Alcoa Announces Income from Continuing Operations of $290 Million or $0.33 per share in Third Quarter 2005
Highlights:
-- Income from continuing operations was $290 million, or $0.33 per diluted share, above prior guidance;
-- Year-to-date income from continuing operations was $1.0 billion, or $1.17 per share;
-- Sales increased 13 percent from the year ago quarter to $6.57 billion;
-- Continued strong balance sheet performance with debt to capital ratio improving to 31.5 percent from 32.2 percent in the previous quarter;
-- Cash from operations was $792 million in the quarter, before a discretionary $300 million contribution to company pension plans; and
-- Strong progress executing upstream growth projects to lower long-term costs.
Alcoa (NYSE: AA) announced today that its income from continuing operations was $290 million, or $0.33 per diluted share, in the third quarter 2005, above prior guidance and flat with the $292 million or $0.33 a year ago, and down from $466 million or $0.53 in the second quarter 2005.
As previously announced, results in the quarter were impacted by lower aluminum prices and higher input costs, particularly for energy. Seasonal weakness in Europe and automotive markets also lowered profitability. On a year-to-date basis, energy and other costs, primarily raw materials, have increased $578 million.
Net income in the quarter was $289 million, or $0.33, down from $460 million, or $0.52, in the previous quarter, and up from $283 million, or $0.32, in the third quarter of 2004.
"A reduced upstream pricing environment and higher energy costs affected our results this quarter," said Alain Belda, Chairman and CEO of Alcoa. "We have an aggressive productivity program, but it has not offset the impact of escalating costs in energy and raw materials and the speed at which they are flowing through.
"As we combat these elements, we are also taking the right approach to ensure competitiveness for the long-term, by investing to reduce our upstream and downstream costs, and continuing with our restructuring efforts to increase effectiveness across global businesses," said Belda.
The sale of railroads serving Alcoa locations in the quarter resulted in a gain of approximately four cents per share, which was substantially offset by losses stemming from a fire at the company's Dover, NJ aerospace castings facility, losses in Russia, the impact of unplanned temporary outages at the Wenatchee, WA, Pt. Comfort, TX and Lake Charles, LA, facilities, and an increase in the reserve for litigation expenses. Most of the impact from recent Gulf coast hurricanes will be in the fourth quarter.
Sales and Balance Sheet Overview
Sales in the quarter of $6.6 billion rose 13 percent over the third quarter of 2004. Sales were down from the sequential quarter's $6.7 billion, primarily due to lower realized alumina and aluminum prices. While metal prices have strengthened somewhat recently, that impact will be reflected in the fourth quarter. Demand for aerospace and commercial vehicle products continued their strength in the quarter.
Sales for the first nine months were $19.5 billion, a 13 percent increase from the first nine months of 2004.
Alcoa's strong balance sheet performance continued in the third quarter. The company's debt to capital ratio improved to 31.5 percent at the end of September from 32.2 percent at the end of the second quarter 2005. Cash from operations was $792 million in the quarter, before a discretionary $300 million contribution to the company's pension plans.
Restructuring Program
The company's 2005 restructuring program, designed to reduce costs and streamline operations along global business lines, continued to make progress. In the second quarter, the company announced the second stage of its 2005 restructuring plan, which will result in the elimination of approximately 8,100 positions and $195 million from its cost base when fully implemented over the course of 12 months.
At the end of the third quarter, the company had eliminated more than 1,400 positions as part of that program.
The company's return on capital stood at 8.3 percent on a trailing four quarters basis.
Update on Growth Projects
"It is critical that we continue to take steps to further position the company to be a low-cost producer for the long-term," said Belda. "The projects we have underway will extend our position as the world's leading supplier of alumina, primary metals and fabricated products and further improve our position on the global cost curve." In addition to negotiations and feasibility studies underway in Trinidad, Ghana and Guinea, the company has numerous projects moving ahead, including:
Refining
Refining growth projects center on brownfield expansions of existing low-cost facilities.
