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AA > SEC Filings for AA > Form 10-Q on 25-Oct-2012All Recent SEC Filings

Show all filings for ALCOA INC

Form 10-Q for ALCOA INC


25-Oct-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

(dollars in millions, except per share amounts and ingot prices; production and shipments in thousands of metric tons [kmt])

Results of Operations

Selected Financial Data:



                                                  Third quarter  ended            Nine months  ended
                                                      September 30,                 September 30,
                                                   2012            2011          2012            2011
Sales                                           $    5,833        $ 6,419      $  17,802       $ 18,962
Amounts attributable to Alcoa common
shareholders:
(Loss) income from continuing operations        $     (143 )      $   172      $     (51 )     $    807
Loss from discontinued operations                       -              -              -              (5 )

Net (loss) income                               $     (143 )      $   172      $     (51 )     $    802

Earnings per share attributable to Alcoa
common shareholders:
Diluted - (Loss) income from continuing
operations                                      $    (0.13 )      $  0.15      $   (0.05 )     $   0.71
Diluted - Net (loss) income                          (0.13 )         0.15          (0.05 )         0.71

Shipments of alumina (kmt)                           2,368          2,256          6,855          6,840
Shipments of aluminum products (kmt)                 1,317          1,277          3,917          3,757

Alcoa's average realized price per metric
ton of aluminum                                 $    2,222        $ 2,689      $   2,328       $  2,734

Loss from continuing operations attributable to Alcoa was $143, or $0.13 per diluted share, in the 2012 third quarter compared with income from continuing operations of $172, or $0.15 per share, in the 2011 third quarter. The decline of $315 was primarily the result of lower realized prices for aluminum and alumina, charges for litigation and environmental remediation matters, and higher input costs. These items were partially offset by net productivity improvements, net favorable foreign currency movements, a decrease in income taxes due to lower operating results, and a decline in the results attributable to noncontrolling interests.

Loss from continuing operations attributable to Alcoa was $51, or $0.05 per share, in the 2012 nine-month period compared with income from continuing operations of $807, or $0.71 per share, in the 2011 nine-month period. The decrease of $858 was principally due to lower realized prices for aluminum and alumina, charges for litigation and environmental remediation matters, and higher input costs. These items were partially offset by net productivity improvements, a decrease in income taxes due to lower operating results, a decline in the results attributable to noncontrolling interests, net favorable foreign currency movements, and a favorable LIFO (last in, first out) impact.

Sales for the 2012 third quarter and nine-month period declined $586, or 9%, and $1,160, or 6%, respectively, compared to the same periods in 2011. The decrease in both periods was mainly caused by a decline in realized prices for aluminum and alumina, driven by lower London Metal Exchange (LME) prices, unfavorable pricing in the midstream segment due to a decrease in metal prices, and unfavorable foreign currency movements, mostly due to a weaker euro, slightly offset by higher volumes in the midstream segment. In the 2012 nine-month period, higher volumes in the downstream segment also contributed positively to Sales.

Cost of goods sold (COGS) as a percentage of Sales was 90.3% in the 2012 third quarter and 87.2% in the 2012 nine-month period compared with 82.4% in the 2011 third quarter and 80.4% in the 2011 nine-month period. In both periods, the percentage was negatively impacted by the previously mentioned lower realized prices, higher input costs, a net charge for adjustments to certain environmental reserves ($173 in the third quarter and $194 in the nine-month period comparisons), and a charge for a civil litigation reserve ($40 in the third quarter and $85 in the nine-month period comparisons). These items were somewhat offset by net productivity improvements and net favorable foreign currency movements due to a stronger U.S. dollar. A change in LIFO adjustments from unfavorable to favorable, primarily due to lower prices for alumina and metal, also positively impacted the percentage in the 2012 nine-month period.


Selling, general administrative, and other expenses (SG&A) decreased $27 and $39 in the 2012 third quarter and nine-month period, respectively, compared to the corresponding periods in 2011. The decline in both periods was primarily driven by less spending across various expenses, including labor, travel, professional and contract services, and information technology. SG&A as a percentage of Sales decreased from 4.1% in the 2011 third quarter to 4.0% in the 2012 third quarter, and was unchanged at 4.0% in both the 2011 nine-month period and the 2012 nine-month period.

Restructuring and other charges were $2 ($2 after-tax) and $27 ($19 after-tax and noncontrolling interests) in the 2012 third quarter and nine-month period, respectively.

