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AA > SEC Filings for AA > Form 10-Q on 24-Jul-2014All Recent SEC Filings

Show all filings for ALCOA INC

Form 10-Q for ALCOA INC


24-Jul-2014

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:



                                                  Second quarter ended             Six months ended
                                                        June 30,                       June 30,
                                                   2014            2013           2014           2013
Sales                                           $     5,836       $ 5,849       $ 11,290       $ 11,682
Net income (loss) attributable to Alcoa
common shareholders                             $       138       $  (119 )     $    (40 )     $     30
Diluted earnings per share attributable to
Alcoa common shareholders                       $      0.12       $ (0.11 )     $  (0.04 )     $   0.03
Shipments of alumina (kmt)                            2,361         2,328          5,010          4,785
Shipments of aluminum products (kmt)                  1,217         1,268          2,373          2,492
Alcoa's average realized price per metric
ton of primary aluminum                         $     2,291       $ 2,237       $  2,246       $  2,318

Net income attributable to Alcoa was $138, or $0.12 per diluted share, in the 2014 second quarter compared with Net loss attributable to Alcoa of $119, or $0.11 per share, in the 2013 second quarter. The improvement in results of $257 was primarily the result of net productivity improvements, higher energy sales, and the absence of a charge for a legal matter. These positive impacts were partially offset by higher costs for most inputs and an unfavorable change in income taxes due to a change from a pretax loss to pretax income.

Net loss attributable to Alcoa was $40, or $0.04 per share, in the 2014 six-month period compared with Net income attributable to Alcoa of $30, or $0.03 per share, in the 2013 six-month period. The decline in results of $70 was primarily the result of higher restructuring charges related to capacity reductions, lower realized prices for aluminum and alumina, and higher costs for most inputs. These negative impacts were mostly offset by net productivity improvements, higher energy sales, net favorable foreign currency movements, the absence of a charge for a legal matter, and a favorable change in income taxes due to a change from pretax income to a pretax loss.

Sales were flat in the 2014 second quarter and declined $392, or 3%, in the 2014 six-month period compared to the same periods in 2013.

In the 2014 second quarter, lower primary aluminum volumes due to curtailed and shutdown smelter capacity and unfavorable product mix in the midstream segment were offset by higher energy sales resulting from excess power due to curtailed smelter capacity, higher volumes in the midstream and downstream segments, and an increase in the average realized price for aluminum.

The decrease in the 2014 six-month period was mainly caused by lower primary aluminum volumes, including those related to curtailed and shutdown smelter capacity; a decline in the average realized price for both aluminum and alumina, driven by lower London Metal Exchange (LME) prices; and unfavorable pricing and product mix in the midstream segment. These negative impacts were partially offset by higher volumes in all other segments and higher energy sales resulting from excess power due to curtailed smelter capacity.

Cost of goods sold (COGS) as a percentage of Sales was 81.6% in the 2014 second quarter and 82.0% in the 2014 six-month period compared with 84.3% in the 2013 second quarter and 83.7% in the 2013 six-month period.

In both periods, the percentage was positively impacted by net productivity improvements across all segments, the previously mentioned higher energy sales, lower costs for caustic and carbon, and the absence of costs related to a planned maintenance outage in 2013 at a power plant in Australia. These items were partially offset by higher costs for bauxite, labor, maintenance, and transportation, and costs related to a new labor agreement that covers employees at 10 locations in the United States (see below).

The percentage in the 2014 second quarter was also favorably impacted by an increase in the average realized price for aluminum, while the percentage in the 2014 six-month period was also unfavorably impacted by a decrease in realized prices for three of the four segments and write-offs of


inventory related to the decisions to permanently shut down certain smelter and rolling mill capacity (difference of $27 - see Restructuring and other charges below).

On June 6, 2014, the United Steelworkers ratified a new five-year labor agreement covering approximately 6,100 employees at 10 U.S. locations; the previous labor agreement expired on May 15, 2014. In the 2014 second quarter and six-month period, as a result of the preparation for and ratification of the new agreement, Alcoa recognized $17 ($11 after-tax) and $18 ($12 after-tax), respectively, in Cost of goods sold for, among other items, business contingency costs and a one-time signing bonus for employees. Additionally, as a result of the provisions of the new labor agreement, a significant plan amendment was adopted by one of Alcoa's U.S. pension plans. Accordingly, this plan was required to be remeasured, which resulted in a decrease to 2014 annual net periodic benefit cost of $13, of which $2 was recognized in the 2014 second quarter. The remaining $11 decrease will be recognized ratably over the second half of 2014.