-- Alumar refinery expansion - The expansion will add 2.1 million metric tons per year ("mtpy") in capacity to the low-cost refinery in Brazil. This project includes creation of a bauxite mine near Juruti in Para state, which will initially produce 2.6 million mtpy of bauxite to supply the expansion.
-- Pinjarra Efficiency Upgrade - The project will expand the low-cost Pinjarra refinery by 657,000 mtpy to more than 4.2 million mtpy. It is scheduled to be completed in the first quarter of 2006.
-- Jamalco Expansion - The company's Alcoa World Alumina and Chemicals (AWAC) affiliate plans to expand the refinery in Clarendon, Jamaica by 1.5 million mtpy, more than doubling the refinery's capacity to approximately 2.8 million mtpy.
Smelting
Growth development work combines greenfield and brownfield smelting projects utilizing globally competitive energy sources.
-- Alcoa Fjardaal in Iceland - The company continued progress building its first greenfield smelter in 20 years. The total project is on-schedule to produce its first metal in April 2007 and is approximately 30 percent complete.
-- Alumar smelter expansion -- The expansion will add 63,000 mtpy to 433,000 mtpy in total. 50 percent will be complete by November 2005, and it will be finished by the end of the first quarter of 2006.
-- Warrick, Indiana power self-generation -- The company began work to lower costs and ensure the ability to self-generate power to fuel its Warrick, IN smelter and rolling mill. As part of this project the company purchased the rights to mine coal in nearby Friendsville, IL.
-- Modernization of Pocos de Caldas smelter - This Brazilian smelter will be upgraded with world-class environmental controls to lower emissions and costs, and improve operational efficiency.
Fabricating and Downstream Growth
In the quarter the company made significant progress on projects that will expand its position and lower its costs in fabricating and downstream businesses, including:
-- Receiving final approval from the Ministry of Commerce in China to establish a new joint venture with China International Trust & Investment (CITIC), its equity partner in Bohai Aluminum, to produce aluminum rolled products at the Bohai plant in Qinghuangdao, China. Alcoa anticipates having the mill commissioned by 2008.
-- Alcoa Fastening Systems business will create two new 50,000 square-foot manufacturing sites in the Suzhou Industrial Park, 100 km from Shanghai, to support rapidly growing commercial aviation and railway/rail car production and sub-assembly in that market.
-- Continued integration of the recently acquired Belaya Kalitva and Samara plants in the Russian Federation. The plants have already begun the process of servicing North American automotive customers.
Segment and Other Results
(all comparisons on a sequential quarter basis, unless noted)
Alumina - After-tax operating income ("ATOI") was $156 million. Stronger shipments were offset by lower LME based pricing. Energy cost increases of $6 million and caustic soda increases of $9 million negatively affected the results. Alumina production for the quarter was 3,688 thousand metric tons ("kmt"), compared to 3,621 kmt in the second quarter of 2005.
Primary Metals - Segment profitability decreased $19 million to $168 million, primarily because of lower metal prices. In addition, the segment was affected by the partial curtailment of production at the Wenatchee, WA facility. Higher fuel costs and higher purchased electricity also had an impact. Primary metal production for the quarter increased 5 kmt to 904 kmt. Third party realized metal prices were relatively unchanged while intra-company metal prices fell due to lower priced downstream commitments. The company purchased approximately 189 kmt of primary metal for internal use as part of its strategy to sell value-added products.
Flat Rolled Products - ATOI for the segment increased $11 million to $81 million. Lower Russian losses and seasonal strength in the can sheet market were offset by lower common alloy shipments in the US and Europe. Aerospace demand remains strong.
Extruded and End Products - ATOI for the segment was up slightly to $23 million. Slightly lower volumes in the U.S. and European extrusions markets were offset by better results from the Russian assets.
Engineered Solutions - ATOI for the segment was $32 million, down $28 million from the second quarter. Roughly half of the decline in profitability was associated with non-operational issues, including the increased expense from a litigation judgment. Operationally, continued strong performance from Alcoa Fastening Systems was offset by seasonal weakness in the automotive markets and continued product launch issues at Alcoa Fujikura Automotive.
