Why did Alcoa's earnings fall so sharply in 2002?

Earnings declined because of lower realized prices for alumina and aluminum, weaker volumes in aerospace, commercial building, telecommunications and industrial gas turbine markets, and the absence of 2001 power sales. The company also recorded $407 million in pretax special charges, a $44 million goodwill impairment, and a $112 million loss from discontinued operations. Cost savings and the end of goodwill amortization partly offset these pressures.

How much debt does Alcoa carry, and has leverage increased?

Total debt outstanding was about $8.5 billion at year-end 2002, with long-term debt of $8.4 billion, up from roughly $6.6 billion a year earlier. Debt as a percentage of invested capital rose to 43.1% from 35.8%. The increase reflects the Ivex and Fairchild acquisitions and was funded largely with $1.4 billion of notes issued in August 2002. Management said $1.25 billion of notes and revolving credit facilities mature in 2003 and planned to refinance them in April 2003.

What is the company doing to restore profitability?

Alcoa is cutting costs (targeting a $1 billion reduction by December 2003 under a 2001 program), eliminating about 8,500 positions, and idling or closing some smelters, including Troutdale, OR and part of Rockdale, TX. It is also divesting noncore businesses with about $1.3 billion of 2002 revenue, such as commodity automotive fasteners and certain architectural and packaging operations, with proceeds used to reduce debt. Management expects 2003 and 2004 cost savings of $75 to $100 million and $125 to $150 million, respectively, from the 2002 restructuring.

What are the main growth projects and their risks?

Alcoa has approved a smelter in Iceland (320,000 metric tons per year, about $1.1 billion, production expected in 2007), a C$1 billion expansion of the Baie Comeau, Quebec smelter, Chinese alumina and aluminum joint ventures, and Brazilian hydroelectric projects. Total anticipated costs of these projects are about $4 billion through 2008. Risks include regulatory and government approvals, funding through operating cash flow, divestiture proceeds and project financing, and the Brazilian projects' potential need for guarantees.

What significant legal and environmental exposures does Alcoa disclose?

The largest identified exposure is the Grasse River PCB remediation near the Massena, New York plant. EPA alternatives range from $2 million to $525 million, and Alcoa has reserved $30 million, the low end of the range it considers realistic, so the final remedy could add liability. Other items include the El Campo, Texas groundwater suits, the Agriculture Street landfill cost recovery claim, an alleged antitrust proceeding in Brazil, and asbestos suits. Management believes reserves and insurance are adequate and that none of these matters will have a materially adverse effect on financial position, though outcomes are uncertain.

HWM 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 28, 2003. Cited figures are marked; the original filing is the authoritative source.

Alcoa Inc. (the filing is Alcoa's 2002 Form 10-K dated February 28, 2003, not Howmet Aerospace, which Alcoa spun off later; Howmet's fasteners and castings businesses appear within Alcoa's Engineered Products and Other groups) reported a sharp earnings decline for 2002.

Net income fell 54% to $420 million^a, or $0.49 per diluted share, from $908 million ($1.05) in 2001. Sales dropped 10% to $20.3 billion, driven by lower realized aluminum and alumina prices and weak demand in aerospace, commercial construction, telecommunications and industrial gas turbine markets. Results also absorbed $407 million of pretax special charges for restructuring and asset impairments, a $44 million goodwill impairment, and a $112 million loss from discontinued operations, partly offset by a $34 million cumulative-effect gain from the goodwill accounting change.

Return on average shareholders' equity dropped to 4.1% from 8.3%. Balance sheet and cash flow pressures were significant. Long-term debt rose to $8.4 billion^b from $6.4 billion after roughly $1.25 billion of acquisitions (notably Ivex Packaging and Fairchild Fasteners), and debt as a percentage of invested capital increased to 43.1% from 35.8%.

Cash from continuing operations fell to $1.9 billion^c from $2.4 billion. Shareholders' equity declined to $9.9 billion, largely because an $820 million pension-related charge hit equity in the fourth quarter. Moody's downgraded Alcoa to A2 and S&P lowered it to A, though management did not expect the downgrades to be material.