In the 2012 third quarter, Restructuring and other charges included $3 ($2 after-tax) for the layoff of approximately 20 employees (Primary Metals segment), including additional employees related to the previously reported smelter curtailments in Spain, and $1 (less than $1 after-tax) for the reversal of a number of small layoff reserves related to prior periods.

In the 2012 nine-month period, Restructuring and other charges included $20 ($14 after-tax and noncontrolling interests) for the layoff of approximately 350 employees (180 in the Primary Metals segment, 70 in the Engineered Products and Solutions segment, 25 in the Alumina segment, and 75 in Corporate), including $9 ($6 after-tax) for the layoff of an additional 160 employees related to the previously reported smelter curtailments in Spain; $9 ($5 after-tax) for lease termination costs; $2 ($2 after-tax) in other miscellaneous charges; and $4 ($2 after-tax and noncontrolling interests) for the reversal of a number of small layoff reserves related to prior periods.

Restructuring and other charges were $9 ($5 after-tax and noncontrolling interests) and $49 ($26 after-tax and noncontrolling interests) in the 2011 third quarter and nine-month period, respectively.

In the 2011 third quarter, Restructuring and other charges included $18 ($11 after-tax and noncontrolling interests) for the layoff of approximately 150 employees (70 in the Global Rolled Products segment, 40 in the Primary Metals segment, 30 in the Alumina segment, and 10 in Corporate); a net charge of $1 (less than $1 after-tax) for other small items; and $10 ($6 after-tax) for the reversal of previously recorded layoff reserves, primarily related to a change in plans for Alcoa's aluminum powder facility in Rockdale, TX.

In the 2011 nine-month period, Restructuring and other charges included $31 ($19 after-tax and noncontrolling interests) for the layoff of approximately 630 employees (420 in the Global Rolled Products segment, 110 in the Primary Metals segment, 60 in the Alumina segment, 30 in the Engineered Products and Solutions segment, and 10 in Corporate); $20 ($8 after-tax and noncontrolling interests) for a litigation matter related to the former St. Croix location; an $8 ($5 after-tax) charge for an adjustment to the fair value of the one remaining foil location classified as held for sale due to foreign currency movements (this business was removed from held for sale classification in the fourth quarter of 2011); a net charge of $4 ($3 after-tax) for other small items; and $14 ($9 after-tax) for the reversal of previously recorded layoff reserves, primarily related to a change in plans for Alcoa's aluminum powder facility in Rockdale, TX.

Alcoa does not include Restructuring and other charges in the results of its reportable segments. The pretax impact of allocating such charges to segment results would have been as follows:

                                                 Third quarter  ended              Nine months  ended
                                                    September 30,                    September 30,
                                                2012               2011           2012             2011
Alumina                                       $      -            $    6        $       1         $   32
Primary Metals                                        3               (6 )              9             (4 )
Global Rolled Products                               -                 5                1              7
Engineered Products and Solutions                    -                (2 )              3              1

Segment total                                         3                3               14             36
Corporate                                            (1 )              6               13             13

Total restructuring and other charges         $       2           $    9        $      27         $   49

As of September 30, 2012, approximately 90 of the 350 employees associated with 2012 restructuring programs, approximately 770 of the 1,600 employees associated with 2011 restructuring programs, approximately 820 of the 875 employees associated with 2010 restructuring programs, and approximately 5,900 of the 6,000 employees associated with 2009 restructuring programs were separated. The remaining separations for a portion of the 2012 and 2011 restructuring programs and all of the 2010 and 2009 restructuring programs are expected to be completed by the end of 2012.

In the 2012 third quarter and nine-month period, cash payments of $3 and $6, respectively, were made against the layoff reserves related to the 2012 restructuring programs; $7 and $21, respectively,


were made against the layoff reserves related to the 2011 restructuring programs; and $1 and $3, respectively, were made against the layoff reserves related to the 2010 restructuring programs.

In the fourth quarter of 2012, restructuring charges, in addition to those recognized in 2011, will likely be recognized upon achieving full curtailment of the Portovesme smelter (see the "Primary Metals" section below).

Interest expense decreased $1, or 1%, and $29, or 7%, in the 2012 third quarter and nine-month period, respectively, compared to the corresponding periods in 2011. In the 2012-nine-month period, the decrease was principally the result of the absence of a $41 net charge related to the early retirement of various outstanding notes ($74 in purchase premiums paid partially offset by a $33 gain for "in-the-money" interest rate swaps), somewhat offset by lower capitalized interest ($10).

