Business News
Alcoa Reports Third Quarter 2008 Results
Wednesday 08. October 2008 - Taking Action to Preserve Profitability, Liquidity Through the Downturn
Highlights:
Net income of $268 million, or $0.33 per share, includes $29 million or $0.04 per share for restructuring.
The sequential impact of currency translation was a negative $52 million or $0.06 per share.
Revenues of $7.2 billion, up from $6.5 billion in 3rd quarter of 2007, excluding divested businesses.
Alumina segment improved ATOI over 2nd quarter, and Engineered Products segment had strongest 3rd quarter profitability in history.
Segment ATOI of $633 million, with two of four segments higher than 3rd quarter of 2007.
Completed purchase of two percent of shares in the quarter, bringing total share buy-back to 12 percent, or roughly half of the authorized levels.
Cash on hand at $831 million and debt-to-capital stands at 36.3 percent.
Trailing 12-month ROC stands at 11.5 percent excluding investments in growth.
Taking action to preserve and enhance strong balance sheet during unprecedented volatility in financial markets.
Curtailing non-critical capital programs, suspending share repurchases.
Alcoa (NYSE: AA) today reported third quarter net income of $268 million, or $0.33 per diluted share. The results include a previously announced $31 million after-tax charge, or $0.04 per share, for the temporary curtailment of the Rockdale, TX aluminum smelter. The negative impact of currency translation on a sequential basis was $52 million, or $0.06 per share.
Net income in the third quarter of 2007 was $555 million, or $0.63 per share. Included in the third quarter 2007 results was the net benefit of $218 million, or $0.25 per share, for the gain on the sale of the companys stake in Chalco, restructuring, and transaction costs. Net income in the second quarter of 2008 was $546 million, or $0.66 per share.
“Despite rising costs and sluggish end markets, combined profitability in the four business segments was in line with last years third quarter,” said Klaus Kleinfeld, Alcoa President and Chief Executive Officer.
“Recently, aluminum prices have fallen steeply and demand has softened further, while input costs remain high,” said Kleinfeld. “The resulting margin squeeze will have a greater impact going forward, but will be somewhat mitigated by the easing of energy prices and a stronger U.S. dollar. We will continue to manage our business to keep it competitive in a turbulent global environment.
“We have taken action to conserve cash and maximize profitability through very adverse economic conditions,” said Kleinfeld. “Given the sharp decline in metal prices and increasingly soft demand in our key markets, we are stopping all non-critical capital projects, making targeted reductions to match market conditions, and are adjusting our manufacturing capacity to meet demand in rapidly changing upstream and downstream markets. We are halting production at our smelter in Rockdale, Texas, adjusting alumina capacity accordingly, and are continually reviewing under-performing assets throughout our portfolio. And, we are suspending our share buy-back program.
“While we face volatile and uncertain markets today, longer term trends will drive a rebound in global aluminum demand and the forward market reflects underlying optimism on medium term aluminum pricing,” said Kleinfeld. “During difficult times, we will examine opportunities across the industry to improve our competitiveness, use every lever to improve profitability, and position the company to deliver stronger value when demand improves.”
Revenues for the quarter were $7.2 billion, down slightly from $7.6 billion in the second quarter of 2008 due to lower metal prices, seasonal downturns in Europe, and weak end markets, particularly the automotive sector. Revenues in the third quarter 2007 were $6.5 billion after excluding the divested businesses.
In the first nine months of 2008, net income was $1.1 billion, or $1.36 per share, and revenues were $22.2 billion. Year-to-date, cash from operations was $626 million, which includes a discretionary $400 million pension contribution in the third quarter.
Capital expenditures for the quarter were $877 million, with 65 percent dedicated to growth projects. The Companys debt-to-capital ratio stood at 36.3 percent at the end of the quarter. The 12-month trailing return on capital (ROC) stood at 11.5 percent at the end of the third quarter, excluding investments in growth.
Segment and Other Results
Alumina
After-tax operating income (ATOI) was $206 million, an increase of $16 million, or 8 percent, from the prior quarter. Overall production declined slightly in the quarter (30 kmt lower) because of the production loss from the Point Comfort refinery (60 kmt), which was closed during Hurricane Ike. Strong operating performance and a stronger U.S. dollar offset the lower production and higher input costs. Net of insurance recovery, the natural gas supply disruption in Western Australia lowered ATOI by $9 million on a sequential basis.
The company is on track to complete its expansion of the Sao Luis refinery and the new Juruti bauxite mine in Brazil. Those expansions are well under way and will begin to deliver positive cash flow to the company in 2009.
Primary Metals
ATOI was $297 million, a decrease of $131 million, or 31 percent, from the prior quarter. Third-party realized ingot price decreased sequentially from $3,058/mt to $2,945/mt due to lower LME pricing coupled with a less favorable product mix and lower regional pricing premiums. Meanwhile, escalating market prices for carbon products and energy continue to negatively impact earnings.
The company’s newest smelter (Fjardaal) produced at nameplate capacity for the second consecutive quarter and is currently the highest-quality metal in Alcoas global system.
Flat-Rolled Products
ATOI was $29 million, a decrease of $26 million, or 47 percent, from the prior quarter. This decline is slightly higher than the typical 35 percent seasonal decline that was forecasted during last quarters analysts call. The higher than expected decline is due to weaker than expected market conditions in North America and Europe as well as the impact of the machinists strike at Boeing. In addition, alloying materials such as manganese, silicon, and magnesium have experienced substantial price increases year-over-year.
Engineered Products and Solutions
ATOI was $101 million, a record third quarter. This was a decrease of $56 million, or 36 percent, from the prior quarter. This decline is slightly higher than the typical 25 to 30 percent seasonal decline that we forecasted during last quarters analysts call. The greater decline is primarily a result of weakening market conditions. Due to tighter credit conditions and high gas prices, annual automotive build rates are now projected to decline 14 percent in North America. Commercial transportation markets have also been weaker than expected. North America Class 8 truck builds dropped 13 percent quarter-over-quarter. Also, lower demand for spares in the aerospace after-market has been driven by little or no growth in global airline capacity.
ATOI to Net Income Reconciliation
The largest variance in reconciling items was in the “Other” line item which includes a $90 million unfavorable sequential change due to currency translation.