Selling, general administrative, and other expenses (SG&A) decreased $9 and $24 in the 2014 second quarter and six-month period, respectively, compared to the corresponding periods in 2013. The decline in both periods was primarily driven by lower expenses for professional and legal fees and contract services, partially offset by higher labor costs and fees associated with a planned acquisition of an aerospace business ($13) (see Engineered Products and Solutions under Segment Information below). SG&A as a percentage of Sales decreased from 4.3% in the 2013 second quarter to 4.2% in the 2014 second quarter, and was unchanged at 4.3% in both the 2013 six-month period and the 2014 six-month period.

Restructuring and other charges were $110 ($54 after-tax and noncontrolling interests) and $571 ($328 after-tax and noncontrolling interests) in the 2014 second quarter and six-month period, respectively.

In the 2014 second quarter, Restructuring and other charges included $107 ($51 after-tax and noncontrolling interest) for exit costs related to decisions to permanently shut down and demolish two smelters and two rolling mills (see below) and $3 ($3 after-tax) for other miscellaneous items, including layoff costs for the separation of approximately 75 employees (30 in the Global Rolled Products segment, 30 in Corporate, and 15 in the other three segments combined).

In the 2014 six-month period, Restructuring and other charges included $443 ($240 after-tax and noncontrolling interest) for exit costs related to decisions to permanently shut down and demolish two smelters and two rolling mills (see below); $68 ($44 after-tax and noncontrolling interest) for the temporary curtailment of two smelters and a related production slowdown at one refinery (see below); $33 ($26 after-tax) for asset impairments related to prior capitalized costs for a modernization project at a smelter in Canada that is no longer being pursued; $17 ($11 after-tax) for layoff costs, including the separation of approximately 245 employees (115 in the Engineered Products and Solutions segment, 30 in the Global Rolled Products segment, 10 in the Alumina and Primary Metals segments combined, and 90 in Corporate); $17 ($11 after-tax) of charges for other miscellaneous items; and $7 ($4 after-tax and noncontrolling interests) for the reversal of a number of small layoff reserves related to prior periods.

In the 2014 first quarter, management approved the permanent shutdown and demolition of the remaining capacity (84 kmt-per-year) at the Massena East smelter in New York and the full capacity (190 kmt-per-year) at the Point Henry smelter in Australia. The capacity at Massena East was fully shut down by the end of the first quarter of 2014 and the Point Henry smelter is expected to be shut down in August 2014. Demolition and remediation activities related to both the Massena East and Point Henry smelters will begin in the second half of 2014 and are expected to be completed by the end of 2020 and 2018, respectively.

The decisions on the Massena East and Point Henry smelters are part of a 15-month review of 460 kmt of smelting capacity initiated by management in the 2013 second quarter for possible curtailment. Through this review, management determined that the remaining capacity of the Massena East smelter was no longer competitive and the Point Henry smelter has no prospect of becoming financially viable. Management also initiated the temporary curtailment of the remaining capacity (62 kmt-per-year) at the Poços de Caldas smelter and additional capacity (85 kmt-per-year) at the São Luís smelter, both in Brazil. These curtailments were completed by the end of May 2014. As a result of these curtailments, production at the Poços de Caldas refinery was reduced (200 kmt-per-year), which was completed by the end of the 2014 second quarter.

Also in the 2014 first quarter, management approved the permanent shutdown of Alcoa's two rolling mills in Australia, Point Henry and Yennora. This decision was made due to the significant impact of excess can sheet capacity in both Australia and Asia. The two rolling mills have a combined can sheet capacity of 200 kmt-per-year and will be closed by the end of 2014. Demolition and remediation activities related to the two rolling mills will begin in 2015 and are expected to be completed by the end of 2018.


In the 2014 second quarter and six-month period, costs related to the shutdown and curtailment actions included $4 and $137, respectively, for the layoff of approximately 1,830 employees (1,230 in the Primary Metals segment, 470 in the Global Rolled Products segment, 90 in the Alumina segment, and 40 in Corporate); accelerated depreciation of $91 and $150, respectively, related to the three facilities in Australia as they continue to operate during 2014; and $10 and $133, respectively, in other exit costs. Additionally, the costs in the 2014 six-month period also include asset impairments of $91, representing the write-off of the remaining book value of all related properties, plants, and equipment. Furthermore in the 2014 six-month period, remaining inventories, mostly operating supplies and raw materials, were written down to their net realizable value resulting in a charge of $34 ($20 after-tax and noncontrolling interest), respectively, which was recorded in Cost of goods sold. The other exit costs of $133 in the 2014 six-month period represent $55 in asset retirement obligations and $38 in environmental remediation, both triggered by the decisions to permanently shut down and demolish the aforementioned structures in the U.S. and Australia, and $40 in other related costs, including supplier and customer contract-related costs. Additional charges of approximately $110 are expected to be recognized throughout the remainder of 2014 related to these shutdown actions in Australia.