Other income, net was $2 in the 2012 third quarter compared with Other expenses, net of $31 in the 2011 third quarter, and Other expenses, net was $4 in the 2012 nine-month period compared with Other income, net of $47 in the 2011 nine-month period.

The change in the 2012 third quarter was mainly the result of net favorable foreign currency movements ($38), an improvement in the cash surrender value of company-owned life insurance, and a favorable change in mark-to-market contracts related to an embedded credit derivative and foreign currency ($25). These items were partially offset by an unfavorable change in mark-to-market contracts related to aluminum and energy ($43), mostly due to a decline in the aluminum price on the LME and the absence of a favorable change in an energy contract that expired in September 2011, and higher deferred compensation.

In the 2012 nine-month period, the change was principally caused by a net unfavorable change in mark-to-market derivative contracts ($54), mostly driven by the absence of a favorable change in an energy contract that expired in September 2011; lower equity income ($40), largely attributable to Alcoa's share of expenses of the joint venture in Saudi Arabia and the absence of a discrete income tax benefit recognized by the consortium related to an investment in a natural gas pipeline in Australia (Alcoa World Alumina and Chemicals' share of the benefit was $24); and higher deferred compensation. These items were somewhat offset by an improvement in the cash surrender value of company-owned life insurance and net favorable foreign currency movements ($9).

The effective tax rate for the third quarter of 2012 and 2011 was 15.9% (benefit on a loss) and 19.6% (provision on income), respectively.

The rate for the 2012 third quarter differs from the U.S. federal statutory rate of 35% primarily due to foreign income taxed in lower rate jurisdictions and a $35 unfavorable impact for operational losses in certain foreign jurisdictions that are excluded from the estimated annual effective tax rate calculation (impact expected to reverse by the end of 2012), somewhat offset by a $12 benefit as a result of including the anticipated gain from the sale of the Tapoco Hydroelectric Project in the calculation of the estimated annual effective tax rate.

The rate for the 2011 third quarter differs from the U.S. federal statutory rate of 35% primarily due to foreign income taxed in lower rate jurisdictions and a $15 net discrete income tax benefit for various items, primarily attributable to adjustments made related to the filing of prior year tax returns in various jurisdictions and the reversal of a valuation allowance for capital losses now available to be used against future capital gains.

The effective tax rate for the 2012 and 2011 nine-month periods was 25.1% (provision on a loss) and 25.3% (provision on income), respectively.

The rate for the 2012 nine-month period differs by (60.1)% from the U.S. federal statutory rate of 35% primarily due to foreign income taxed in lower rate jurisdictions, a $39 unfavorable impact for operational losses in certain foreign jurisdictions that are excluded from the estimated annual effective tax rate calculation (impact expected to reverse by the end of 2012), and an $8 discrete income tax charge related to prior year U.S. taxes on certain depletable assets, slightly offset by the previously mentioned $12 benefit.

The rate for the 2011 nine-month period differs from the U.S. federal statutory rate of 35% primarily due to foreign income taxed in lower rate jurisdictions.

Net loss attributable to noncontrolling interests for the 2012 third quarter and nine-month period was $32 and $44, respectively, compared to Net income attributable to noncontrolling interests of $53 and $166 in the 2011 third quarter and nine-month period, respectively. The change in both periods was primarily due to lower earnings at Alcoa World Alumina and Chemicals (AWAC), which is owned 60% by Alcoa and 40% by Alumina Limited. The decline in earnings at AWAC was mainly driven by lower realized prices, due to a decrease in contractual LME-based pricing; higher input costs, particularly caustic; and a charge for a litigation reserve of $16 (third quarter) and $34 (nine months); somewhat offset by net productivity improvements and net favorable foreign currency movements due to a stronger U.S. dollar.


Segment Information

Alumina



                                         Third quarter  ended          Nine months  ended
                                             September 30,                September 30,
                                          2012            2011          2012          2011
 Alumina production (kmt)                   4,077          4,140         12,263       12,308
 Third-party alumina shipments (kmt)        2,368          2,256          6,855        6,840

 Third-party sales                     $      764        $   879     $    2,289     $  2,615
 Intersegment sales                           575            751          1,768        2,107

 Total sales                           $    1,339        $ 1,630     $    4,057     $  4,722


 After-tax operating income (ATOI)     $       (9 )      $   154     $       49     $    482

Alumina production decreased 2% in the 2012 third quarter and was flat in the 2012 nine-month period compared with the corresponding periods in 2011. The decline in the 2012 third quarter was largely due to lower production at the refineries in Suriname, Jamaica, and Spain as a result of the initiation of management's plan to reduce annual production capacity by approximately 390 kmt to align production with smelter curtailments initiated during the first quarter of 2012 and to reflect prevailing market conditions. In the 2012 nine-month period, lower production at the refineries in Suriname, Jamaica, and Spain was mostly offset by higher production at the three refineries in Australia and the São Luís (Brazil) refinery, due to system process improvements.

