Alcoa Ends Strong 2011 with Tough Fourth Quarter, as Solid Profits Trump Restructuring Costs for Year

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Researched by Industrial Info Resources (Sugar Land, Texas)--Aluminum maker Alcoa Incorporated (NYSE:AA) (Pittsburgh, Pennsylvania) reported strong overall results for full-year 2011 as aluminum demand soared and net income more than doubled that of 2010. The fourth quarter was shakier, however, as restructuring charges from major closings and curtailments, as well as market weaknesses, erased most of the gains. The quarter saw a net loss of $191 million, compared to net income of $258 million in fourth-quarter 2010, but full-year 2011 saw net income of $611 million, compared to $254 million in 2010.

Total sales stood at $5.99 billion for the quarter, a 5.96% increase from the same period in the previous year, and $24.95 billion for the full year, an 18.74% increase from 2010. Aluminum demand grew 10% during 2011, following 13% growth in 2010, while alumina production in the fourth quarter hit a record 4.18 million metric tons. The alumina segment also benefited from a $30 million land sale in Australia.

However, the closure and curtailment of high-cost smelting capacity resulted in $159 million in restructuring-related charges in the fourth quarter, which also was negatively affected by lower aluminum prices and severe weaknesses in the debt-ridden European markets. The Flat-Rolled Products segment also was hurt by the European market in the fourth quarter, as well as seasonal volume declines in North America and Russia. A 12% drop in third-party realized metal prices hit the Primary Metals segment.

Capital spending for 2011 was lower than expected at $1.3 billion, which was 86% of the company's target. A planned investment in a major Saudi Arabia joint venture totaled just $249 million, which was 62% of the target.

"On a quarterly basis, each of our businesses faced challenges ranging from lower realized prices to market weakness and rising costs," said Chuck McLane, the executive vice president and chief financial officer of Alcoa, in a conference call. "However, when you examine the full-year results, it shows strong performance and, in most cases, exceeds the prior year results. Alumina not only finished the year with higher [earnings before income taxes, depreciation and amortization] per ton, but also exceeded the historical average of $66 per ton. The move to alumina index pricing for approximately 20% of third-party shipments helped the business achieve year-over-year improvements in the face of difficult market conditions."

Industrial Info is tracking more than $4 billion in active Alcoa projects, including $110 million in refurbishments at the Cheoah Hydro Plant in Tapoco, North Carolina, through the company's subsidiary Tapoco-APGI. The project involves replacing four 20-megawatt (MW) Allis Chalmers Francis turbine generator with four 27-MW, "fish friendly" Voith Siemens Hydro Vertical Francis turbines. The company also will replace bearings, transformer, breakers, governors, the lubrication system and switchgear. The project is expected to be completed in November 2014.

The Alumina and Engineering Products segments reported solid gains for the fourth quarter and full year, while the Primary Metals and Flat-Rolled Products segments saw steep losses in the quarter but held steady for the year:

• The Alumina segment reported $125 million in after-tax operating income for the quarter, compared to $65 million in the same period in the previous year. For the year, the segment reported $607 million, more than double the $301 million in 2010.
• The Primary Metals segment reported $32 million in after-tax operating loss for the quarter, compared to a $178 million gain in fourth-quarter 2010. For the year, the segment reported $481 million, a 1.43% decrease from 2010.
• The Flat-Rolled Products segment reported $26 million in after-tax operating income for the quarter, compared to $53 million in the same period in the previous year. For the year, the segment reported $266 million, a 20.9% increase from 2010.
• The Engineered Products and Services segment reported $122 million in after-tax operating income for the quarter, a 7.96% increase from fourth-quarter 2010. For the year, the segment reported $539 million, a 29.88% increase from 2010.

Alcoa executives forecast worldwide aluminum demand to grow 7% in 2012, and expect to see a global aluminum industry deficit of 600,000 metric tons. Executives said that the company's current growth projection is more than what is needed to meet a predicted doubling of global aluminum demand before 2020. The company also expects to see global growth in the aerospace, automotive, commercial transportation, construction and packaging industries. Alcoa plans to close or curtail 531,000 metric tons, or 12%, of its smelting capacity, including a total of 291,000 metric tons at its facilities in Alcoa, Tennessee, and Rockdale, Texas. Capital spending is expected to total roughly $1.02 billion.

"Looking ahead, we anticipate incremental improvements in all of our markets, with the exception of commercial transportation in Europe, and building and construction in North America," McLane said in the conference call. "We also anticipate better quarter-over-quarter productivity gains."

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