Restructuring and other charges were $244 ($170 after-tax and noncontrolling interests) and $251 ($175 after-tax and noncontrolling interests) in the 2013 second quarter and six-month period, respectively.

In the 2013 second quarter, Restructuring and other charges included $103 ($62 after noncontrolling interest) related to a legal matter; $86 ($70 after-tax) for exit costs related to the permanent shutdown and demolition of certain structures at two non-U.S. locations (see below); $29 ($19 after-tax) for asset impairments and related costs for retirements of previously idled structures; $24 ($18 after-tax and noncontrolling interests) for the layoff of approximately 470 employees (190 in the Global Rolled Products segment, 180 in the Engineered Products and Solutions segment, 55 in the Primary Metals segment, and 45 in Corporate); a charge of $4 ($2 after-tax) for other miscellaneous items; and $2 ($1 after-tax and noncontrolling interests) for the reversal of a number of small layoff reserves related to prior periods.

In the 2013 six-month period, Restructuring and other charges included $218 ($151 after-tax and noncontrolling interests) for the previously mentioned legal matter, exit costs at two non-U.S. locations, and retirements of previously idled structures combined; $27 ($20 after-tax and noncontrolling interests) for layoff costs, including the separation of approximately 530 employees (190 in the Global Rolled Products segment, 180 in the Engineered Products and Solutions segment, 115 in the Primary Metals segment, and 45 in Corporate) and a pension plan settlement charge related to previously separated employees; a charge of $8 ($5 after-tax) for other miscellaneous items; and $2 ($1 after-tax and noncontrolling interests) for the reversal of a number of small layoff reserves related to prior periods.

In the 2013 second quarter, management approved the permanent shutdown and demolition of (i) two potlines (capacity of 105 kmt-per-year) that utilize Soderberg technology at the smelter located in Baie Comeau, Québec, Canada (remaining capacity of 280 kmt-per-year composed of two prebake potlines) and
(ii) the smelter located in Fusina, Italy (capacity of 44 kmt-per-year). The two Soderberg lines at Baie Comeau were fully shut down by the end of September 2013 while the Fusina smelter was previously temporarily idled in 2010. Demolition and remediation activities related to the two Soderberg lines and the Fusina smelter began in the fourth quarter of 2013 and are expected to be completed by the end of 2015 and 2017, respectively.

The decision on the two Soderberg lines was part of a 15-month review of 460 kmt of smelting capacity initiated by management earlier in the 2013 second quarter for possible curtailment (announced on May 1, 2013), while the decision on the Fusina smelter was in addition to the capacity being reviewed. Factors leading to both decisions were in general focused on achieving sustained competitiveness and included, among others: lack of an economically viable, long-term power solution (Italy); changed market fundamentals; other existing idle capacity; and restart costs.

In both the 2013 second quarter and six-month period, exit costs related to these actions included accelerated depreciation of $23 (Baie Comeau) and asset impairments of $14 (Fusina) representing the write-off of the remaining book value of all related properties, plants, and equipment, and $49 in other exit costs. Additionally, in both the 2013 second quarter and six-month period, remaining inventories, mostly operating supplies and raw materials, were written down to their net realizable value resulting in a charge of $7 ($5 after-tax), which was recorded in Cost of goods sold. The other exit costs of $49 represent $44 in asset retirement obligations and $5 in environmental remediation, both triggered by the decisions to permanently shut down and demolish these structures.


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:

                                           Second quarter ended          Six months ended
                                                 June 30,                    June 30,
                                           2014            2013          2014          2013
 Alumina                                 $      -        $      -      $      7       $   -
 Primary Metals                                 84              94          415           94
 Global Rolled Products                         23               7          113           10
 Engineered Products and Solutions              -               19            4           22

 Segment total                                 107             120          539          126
 Corporate                                       3             124           32          125

 Total restructuring and other charges   $     110       $     244     $    571       $  251

As of June 30, 2014, approximately 745 of the 2,075 employees associated with 2014 restructuring programs and approximately 1,350 of the 1,660 employees associated with 2013 restructuring programs were separated. The remaining separations for the 2014 and 2013 restructuring programs are expected to be completed by the end of 2014.