Packaging and Consumer - ATOI was $13 million lower, primarily because of seasonally lower volumes in the consumer products business. Compared to the year ago quarter, ATOI declined by $6 million after tax due to higher metal costs.
ATOI to Net Income Reconciliation
The largest variances in reconciling items were in the "restructuring and other charges" and "other" line items. The change in "Restructuring and Other Charges" and the "other" line items is due to the non-recurrence of certain second quarter items.
Alcoa will hold its quarterly conference call at 5:00 PM Eastern Time on October 10th to present the quarter's results. The meeting will be webcast via alcoa.com. Call information and related details are available at www.alcoa.com under "Invest."
About Alcoa
Alcoa is the world's leading producer and manager of primary aluminum, fabricated aluminum and alumina facilities, and is active in all major aspects of the industry. Alcoa serves the aerospace, automotive, packaging, building and construction, commercial transportation and industrial markets, bringing design, engineering, production and other capabilities of Alcoa's businesses to customers. In addition to aluminum products and components, Alcoa also markets consumer brands including Reynolds Wrap(R) foils and plastic wraps, Alcoa(R) wheels, and Baco(R) household wraps. Among its other businesses are vinyl siding, closures, fastening systems, precision castings, and electrical distribution systems for cars and trucks. The company has 131,000 employees in 43 countries and has been named one of the top three most sustainable corporations in the world at the World Economic Forum in Davos, Switzerland. More information can be found at www.alcoa.com
Forward Looking Statement
Certain statements in this release relate to future events and expectations and as such constitute forward-looking statements involving known and unknown risks and uncertainties that may cause actual results, performance or achievements of Alcoa to be different from those expressed or implied in the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include: (a) material adverse changes in economic or aluminum industry conditions generally, including global supply and demand conditions and prices for primary aluminum, alumina and other products; (b) material adverse changes in the markets served by Alcoa, including the transportation, building, construction, distribution, packaging, industrial gas turbine and other markets; (c) Alcoa's inability to achieve the level of cost savings, productivity improvements or earnings growth anticipated by management, whether due to significant increases in energy, raw materials or employee benefits costs, labor disputes or other factors; (d) Alcoa's inability to realize the full extent of the expected savings or benefits from its restructuring activities or to complete such activities in accordance with its planned timetable; (e) Alcoa's inability to complete its expansion projects and investment activities outside the U.S. as planned and by targeted completion dates, or to assure that the anticipated integration costs at its recently acquired Russian facilities will not exceed its estimates; (f) unfavorable changes in laws, governmental regulations or policies, currency exchange rates or competitive factors in the countries in which Alcoa operates; (g) significant legal proceedings or investigations adverse to Alcoa, including environmental, product liability, safety and health and other claims; and (h) the other risk factors summarized in Alcoa's Form 10-K for the year ended December 31, 2004, Forms 10-Q for the quarters ended March 31, 2005 and June 30, 2005 and other reports filed with the Securities and Exchange Commission.