Third-party sales for the Alumina segment dropped 13% in the 2012 third quarter and 12% in the 2012 nine-month period compared with the same periods in 2011. In the 2012 third quarter, the decrease was primarily due to a 20% decline in realized prices, driven by a decrease in contractual LME-based pricing, and unfavorable foreign currency movements due to a weaker Australian dollar, slightly offset by higher demand. The drop in the 2012 nine-month period was principally the result of a 16% decline in realized prices, driven by a decrease in contractual LME-based pricing.

Intersegment sales decreased 23% and 16% in the 2012 third quarter and nine-month period, respectively, compared to the corresponding periods in 2011, mostly due to lower realized prices and decreased demand from the Primary Metals segment.

ATOI for this segment declined $163 in the 2012 third quarter and $433 in the 2012 nine-month period compared to the same periods in 2011. The decrease in both periods was primarily the result of the previously mentioned lower realized prices and higher input costs, particularly caustic, somewhat offset by net productivity improvements and net favorable foreign currency movements due to a stronger U.S. dollar, especially against the Brazilian real.

In the fourth quarter of 2012, as the shift from LME-linked contracts to the alumina price index continues, approximately 40% of this segment's third-party shipments are expected to be based on the alumina price index or at spot price. Continued net productivity improvements are anticipated, while caustic prices are expected to remain flat.


Primary Metals



                                                   Third quarter  ended            Nine months  ended
                                                       September 30,                 September 30,
                                                    2012            2011          2012            2011
Aluminum production (kmt)                               938            964          2,830          2,813
Third-party aluminum shipments (kmt)                    768            754          2,288          2,176

Alcoa's average realized price per metric ton
of aluminum                                      $    2,222        $ 2,689      $   2,328        $ 2,734

Third-party sales                                $    1,794        $ 2,124      $   5,542        $ 6,249
Intersegment sales                                      691            798          2,234          2,559

Total sales                                      $    2,485        $ 2,922      $   7,776        $ 8,808


ATOI                                             $      (14 )      $   110      $      (7 )      $   513

At September 30, 2012, Alcoa had 533 kmt of idle capacity on a base capacity of 4,227 kmt. In the 2012 third quarter, idle capacity increased by 59 kmt compared to June 30, 2012, mostly due to the initiation of the curtailment of the Portovesme smelter in Italy (150 kmt-per-year). The decision to curtail this facility was made at the end of 2011, as part of a plan to restructure Alcoa's global smelting system, resulting from uncertain prospects for viable, long-term power once the current agreement expires at the end of 2012, combined with rising raw material costs and falling global aluminum prices. The Portovesme smelter is expected to be fully curtailed during the fourth quarter of 2012.

Aluminum production decreased 3% in the 2012 third quarter and increased 1% in the 2012 nine-month period compared with the corresponding periods in 2011. In the 2012 third quarter, the decline was mainly caused by lower production at the two partially curtailed smelters in Spain (Avilés (46 kmt out of 93 kmt-per-year) and La Coruña (44 kmt out of 87 kmt-per-year)) and the previously mentioned Portovesme smelter. The increase in the 2012 nine-month period was primarily due to higher production at the Massena East, NY, Wenatchee, WA, and Ferndale, WA smelters, partially offset by lower production at the two partially curtailed smelters in Spain and the Portovesme smelter. In the 2012 nine-month period, the improvements at the mentioned smelters were due to capacity that was restarted during the first quarter of 2011 (Massena East (125 kmt-per-year), Ferndale (Intalco: 47 kmt-per-year), and Wenatchee (43 kmt-per-year)). The full restarts of this U.S. capacity were achieved by the end of 2011.

Third-party sales for the Primary Metals segment decreased 16% in the 2012 third quarter and 11% in the 2012 nine-month period compared with the same periods in 2011. The decline in both periods was mostly the result of a 17% (third quarter) and a 15% (nine months) drop in realized prices, driven by 20% (third quarter) and 19% (nine months) lower LME prices, and the previously mentioned curtailments, somewhat offset by higher buy/resell activity due to the curtailments and higher volumes, largely attributable to the previously mentioned restarted U.S. capacity.