In the 2014 second quarter and six-month period, cash payments of $22 and $23, respectively, were made against the layoff reserves related to the 2014 restructuring programs and $8 and $32, respectively, were made against the layoff reserves related to the 2013 restructuring programs.

Interest expense declined $13, or 11%, in the 2014 second quarter and $8, or 3%, in the 2014 six-month period compared to the corresponding periods in 2013. In both periods, the decrease was principally the result of a 10% (second quarter) and an 8% (six months) lower average debt level, which was mostly attributable to lower outstanding long-term debt due to the June 2013 repayment of $422 in 6.00% Notes and the March 2014 extinguishment of $575 in 5.25% Convertible Notes, and lower amortization of debt-related costs due to the extinguishment of the aforementioned convertible notes. These positive impacts were partially offset in the 2014 second quarter and mostly offset in the 2014 six-month period by lower capitalized interest ($10 and $23, respectively).

Other expenses, net was $5 in the 2014 second quarter compared with $19 in the 2013 second quarter, and Other expenses, net was $30 in the 2014 six-month period compared to Other income, net of $8 in the 2013 six-month period.

The change in the 2014 second quarter was primarily due to a net favorable change in mark-to-market derivative contracts ($24), partially offset by a higher equity loss related to Alcoa's share of the joint venture in Saudi Arabia due to start-up costs of the entire complex, including restart costs for one of the smelter potlines that was previously shut down due to a period of instability.

In the 2014 six-month period, the change was mainly the result of a higher equity loss related to Alcoa's share of the joint venture in Saudi Arabia due to start-up costs of the entire complex, including restart costs for one of the smelter potlines that was previously shut down due to a period of instability, a net unfavorable change in mark-to-market derivative aluminum contracts ($16), and net unfavorable foreign currency movements ($16). These negative impacts were partially offset by a gain on the sale of a mining interest in Suriname ($28) and a net favorable change in other mark-to-market derivative contracts ($18).

The effective tax rate for the second quarter of 2014 and 2013 was 37.7% (provision on income) and 16.5% (provision on a loss), respectively.

The rate for the 2014 second quarter differs from the U.S. federal statutory rate of 35% primarily due to the U.S. tax impact of deemed distributions from otherwise lower tax rate foreign jurisdictions and operational income of certain foreign subsidiaries taxed in lower rate jurisdictions, mostly offset by a $20 favorable impact related to the interim period treatment of operational losses in certain foreign jurisdictions for which no tax benefit was recognized (partial reversal of the 2014 first quarter impact).

The rate for the 2013 second quarter differs (by (51.5) percentage points) from the U.S. federal statutory rate of 35% primarily due to a $103 nondeductible charge for a legal matter, restructuring charges related to operations in Canada (benefit at a lower tax rate) and Italy (no tax benefit), and a $10 discrete income tax charge related to prior year taxes in Spain and Australia.

The effective tax rate for the 2014 and 2013 six-month periods was 1.5% (provision on a loss) and 79.4% (provision on income), respectively.

The rate for the 2014 six-month period differs (by (36.5) percentage points) from the U.S. federal statutory rate of 35% primarily due to a $36 unfavorable impact related to the interim period treatment of operational losses in certain foreign jurisdictions for which no tax benefit was recognized (impact is


expected to reverse by the end of 2014).

The rate for the 2013 six-month period differs from the U.S. federal statutory rate of 35% primarily due to the previously mentioned $103 nondeductible charge, restructuring charges in Canada and Italy, and $10 discrete income tax charge, somewhat offset by a $19 discrete income tax benefit related to new U.S. tax legislation.

On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law and reinstated various expired or expiring temporary business tax provisions through 2013. Two specific temporary business tax provisions that expired in 2011 and impacted Alcoa are the look-through rule for payments between related controlled foreign corporations and the research and experimentation credit. The expiration of these two provisions resulted in Alcoa recognizing a higher income tax provision of $19 in 2012. As tax law changes are accounted for in the period of enactment, Alcoa recognized the previously mentioned discrete income tax benefit in the 2013 first quarter related to the 2012 tax year to reflect the extension of these provisions.

In December 2011, one of Alcoa's subsidiaries in Brazil applied for a tax holiday related to its expanded mining and refining operations. During 2013, the application was amended and re-filed. The deadline for the Brazilian government to deny the application was July 11, 2014. Since Alcoa did not receive notice that its application was denied, the tax holiday took effect automatically on July 12, 2014. As a result, the tax rate for this subsidiary will decrease significantly (from 34% to 15%), resulting in future cash tax savings over the 10-year holiday period (retroactively effective as of January 1, 2013). Additionally, a portion of the subsidiary's net deferred tax asset that reverses within the holiday period will be remeasured at the new lower tax rate in the 2014 third quarter. This remeasurement will result in a decrease to this subsidiary's net deferred tax asset and a noncash charge to earnings of approximately $60.

