10-QPeriod: Q2 FY2003

Howmet Aerospace Inc. Quarterly Report for Q2 Ended Jun 30, 2003

Filed July 24, 2003For Securities:HWM

Summary

Howmet Aerospace Inc. (HWM), operating as Alcoa Inc. in this filing, reported a decrease in net income for the second quarter and the first six months of 2003 compared to the same periods in 2002. While sales saw an increase driven by acquisitions, primarily Ivex Packaging Corporation and Fairchild Fasteners, profitability was impacted by various factors including higher energy costs, lower volumes in certain markets, and significant restructuring and accounting-related charges. The company is also managing ongoing divestitures of non-core businesses and strategic initiatives such as expanding its Latin American operations through stock issuance. Financially, Alcoa strengthened its balance sheet with an increase in cash from operations, largely due to an advance payment on a long-term aluminum supply contract. However, financing activities consumed more cash due to net debt repayments compared to net borrowings in the prior year. Investors should note the impact of accounting changes, particularly the adoption of SFAS No. 143 for asset retirement obligations, which resulted in a cumulative effect charge. The company also provided updates on its various business segments, highlighting performance drivers and market outlooks, and addressed potential environmental and market risks.

Key Highlights

  • 1Net income for the six months ended June 30, 2003, was $367 million, down from $450 million in the prior year, impacted by accounting changes and discontinued operations.
  • 2Sales increased to $10,572 million for the six months ended June 30, 2003, up from $10,058 million in the prior year, driven by acquisitions.
  • 3Cash from operations significantly increased to $1,215 million for the six months ended June 30, 2003, from $667 million in the prior year, boosted by a $440 million advance payment on a long-term aluminum supply contract.
  • 4The company adopted SFAS No. 143 (Asset Retirement Obligations), resulting in a $47 million cumulative effect charge in 2003, compared to a $34 million cumulative effect income from SFAS No. 142 (Goodwill) adoption in 2002.
  • 5Alcoa is proceeding with the divestiture of non-core businesses, with some classified as discontinued operations or assets held for sale.
  • 6Capital expenditures decreased to $401 million for the first six months of 2003 from $565 million in the prior year, and acquisitions were also lower.
  • 7The company faces ongoing risks related to commodity price fluctuations, foreign exchange rates, and interest rates, and is utilizing derivative instruments to mitigate these risks.

Frequently Asked Questions

The primary driver for the increase in sales for the first six months of 2003 was the acquisitions of Ivex Packaging Corporation and Fairchild Fasteners in 2002, which contributed significantly to revenue.

The adoption of SFAS No. 143 effective January 1, 2003, resulted in a $47 million cumulative effect charge in the first half of 2003. This standard requires companies to recognize liabilities for asset retirement obligations at fair value.

Cash flow from operations significantly increased to $1,215 million in the first six months of 2003 from $667 million in the same period of 2002. This increase was largely due to a $440 million advance payment received on a long-term aluminum supply contract and lower working capital requirements.

For the Alumina and Chemicals segment, demand is expected to remain at current levels with flat pricing. Primary Metals may see continued pressure from lower shipments and higher energy costs. Flat-Rolled Products expects seasonal strength in rigid container sheet but flat overall conditions. Engineered Products anticipates decreased demand due to market softness, while Packaging and Consumer expects seasonal increases in North America. The Other segment anticipates lower overall third-party sales.