Intersegment sales declined 13% in both the 2012 third quarter and nine-month period compared to the corresponding periods in 2011, mainly as a result of a decrease in realized prices, driven by the lower LME, somewhat offset by higher buy/resell activity.

ATOI for this segment declined $124 in the 2012 third quarter and $520 in the 2012 nine-month period compared to the same periods in 2011. In both periods, the decrease was primarily due to the previously mentioned drop in realized prices and an unfavorable impact as a result of business interruption and repair costs related to a fire in March 2012 at the Massena West, NY cast house ($7 in the third quarter and $14 in the nine-month period comparisons), partially offset by lower costs for alumina and energy, net favorable foreign currency movements due to a stronger U.S. dollar, particularly against the euro and Brazilian real, and net productivity improvements. Higher input costs, particularly carbon, also contributed to the decline in ATOI in the 2012 nine-month period.

In the fourth quarter of 2012, net productivity improvements are expected to continue while smelter curtailments will result in a negative impact to ATOI of approximately $15. Also, the sale of U.S. hydropower assets (known as the Tapoco Hydroelectric Project) is expected to close, resulting in a significant gain.


Global Rolled Products



                                          Third quarter  ended          Nine months  ended
                                              September 30,                September 30,
                                           2012            2011          2012          2011
 Third-party aluminum shipments (kmt)           483           454          1,419        1,373

 Third-party sales                      $     1,849       $ 1,974     $    5,607      $ 5,951
 Intersegment sales                              42            48            130          179

 Total sales                            $     1,891       $ 2,022     $    5,737      $ 6,130


 ATOI                                   $        98       $    60     $      289      $   240

Third-party sales for the Global Rolled Products segment decreased 6% in both the 2012 third quarter and nine-month period compared with the corresponding periods in 2011. In both periods, the decline was principally the result of unfavorable pricing due to a decrease in metal prices and unfavorable foreign currency movements, mostly due to a weaker euro. Somewhat offsetting these negative impacts in both periods were favorable product mix and higher volumes, largely attributable to the packaging and automotive markets in the 2012 third quarter, and the packaging, aerospace, automotive, and commercial transportation markets, somewhat offset by the industrial products market in the 2012 nine-month period.

ATOI for this segment improved 63% in the 2012 third quarter and 20% in the 2012 nine-month period compared to the same periods in 2011. The increase in both periods was principally related to net productivity improvements across all businesses, favorable product mix, and the previously mentioned higher volumes, somewhat offset by higher input costs, particularly labor, transportation, and energy. In the 2012 nine-month period, the previously mentioned unfavorable pricing and net unfavorable foreign currency movements, mostly due to a weaker euro, also negatively impacted ATOI.

In the fourth quarter of 2012, the aerospace and automotive markets are expected to remain strong, while packaging will be affected by a seasonal decline in demand. Also, the industrial products market in Europe and North America is expected to weaken, resulting in increasing pricing pressure and demand reduction. Additionally, slower growth rates in China and Russia are expected to continue.

Engineered Products and Solutions



                                          Third quarter  ended          Nine months  ended
                                              September 30,                September 30,
                                           2012            2011          2012          2011
 Third-party aluminum shipments (kmt)            53            56            170          168

 Third-party sales                      $     1,367       $ 1,373     $    4,177      $ 3,990

 ATOI                                   $       160       $   138     $      475      $   417

Third-party sales for the Engineered Products and Solutions segment were flat in the 2012 third quarter and rose 5% in the 2012 nine-month period compared with the corresponding periods in 2011. In the 2012 third quarter, lower volumes related to the nonresidential building and construction end market and unfavorable foreign currency movements due to a weaker euro were virtually offset by higher volumes related to the aerospace end market. The increase in the 2012 nine-month period was principally due to higher volumes related to the aerospace and commercial transportation end markets, slightly offset by unfavorable foreign currency movements due to a weaker euro.

ATOI for this segment improved 16% in the 2012 third quarter and 14% in the 2012 nine-month period compared to the same periods in 2011. In both periods, the increase was mainly the result of net productivity improvements. The previously mentioned volume impacts also contributed positively to ATOI in the 2012 nine-month period.

In the fourth quarter of 2012, continued net productivity improvements and share gains through innovation are anticipated. Also, continued weakness in the building and construction market, particularly


in Europe, and in the North American and European commercial transportation markets, due to declining heavy truck build rates, is expected. . . .
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