Net loss attributable to noncontrolling interests was $9 in the 2014 second quarter and $28 in the 2014 six-month period compared with $29 in the 2013 second quarter and $8 in the 2013 six-month period. The change in both periods was mostly due to the results of Alcoa World Alumina and Chemicals (AWAC), which is owned 60% by Alcoa and 40% by Alumina Limited. In the 2014 second quarter, AWAC generated a smaller loss compared to the same period in 2013 mainly driven by the absence of a $103 charge for a legal matter, partially offset by additional restructuring and other charges associated with management's decision in the 2014 first quarter to permanently shut down the Point Henry smelter in Australia (see Restructuring and other charges above and Primary Metals under Segment Information below). AWAC generated a higher loss in the 2014 six-month period compared with the corresponding period in 2013 largely attributable to restructuring and other charges associated with the decision to permanently shut down the Point Henry smelter, partially offset by the absence of the previously mentioned charge for a legal matter.

In both the 2013 second quarter and six-month period, Alumina Limited's share of the charge for a legal matter was included in Net loss attributable to noncontrolling interests at 40%. Subsequently, in the 2013 fourth quarter, Alumina Limited's share of this charge was reduced to 15% based on a cost allocation agreement between Alcoa and Alumina Limited reached in 2012 as a result of meeting certain criteria at the time the legal matter was resolved in January 2014. Consequently, a credit of $26 was reflected in Net loss attributable to noncontrolling interests in the 2013 fourth quarter equivalent to the difference of Alumina Limited's ownership interest and the stated percentage in the cost allocation agreement.

Segment Information

Alumina



                                                     Second quarter ended            Six months ended
                                                           June 30,                      June 30,
                                                      2014            2013          2014          2013
Alumina production (kmt)                                 4,077         4,161          8,249        8,155
Third-party alumina shipments (kmt)                      2,361         2,328          5,010        4,785

Alcoa's average realized price per metric ton
of alumina                                         $       318       $   347      $     316      $   339
Alcoa's average cost per metric ton of alumina*    $       290       $   305      $     284      $   305

Third-party sales                                  $       761       $   822      $   1,606      $ 1,648
Intersegment sales                                         480           581            990        1,176

Total sales                                        $     1,241       $ 1,403      $   2,596      $ 2,824


ATOI                                               $        38       $    64      $     130      $   122

* Includes all production-related costs, including raw materials consumed; conversion costs, such as labor, materials, and utilities; depreciation, depletion, and amortization; and plant administrative expenses.

Alumina production decreased 2% in the 2014 second quarter and increased 1% in the 2014 six-month period compared with the corresponding periods in 2013. The decline in the 2014 second quarter was largely attributable to lower production at the Point Comfort (TX) (weather-related interruption), Poços de Caldas (Brazil), and San


Ciprian (Spain) refineries, somewhat offset by higher production at the refineries in Australia. In the 2014 six-month period, the improvement was due to higher production at every refinery in the global system, except for Poços de Caldas and San Ciprian. The Poços de Caldas refinery started to reduce production near the end of the 2014 first quarter in response to the decision to fully curtail the Poços de Caldas smelter by the end of May 2014 (see Primary Metals below). As a result, management reduced the alumina production at the Poços de Caldas refinery by approximately 200 kmt-per-year by the end of the 2014 second quarter.

Third-party sales for the Alumina segment declined 7% and 3% in the 2014 second quarter and six-month period, respectively, compared with the same periods in 2013. In both periods, the decrease was primarily due to a reduction in buy/resell activity, unfavorable foreign currency movements related to the revaluation of outstanding customer receivables in Australia, and an 8% (second quarter) and a 7% (six months) decline in average realized price. The negative impacts in the 2014 six-month period were partially offset by an improvement of 5% in volume. The change in average realized price was driven by a 6% (second quarter) and 11% (six months) lower average LME price for those customer shipments still linked to the LME (35%), mostly offset by higher alumina index/spot pricing for all other customer shipments (65%).

Intersegment sales decreased 17% in the 2014 second quarter and 16% in the 2014 six-month period compared to the corresponding periods in 2013 due to lower demand from the Primary Metals segment and lower realized price.

. . .

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