Alcoa and subsidiaries
Condensed Statement of Consolidated Income (unaudited)
(in millions, except per-share, share, and metric ton amounts)
Quarter ended
September 30 June 30 September 30
2004 2005 2005
------------ ---------- ------------
Sales $5,818 $6,698 $6,566
Cost of goods sold 4,664 5,414 5,405
Selling, general administrative,
and other expenses 300 348 317
Research and development
expenses 43 47 51
Provision for depreciation,
depletion, and amortization 294 315 321
Restructuring and other charges 4 260 7
Interest expense 66 87 96
Other income, net (55) (347) (92)
------------ ---------- ------------
Total costs and expenses 5,316 6,124 6,105
Income from continuing
operations before taxes on
income 502 574 461
Provision for taxes on income 138 48 112
------------ ---------- ------------
Income from continuing
operations before minority
interests' share 364 526 349
Less: Minority interests' share 72 60 59
------------ ---------- ------------
Income from continuing
operations 292 466 290
Loss from discontinued
operations (9) (6) (1)
------------ ---------- ------------
NET INCOME $ 283 $ 460 $ 289
============ ========== ============
Earnings (loss) per common
share:
Basic:
Income from continuing
operations $ .33 $ .53 $ .33
Loss from discontinued
operations (.01) -- --
------------ ---------- ------------
Net income $ .32 $ .53 $ .33
============ ========== ============
Diluted:
Income from continuing
operations $ .33 $ .53 $ .33
Loss from discontinued
operations (.01) (.01) --
------------ ---------- ------------
Net income $ .32 $ .52 $ .33
============ ========== ============
Average number of shares used
to compute:
Basic earnings per common
share 869,953,918 872,149,447 872,515,797
Diluted earnings per common
share 876,526,090 877,950,254 876,583,063
Shipments of aluminum products
(metric tons) 1,275,000 1,401,000 1,424,000
Alcoa and subsidiaries
Condensed Statement of Consolidated Income (unaudited)
(in millions, except per-share, share and metric ton amounts)
Nine months ended
September 30 September 30
2004 2005
-------------- -------------
Sales $17,257 $19,490
Cost of goods sold 13,630 15,758
Selling, general administrative,
and other expenses 925 990
Research and development expenses 129 144
Provision for depreciation, depletion,
and amortization 883 949
Restructuring and other charges (22) 312
Interest expense 199 261
Other income, net (202) (475)
-------------- -------------
Total costs and expenses 15,542 17,939
Income from continuing operations
before taxes on income 1,715 1,551
Provision for taxes on income 482 349
-------------- -------------
Income from continuing operations
before minority interests' share 1,233 1,202
Less: Minority interests' share 197 179
-------------- -------------
Income from continuing operations 1,036 1,023
Income (loss) from discontinued
operations 6 (14)
-------------- -------------
NET INCOME $1,042 $1,009
============== =============
Earnings (loss) per common share:
Basic:
Income from continuing
operations $1.19 $1.17
Income (loss) from
discontinued operations .01 (.01)
-------------- -------------
Net income $1.20 $1.16
============== =============
Diluted:
Income from continuing
operations $1.18 $1.17
Income (loss) from
discontinued operations .01 (.02)
-------------- -------------
Net income $1.19 $1.15
============== =============
Average number of shares used to
compute:
Basic earnings per common share 869,650,782 872,054,221
Diluted earnings per common share 877,393,050 877,743,271
Common stock outstanding at the end
of the period 870,152,606 872,706,561
Shipments of aluminum products
(metric tons) 3,833,000 4,115,000
Alcoa and subsidiaries
Condensed Consolidated Balance Sheet (unaudited)
(in millions)
December 31 September 30
2004 2005
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $457 $532
Receivables from customers, less
allowances: $86 in 2004, and $82 in 2005 2,694 3,084
Other receivables 256 297
Inventories 2,968 3,512
Deferred income taxes 279 197
Prepaid expenses and other current assets 788 1,075
--------- ---------
Total current assets 7,442 8,697
--------- ---------
Properties, plants and equipment, at cost 25,794 26,838
