Why did earnings fall even though sales hit a record in 2005?

Higher aluminum and alumina prices lifted revenue, but costs for energy, raw materials, and resins rose faster. The weaker U.S. dollar, $339 million of restructuring charges, a $58 million charge to close the Hamburg smelter, and $69 million of operating losses at the acquired Russian facilities also weighed on results. Income from continuing operations fell 10% to $1,233 million, though 2005 also included one-time gains such as the Elkem stake sale.

How much cash is Alcoa spending on growth, and how is it being funded?

Capital expenditures reached $2,138 million in 2005, about 60% for growth projects, including the Iceland smelter, Alumar expansion, and refinery expansions in Jamaica, Australia, and Brazil. Management expects 2006 capital spending of $2.5 to $3.0 billion. Cash from operations of $1,676 million was supplemented by $869 million from the Elkem sale and $408 million from the Southern Graphic Systems sale. Alcoa had $3 billion of undrawn revolving credit facilities at year-end, and its debt-to-capital ratio was 30.8%.

What is the biggest near-term labor risk?

The master labor agreement with the United Steelworkers covering 15 U.S. locations and about 9,000 employees expires May 31, 2006. If a new long-term agreement is not reached, a work stoppage at some or all plants could begin June 1, 2006. Management cites labor disruptions as a risk factor, and prior strikes at Becancour in 2004 curtailed production there.

What environmental and legal liabilities could affect future results?

The largest is the Grasse River PCB cleanup in Massena, New York, where remedial alternatives range from $2 million to $525 million. Alcoa has reserved $65 million (the $30 million original reserve plus $35 million for a pilot study), and EPA's final remedy, expected around 2008 or later, could require additional reserves. Other matters include the East St. Louis, Illinois remediation, a Virgin Islands red dust class action, and a Justice Department antitrust investigation into aluminum fluoride. Total environmental remediation reserves were $390 million at year-end 2005.

HWM 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 17, 2006. Cited figures are marked; the original filing is the authoritative source.

This Form 10-K, filed February 17, 2006 for fiscal 2005, is from Alcoa Inc. (NYSE: AA), not Howmet Aerospace as the request states.

Howmet was an Alcoa subsidiary at the time. Alcoa is the world's leading producer of primary aluminum, fabricated aluminum, and alumina, operating in 42 countries, with North America at 61% of revenues and Europe at 23%. Sales reached a record $26,159 million^a, up 13% from $23,236 million, driven by higher realized aluminum and alumina prices (LME up about 10%) and stronger demand in aerospace and commercial transportation.

Income from continuing operations fell to $1,233 million^b ($1.40 per diluted share) from $1,377 million ($1.57), as cost inflation in energy and raw materials, a weaker U.S. dollar, $339 million of pre-tax restructuring charges, a $58 million Hamburg smelter closure charge, and $69 million of operating losses at newly acquired Russian facilities offset gains such as the $345 million pre-tax sale of the Elkem ASA stake. Net income was $1,233 million. Cash from operations declined 24% to $1,676 million, including a $300 million discretionary pension contribution, while capital expenditures rose to $2,138 million (up 87%) as the company funded growth projects, including the Fjardaal smelter in Iceland (scheduled for April 2007), alumina refinery expansions in Brazil, Australia and Jamaica, and the Juruti bauxite mine.

Management guides 2006 capital spending to $2.5 to $3.0 billion^c. The debt-to-capital ratio was 30.8%, within the 25% to 35% target range, and total assets were $33,696 million.

The dividend was held at $0.60^d per share annually. Key risks for investors include the May 31, 2006 expiration of the master labor agreement with the United Steelworkers covering about 9,000 U.S. employees, environmental liabilities such as the Grasse River PCB remediation (costs estimated at $2 million to $525 million, with a reserve of $65 million), and a U.S. Department of Justice antitrust investigation into aluminum fluoride.

02—Key points

Key Highlights

Record 2005 sales of $26,159 million, up 13%, with about half the increase from higher realized prices for aluminum and alumina.
Income from continuing operations declined to $1,233 million ($1.40 diluted EPS) from $1,377 million ($1.57), as energy and raw material cost inflation, restructuring charges, and Russian integration losses outweighed higher prices.
Cash from operations fell 24% to $1,676 million, including a $300 million voluntary pension contribution, while capital expenditures rose 87% to $2,138 million to fund growth projects.
Restructuring charges of $339 million pre-tax in 2005 tied to a global realignment, with about 8,600 planned job eliminations and roughly $200 million of expected annual savings.
Non-recurring gains included a $345 million pre-tax gain on the sale of the Elkem ASA stake and a $67 million gain on the sale of railroad assets; a $120 million tax benefit also reduced the effective tax rate to 22.8%.
Growth pipeline includes the Fjardaal smelter in Iceland (346,000 mtpy, expected April 2007), Brazilian refinery and smelter expansions, and a proposed Trinidad smelter, with 2006 capex guided to $2.5 to $3.0 billion.
Labor and legal risks include the USW master labor agreement expiring May 31, 2006 (about 9,000 U.S. employees), the Grasse River PCB remediation, and a DOJ antitrust investigation into aluminum fluoride.

03—Questions

Frequently Asked Questions

Why did earnings fall even though sales hit a record in 2005?
Higher aluminum and alumina prices lifted revenue, but costs for energy, raw materials, and resins rose faster. The weaker U.S. dollar, $339 million of restructuring charges, a $58 million charge to close the Hamburg smelter, and $69 million of operating losses at the acquired Russian facilities also weighed on results. Income from continuing operations fell 10% to $1,233 million, though 2005 also included one-time gains such as the Elkem stake sale.
How much cash is Alcoa spending on growth, and how is it being funded?
Capital expenditures reached $2,138 million in 2005, about 60% for growth projects, including the Iceland smelter, Alumar expansion, and refinery expansions in Jamaica, Australia, and Brazil. Management expects 2006 capital spending of $2.5 to $3.0 billion. Cash from operations of $1,676 million was supplemented by $869 million from the Elkem sale and $408 million from the Southern Graphic Systems sale. Alcoa had $3 billion of undrawn revolving credit facilities at year-end, and its debt-to-capital ratio was 30.8%.
What is the biggest near-term labor risk?
The master labor agreement with the United Steelworkers covering 15 U.S. locations and about 9,000 employees expires May 31, 2006. If a new long-term agreement is not reached, a work stoppage at some or all plants could begin June 1, 2006. Management cites labor disruptions as a risk factor, and prior strikes at Becancour in 2004 curtailed production there.
What environmental and legal liabilities could affect future results?
The largest is the Grasse River PCB cleanup in Massena, New York, where remedial alternatives range from $2 million to $525 million. Alcoa has reserved $65 million (the $30 million original reserve plus $35 million for a pilot study), and EPA's final remedy, expected around 2008 or later, could require additional reserves. Other matters include the East St. Louis, Illinois remediation, a Virgin Islands red dust class action, and a Justice Department antitrust investigation into aluminum fluoride. Total environmental remediation reserves were $390 million at year-end 2005.

04—Continue

← View all 10-K filings