Management is pursuing a portfolio reshaping: it committed in late 2002 to divest noncore businesses with roughly $1.3 billion^d of 2002 revenue, using proceeds mainly to repay debt. Growth capital is directed to projects totaling about $4 billion through 2008, including a $1.1 billion smelter in Iceland and a C$1 billion expansion in Baie Comeau, Quebec. Idle smelting capacity of about 445,000 metric tons per year and an 8,500-person workforce reduction are ongoing, with savings targeted at $75 to $100 million in 2003 and $125 to $150 million in 2004.

02—Key points

Key Highlights

Net income fell 54% to $420 million ($0.49 diluted EPS) from $908 million ($1.05) in 2001, and return on average equity dropped to 4.1% from 8.3%.
Sales declined 10% to $20.3 billion, reflecting lower aluminum and alumina prices and weak aerospace, construction, telecom and gas turbine end markets.
Pretax special items of $407 million covered restructuring and asset write-downs, including about 8,500 job cuts, plus a $44 million goodwill impairment in telecommunications.
Long-term debt rose to $8.4 billion from $6.4 billion, and debt to invested capital reached 43.1% (vs. 35.8%), after acquisitions of Ivex Packaging and Fairchild Fasteners.
Credit ratings were lowered in 2002: Moody's cut long-term debt to A2 from A1, and S&P cut the corporate rating to A from A+.
A $820 million pension-related charge reduced shareholders' equity to $9.9 billion from $10.6 billion.
The company plans to divest about $1.3 billion of 2002 revenue in noncore businesses, with proceeds mainly used to pay down debt, and expects roughly $4 billion of growth investment through 2008.

03—Questions

Frequently Asked Questions

Why did Alcoa's earnings fall so sharply in 2002?
Earnings declined because of lower realized prices for alumina and aluminum, weaker volumes in aerospace, commercial building, telecommunications and industrial gas turbine markets, and the absence of 2001 power sales. The company also recorded $407 million in pretax special charges, a $44 million goodwill impairment, and a $112 million loss from discontinued operations. Cost savings and the end of goodwill amortization partly offset these pressures.
How much debt does Alcoa carry, and has leverage increased?
Total debt outstanding was about $8.5 billion at year-end 2002, with long-term debt of $8.4 billion, up from roughly $6.6 billion a year earlier. Debt as a percentage of invested capital rose to 43.1% from 35.8%. The increase reflects the Ivex and Fairchild acquisitions and was funded largely with $1.4 billion of notes issued in August 2002. Management said $1.25 billion of notes and revolving credit facilities mature in 2003 and planned to refinance them in April 2003.
What is the company doing to restore profitability?
Alcoa is cutting costs (targeting a $1 billion reduction by December 2003 under a 2001 program), eliminating about 8,500 positions, and idling or closing some smelters, including Troutdale, OR and part of Rockdale, TX. It is also divesting noncore businesses with about $1.3 billion of 2002 revenue, such as commodity automotive fasteners and certain architectural and packaging operations, with proceeds used to reduce debt. Management expects 2003 and 2004 cost savings of $75 to $100 million and $125 to $150 million, respectively, from the 2002 restructuring.
What are the main growth projects and their risks?
Alcoa has approved a smelter in Iceland (320,000 metric tons per year, about $1.1 billion, production expected in 2007), a C$1 billion expansion of the Baie Comeau, Quebec smelter, Chinese alumina and aluminum joint ventures, and Brazilian hydroelectric projects. Total anticipated costs of these projects are about $4 billion through 2008. Risks include regulatory and government approvals, funding through operating cash flow, divestiture proceeds and project financing, and the Brazilian projects' potential need for guarantees.
What significant legal and environmental exposures does Alcoa disclose?
The largest identified exposure is the Grasse River PCB remediation near the Massena, New York plant. EPA alternatives range from $2 million to $525 million, and Alcoa has reserved $30 million, the low end of the range it considers realistic, so the final remedy could add liability. Other items include the El Campo, Texas groundwater suits, the Agriculture Street landfill cost recovery claim, an alleged antitrust proceeding in Brazil, and asbestos suits. Management believes reserves and insurance are adequate and that none of these matters will have a materially adverse effect on financial position, though outcomes are uncertain.

04—Continue

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