Less: accumulated depreciation, depletion
and amortization 13,244 13,828
--------- ---------
Net properties, plants and equipment 12,550 13,010
--------- ---------
Goodwill 6,412 6,299
Investments 2,066 1,263
Other assets 3,597 3,973
Assets held for sale 542 369
--------- ---------
Total assets $32,609 $33,611
========= =========
LIABILITIES
Current liabilities:
Short-term borrowings $267 $270
Commercial paper 630 1,162
Accounts payable, trade 2,218 2,400
Accrued compensation and retirement costs 1,013 1,007
Taxes, including taxes on income 1,018 932
Other current liabilities 1,073 1,399
Long-term debt due within one year 57 47
--------- ---------
Total current liabilities 6,276 7,217
--------- ---------
Long-term debt, less amount due within
one year 5,345 5,386
Accrued pension benefits 1,513 1,284
Accrued postretirement benefits 2,150 2,119
Other noncurrent liabilities and
deferred credits 1,727 1,762
Deferred income taxes 789 868
Liabilities of operations held for sale 93 28
--------- ---------
Total liabilities 17,893 18,664
--------- ---------
MINORITY INTERESTS 1,416 1,302
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock 55 55
Common stock 925 925
Additional capital 5,775 5,742
Retained earnings 8,636 9,124
Treasury stock, at cost (1,926) (1,863)
Accumulated other comprehensive loss (165) (338)
--------- ---------
Total shareholders' equity 13,300 13,645
--------- ---------
Total liabilities and equity $32,609 $33,611
========= =========
Alcoa and subsidiaries
Condensed Statement of Consolidated Cash Flows (unaudited)
(in millions)
Nine months ended September 30
2004 2005
-------- --------
CASH FROM OPERATIONS
Net income $1,042 $1,009
Adjustments to reconcile net income to
cash from operations:
Depreciation, depletion, and
amortization 889 950
Change in deferred income taxes (88) (116)
Equity (income) loss, net of
dividends (49) 48
Noncash restructuring and other
charges (22) 312
Net gain on early retirement of debt
and interest rate swaps (58) --
Gains from investing activities -
sale of assets (7) (409)
Provision for doubtful accounts 19 14
(Income) loss from discontinued
operations (6) 14
Minority interests 197 179
Other 28 (28)
Changes in assets and liabilities,
excluding effects of acquisitions and
divestitures:
Increase in receivables (334) (575)
Increase in inventories (459) (511)
Increase in prepaid expenses and
other current assets (142) (26)
Increase in accounts payable and
accrued expenses 401 289
Increase (decrease) in taxes,
including taxes on income 183 (41)
Cash paid on early retirement of debt
and interest rate swaps (52) --
Cash paid on long-term aluminum supply
contract -- (93)
Pension contributions -- (300)
Net change in noncurrent assets and
liabilities (222) (74)
Net change in net assets held for
sale 50 --
--------- ---------
CASH PROVIDED FROM CONTINUING
OPERATIONS 1,370 642
CASH PROVIDED FROM (USED FOR)
DISCONTINUED OPERATIONS 38 (5)
--------- ---------
CASH FROM OPERATIONS 1,408 637
--------- ---------
FINANCING ACTIVITIES
Net changes to short-term borrowings (12) 4
Common stock issued for stock
compensation plans 69 27
Repurchase of common stock (68) --
Dividends paid to shareholders (392) (393)
Dividends paid to minority interests (115) (74)
Net change in commercial paper 730 532
Additions to long-term debt 138 272
Payments on long-term debt (1,422) (249)
--------- ---------
CASH (USED FOR) PROVIDED FROM
FINANCING ACTIVITIES (1,072) 119
--------- ---------
INVESTING ACTIVITIES
Capital expenditures (668) (1,376)
Acquisition of AFL minority interest -- (176)
Acquisitions, net of cash acquired -- (257)
Proceeds from the sale of assets 355 90
Sale of investments -- 1,081
Change in short-term investments and
restricted cash 20 (17)
Other (56) (26)
--------- ---------
CASH USED FOR INVESTING ACTIVITIES (349) (681)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH (2) --
--------- ---------
Net change in cash and cash equivalents (15) 75
Cash and cash equivalents at beginning
of year 576 457
--------- ---------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $561 $532
========= =========
Alcoa and subsidiaries
