30, 2004 include the operations of Pechiney. The financial statements as at December 31, 2003 include only the balance sheet of Pechiney. The interim consolidated financial statements for the quarter and nine months ended September 30, 2003 do not include the operations of Pechiney.

2.	ACCOUNTING CHANGES

	Asset Retirement Obligations Effective January 1, 2003, the Company retroactively adopted Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations. Under SFAS No. 143, the Company recognized additional liabilities, at fair value, of approximately $107 as at January 1, 2003, for existing legal asset retirement obligations. Such liabilities are adjusted for accretion costs and revisions in estimated cash flows. 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 is 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. An after-tax charge of $39 for the cumulative effect of accounting change was recorded as a result of the new standard, relating primarily to costs for spent potlining disposal for pots currently in operation.