Why did Alcoa's reported 1993 earnings swing so sharply from the 1992 loss?

The 1992 loss of $1,139.2 million was driven by a one-time $1,166.4 million after-tax charge to adopt SFAS 106 (postretirement benefits), plus a $50.2 million extraordinary loss and $217 million of special charges, partially offset by a $55 million tax accounting credit. The 1993 result of $4.8 million reflects no comparable one-time accounting charge, though it absorbed $74.5 million of after-tax special charges and was pressured by weak aluminum prices.

What is driving the aluminum market weakness, and what is Alcoa doing about it?

Former Soviet producers began exporting large volumes of metal after the Soviet Union's collapse, which left the market in oversupply: about 109 days of inventory at year-end 1993 versus 42 days in 1988-90. LME prices hit an eight-year low of 47 cents per pound in November 1993. A January 1994 multigovernment accord has Russia cutting exports by 500,000 metric tons per year for up to two years. Alcoa has idled 310,000 metric tons of U.S. capacity and announced further cuts, while pursuing cost reductions at every level.

How healthy is the balance sheet and how is the company funding itself?

Total assets were $11,596.9 million and shareholders' equity was $3,583.8 million at year-end 1993. Long-term debt rose to $1,432.5 million, and debt as a percent of invested capital increased to 22% from 15%, mainly from $175 million of 4-5/8% notes, $180 million of Aluminio floating-rate notes, and $337 million of commercial paper. Alcoa has two $375 million revolving credit agreements to back the paper. Investors should note that minority interests of $1,389.2 million (chiefly Alcoa of Australia and AIHC preferred stock) represent a significant claim on consolidated earnings and cash.

What environmental and legal risks could affect future results?

Alcoa's remediation reserve was $414 million at year-end 1993, with about 38% tied to its Massena, New York plant, and remediation spending was $71 million in 1993. Ongoing matters include the Grasse River PCB cleanup, natural resource damage claims at Massena and Lavaca Bay (Texas), and a Superfund listing proposal for Point Comfort. Antitrust grand jury investigations are underway in small press hard alloy extrusions and used beverage can and scrap pricing, a $100+ million lawsuit (Aluminum Chemicals, Inc.) is scheduled for trial in July 1994, and the company is pursuing insurance recovery from nearly 100 carriers. Management says none is expected to have a materially adverse effect on financial position, but liquidity or operating results in a given period could be materially affected.

HWM 10-K FY1993 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 11, 1994. Cited figures are marked; the original filing is the authoritative source.

This is Alcoa's (Aluminum Company of America, NYSE: AA) Form 10-K for fiscal 1993, filed March 11, 1994.

The filer is Aluminum Company of America, not Howmet Aerospace as the request states. Howmet's later business descends from Alcoa's engineered-products operations, but this document is Alcoa's consolidated report. Its content covers the full Alcoa group, so the analysis below reflects Alcoa.

Alcoa's 1993 results were close to breakeven. Sales and operating revenues fell 4.6% to $9,055.9 million^a from $9,491.5 million, driven by lower aluminum ingot shipments (down 18%) and weaker RCS (rigid container sheet) prices. Reported net income was $4.8 million ($0.03 per share), compared with a 1992 net loss of $1,139.2 million that included a $1,166.4 million postretirement accounting charge.

Excluding $74.5 million^b of after-tax special charges, adjusted net income was $79.3 million, versus $196.3 million in 1992. The U.S. operations posted a $193 million operating loss before special items, while the Pacific (Alcoa of Australia) and Other Americas (Aluminio, Brazil) segments carried profitability. Management's strategy is cost reduction and capacity discipline.

Alcoa idled 310,000 metric tons of U.S. smelting capacity in 1993, announced a further 100,000 metric ton U.S. cut in February 1994, and reported that global aluminum oversupply (109 days of inventory, LME prices at an eight-year low of 47 cents per pound in November 1993) persisted. Cash from operations fell to $535 million^c from $1,208 million.