Segment Information (unaudited)(a)
(in millions, except metric ton amounts and realized prices)
Consolidated
Third-Party
Revenues: 1Q04 2Q04 3Q04 4Q04 2004 1Q05 2Q05 3Q05
------- ------ ------ ------ ------- ------ ------ ------
Alumina $463 $486 $490 $536 $1,975 $505 $533 $531
Primary
Metals 878 959 930 1,039 3,806 1,089 1,124 1,204
Flat-Rolled
Products 1,450 1,490 1,520 1,502 5,962 1,655 1,763 1,679
Extruded and
End Products 943 1,027 1,028 976 3,974 1,037 1,153 1,092
Engineered
Solutions 1,149 1,189 1,106 1,159 4,603 1,241 1,286 1,246
Packaging and
Consumer 660 762 737 764 2,923 708 827 806
----------------------------------------------------------------------
Total (1) $5,543 $5,913 $5,811 $5,976 $23,243 $6,235 $6,686 $6,558
======================================================================
Consolidated
Intersegment
Revenues: 1Q04 2Q04 3Q04 4Q04 2004 1Q05 2Q05 3Q05
------- ------ ------ ------ ------- ------ ------ ------
Alumina $338 $349 $341 $390 $1,418 $393 $439 $424
Primary
Metals 1,038 1,129 1,039 1,129 4,335 1,303 1,215 1,108
Flat-Rolled
Products 23 23 25 18 89 34 36 29
Extruded and
End Products 15 12 14 13 54 14 19 14
Engineered
Solutions - - - - - - - -
Packaging and
Consumer - - - - - - - -
----------------------------------------------------------------------
Total $1,414 $1,513 $1,419 $1,550 $5,896 $1,744 $1,709 $1,575
======================================================================
Consolidated
Third-Party
Shipments
(Kmt): 1Q04 2Q04 3Q04 4Q04 2004 1Q05 2Q05 3Q05
------- ------ ------ ------ ------- ------ ------ ------
Alumina 1,838 1,981 2,030 2,213 8,062 1,923 1,951 2,017
Primary
Metals 469 472 459 482 1,882 487 520 590
Flat-Rolled
Products 515 517 521 493 2,046 509 560 543
Extruded and
End
Products 225 235 225 210 895 221 237 224
Engineered
Solutions 34 33 31 35 133 39 38 36
Packaging
and
Consumer 38 41 39 46 164 34 46 31
----------------------------------------------------------------------
Total
Aluminum 1,281 1,298 1,275 1,266 5,120 1,290 1,401 1,424
======================================================================
Alcoa's
average
realized
price-
Primary(mt) $1,783 $1,867 $1,869 $1,942 $1,867 $2,042 $1,977 $1,963
======================================================================
After-Tax
Operating
Income
(ATOI): 1Q04 2Q04 3Q04 4Q04 2004 1Q05 2Q05 3Q05
------- ------ ------ ------ ------- ------ ------ ------
Alumina $127 $159 $169 $177 $632 $161 $182 $156
Primary
Metals 192 230 188 198 808 225 187 168
Flat-Rolled
Products 66 59 62 59 246 75 70 81
Extruded and
End Products
(2) 17 30 28 (2) 73 10 20 23
Engineered
Solutions 62 69 39 41 211 59 60 32
Packaging and
Consumer 29 48 34 30 141 16 41 28
----------------------------------------------------------------------
Total $493 $595 $520 $503 $2,111 $546 $560 $488
======================================================================
Reconcilia-
tion of ATOI
to consolidated
net income: 1Q04 2Q04 3Q04 4Q04 2004 1Q05 2Q05 3Q05
------- ------ ------ ------ ------- ------ ------ ------
Total ATOI $493 $595 $520 $503 $2,111 $546 $560 $488
Impact of
inter-
segment
profit
adjust-
ments 23 8 3 18 52 17 (16) (2)
Unallocated
amounts
(net of
tax):
Interest
income 7 5 8 6 26 7 9 12
Interest
expense (41) (45) (44) (46) (176) (51) (56) (62)
Minority
interests (51) (74) (72) (48) (245) (60) (60) (59)
Corporate
expense (74) (63) (68) (78) (283) (69) (73) (82)
Restruct-
uring and
other
charges 31 (4) (3) (1) 23 (30) (172) (5)
Discont-
inued
opera-
tions 10 5 (9) (71) (65) (7) (6) (1)
Other (43) (23) (52) (15) (133) (93) 274 -
----------------------------------------------------------------------
Consolid-
ated net
income $355 $404 $283 $268 $1,310 $260 $460 $289
----------------------------------------------------------------------
(a) Segment information for all prior periods has been restated to
reflect the change in segments due to a global realignment within
the company, effective January 2005.
(1) The difference between the segment total and consolidated
third-party revenues is in Corporate.
(2) The first quarter 2005 ATOI amount has been modified to correct a
tax adjustment that should have been reflected in Corporate.