Debt rose to $1,432.5 million^d in long-term debt, and debt as a percent of invested capital increased to 22% from 15%. The company also faces significant environmental remediation liabilities ($414 million reserve) and several antitrust and product-liability investigations.

02—Key points

Key Highlights

Sales and operating revenues declined 4.6% to $9,055.9 million in 1993 from $9,491.5 million in 1992, with the Aluminum Processing segment falling 8% to $5,974 million as ingot shipments dropped 18%.
Reported 1993 net income of $4.8 million ($0.03 per share) versus a 1992 net loss of $1,139.2 million, which was driven by a $1,166.4 million after-tax postretirement accounting charge; adjusted net income (before special items) fell to $79.3 million from $196.3 million.
The U.S. business posted a $193 million operating loss before special items in 1993, while the Pacific (Alcoa of Australia) segment earned $399 million of operating profit.
Special charges of $74.5 million after tax (mainly $134 million pre-tax severance for U.S. aluminum workforce cuts) and a tax-rate-driven $35 million net benefit shaped reported earnings.
Capacity reductions: 310,000 metric tons of U.S. smelting idled in 1993, plus a further 100,000 metric ton U.S. cut and smaller Australian and Surinamese reductions announced in February 1994.
Cash from operations dropped to $535 million from $1,208 million; capital expenditures were $757 million, and dividends of $1.60 per share were maintained despite the weak year.
Leverage increased: long-term debt rose to $1,432.5 million from $855.3 million, and debt as a percent of invested capital reached 22%; February 1994 refinancing included $250 million of 5-3/4% notes and the early redemption of $225 million of 7% debentures, with a $67.9 million extraordinary loss expected in Q1 1994.

03—Questions

Frequently Asked Questions

Why did Alcoa's reported 1993 earnings swing so sharply from the 1992 loss?
The 1992 loss of $1,139.2 million was driven by a one-time $1,166.4 million after-tax charge to adopt SFAS 106 (postretirement benefits), plus a $50.2 million extraordinary loss and $217 million of special charges, partially offset by a $55 million tax accounting credit. The 1993 result of $4.8 million reflects no comparable one-time accounting charge, though it absorbed $74.5 million of after-tax special charges and was pressured by weak aluminum prices.
What is driving the aluminum market weakness, and what is Alcoa doing about it?
Former Soviet producers began exporting large volumes of metal after the Soviet Union's collapse, which left the market in oversupply: about 109 days of inventory at year-end 1993 versus 42 days in 1988-90. LME prices hit an eight-year low of 47 cents per pound in November 1993. A January 1994 multigovernment accord has Russia cutting exports by 500,000 metric tons per year for up to two years. Alcoa has idled 310,000 metric tons of U.S. capacity and announced further cuts, while pursuing cost reductions at every level.
How healthy is the balance sheet and how is the company funding itself?
Total assets were $11,596.9 million and shareholders' equity was $3,583.8 million at year-end 1993. Long-term debt rose to $1,432.5 million, and debt as a percent of invested capital increased to 22% from 15%, mainly from $175 million of 4-5/8% notes, $180 million of Aluminio floating-rate notes, and $337 million of commercial paper. Alcoa has two $375 million revolving credit agreements to back the paper. Investors should note that minority interests of $1,389.2 million (chiefly Alcoa of Australia and AIHC preferred stock) represent a significant claim on consolidated earnings and cash.
What environmental and legal risks could affect future results?
Alcoa's remediation reserve was $414 million at year-end 1993, with about 38% tied to its Massena, New York plant, and remediation spending was $71 million in 1993. Ongoing matters include the Grasse River PCB cleanup, natural resource damage claims at Massena and Lavaca Bay (Texas), and a Superfund listing proposal for Point Comfort. Antitrust grand jury investigations are underway in small press hard alloy extrusions and used beverage can and scrap pricing, a $100+ million lawsuit (Aluminum Chemicals, Inc.) is scheduled for trial in July 1994, and the company is pursuing insurance recovery from nearly 100 carriers. Management says none is expected to have a materially adverse effect on financial position, but liquidity or operating results in a given period could be materially affected.

04—Continue

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