NEW YORK-(BUSINESS WIRE)-Alcoa (NYSE:AA) reported strong operational performance in second quarter 2013 offset by special items primarily for restructuring and a legacy legal matter. As a result, Alcoa reported a net loss of $119 million, or $0.11 per share, in second quarter 2013, which includes $195 million of special items.
Excluding the impact of special items, net income was $76 million, or $0.07 per share, driven by productivity gains across all business segments and record performance in Engineered Products and Solutions. In the first half of 2013, Alcoas value-add businesses accounted for 57 percent of total revenues and 80 percent of segment after-tax operating income.
The Company reported solid second quarter 2013 revenue of $5.8 billion, positive free cash flow, and lower debt as strong end-market demand mitigated an 8 percent sequential decline in London Metal Exchange (LME) cash price.
Our businesses showed remarkable operating performance in the quarter with solid free cash flow, said Klaus Kleinfeld, Alcoa chairman and CEO. In our value-add businesses we reached another milestone with record profitability in our downstream business while acting decisively to defy the headwinds of falling metal prices in our upstream businesses. We improved our competitive position by actively restructuring, curtailing, and closing facilities and made progress addressing legacy legal issues.
Second quarter 2013 net loss of $119 million, or $0.11 per share, compares to net income of $149 million, or $0.13 per share, in first quarter 2013, and a net loss of $2 million, or $0.00 per share, in second quarter 2012.
Excluding special items, second quarter 2013 net income of $76 million, or $0.07 per share, compares to $121 million, or $0.11 per share, in first quarter 2013 and $61 million, or $0.06 per share, in second quarter 2012. The $45 million sequential decline was largely due to lower LME prices. Lower prices were partially offset by higher volumes, particularly in the midstream business, productivity savings, and the favorable impact of foreign exchange rates.
In second quarter 2013, Alcoas net loss included $42 million in charges for the closing of the two Soderberg potlines at its Baie-Comeau smelter in Québec, which is part of the 460,000 metric tons of smelting capacity Alcoa has said is under review. The remaining previously announced charges associated with the closure will be recognized in future periods.
In addition to the smelting capacity review, Alcoa also announced its intention to permanently close its Fusina smelter in Italy and recorded a $34 million charge. A $37 million charge was taken for restructuring across all business segments, including asset retirements of previously idled structures. Alcoa also recorded a charge of $62 million in connection with settlement negotiations related to the government investigation of the Alba matter (see Alba Update below).
Continued Growth Across End Markets
Alcoa continues to project 7 percent global aluminum demand growth in 2013 and essentially balanced alumina and aluminum markets.
Alcoa projects global growth this year across the aerospace (9-10 percent), automotive (1-4 percent), commercial transportation (3-8 percent), packaging (1-2 percent), building and construction (4-5 percent), and industrial gas turbine (3-5 percent) end markets.
Strong Execution Against Strategic Goals
Alcoa made investments to capitalize on value-added growth opportunities and took definitive actions in second quarter 2013 to improve its position on the aluminum cost curve.
As previously announced, to serve growing demand for the Companys third generation aluminum-lithium alloys, Alcoa completed the expansion of aluminum-lithium capacity at its Kitts Green facility in the United Kingdom and also expanded capacity by 30 percent at the Alcoa Technical Center outside Pittsburgh. Construction is progressing on the $90 million greenfield state-of-the-art aluminum-lithium alloy casting facility in Lafayette, Indiana. It is scheduled to be completed and online by the end of 2014. Alcoa projects its aluminum-lithium revenues will quadruple over the next six years to nearly $200 million.
Alcoa announced a $275 million North American investment over the next three years to expand and convert capacity at its Alcoa, Tenn., rolling mill to support the growing demand for aluminum sheet for automotive production. Alcoa previously announced a $300 million expansion of its Davenport, Iowa plant, which is set to be completed by the end of this year.
The Company announced the review of 460,000 metric tons of smelting capacity for possible curtailment due to low metal prices and to maintain cost competitiveness. The review equates to 11 percent of Alcoas global smelting capacity. As part of that review, Alcoa announced it would permanently close the two Soderberg potlines at its Baie-Comeau smelter in Québec by the end of third quarter 2013.
The two lines are among Alcoas highest-cost smelting capacity and represent 105,000 metric tons of capacity per year. In addition to the review, Alcoa announced its intent to permanently close its Fusina smelter in Italy, representing 44,000 metric tons of smelting capacity. These two closures will reduce the Companys global smelting capacity to approximately 4.1 million metric tons with 13 percent, or 523,000 metric tons, of smelting capacity idled.
Strong Execution Against 2013 Financial Targets
Alcoa remains committed to being free cash flow positive in 2013. In second quarter 2013, the Company generated $228 million in free cash flow by successfully executing against its annual financial and operational targets to maximize profitability and generate cash. Days working capital, which ultimately equates to cash, was a second quarter record low of 27 days, 6 days lower than second quarter 2012. This milestone was the 15th successive year-over-year improvement and equates to approximately $400 million in cash.
In the first half of 2013, Alcoa achieved $539 million in productivity savings across all business segments against a $750 million annual target; managed growth capital expenditures of $203 million against a $550 million annual plan and controlled sustaining capital expenditures of $318 million against a $1.0 billion annual plan. Progress and expenditures on the Saudi Arabia joint venture project were on track with $75 million year-to-date invested against a $350 million annual plan; and Alcoas debt-to-capital ratio stood at 34.5 percent, 20 basis points lower than first quarter 2013 and 160 basis points lower than second quarter 2012. Net debt-to-capital stood at 31.1 percent.
Alcoa ended the quarter with cash on hand of $1.2 billion and reduced debt by $566 million from first quarter 2013.
Engineered Products and Solutions
After-tax operating income (ATOI) in the second quarter was $193 million, up from $173 million in first quarter 2013, a 12 percent improvement, and up 23 percent from $157 million in the second quarter of 2012. Sequentially, favorable productivity and higher volumes across all market segments drove the improvement. Innovation continues to drive share gains across all markets. This segment reported a record quarterly adjusted EBITDA margin of 22.2 percent, compared to 20.9 percent and 19.2 percent, respectively, for first quarter 2013 and the same quarter last year.
Global Rolled Products
ATOI in the second quarter was $79 million compared to $81 million in first quarter 2013 and $78 million in second quarter 2012. Sequentially, lower metal prices were largely offset by strong demand from the aerospace, automotive, and packaging businesses. Adjusted EBITDA per metric ton decreased to $322 from $385 in first quarter 2013. This segment reported its best second quarter ever in days working capital, which improved by 7 days compared with second quarter 2012.
ATOI in the second quarter was $64 million up from $58 million in first quarter 2013, and up from $23 million in second quarter 2012. Sequentially, the increase was driven by relatively higher Alumina Price Index-based pricing, a favorable impact from foreign exchange rates, and strong productivity savings, partially offset by lower LME prices. Strong performance across the business also offset increased costs in mining due to the Myara crusher move in Australia and an increase in bauxite costs in Suriname. Adjusted EBITDA per metric ton was $47 up from $44 in first quarter 2013 and up from $31 in second quarter 2012. This segment reported its best ever days working capital in second quarter 2013. It improved by 12 days compared with second quarter 2012.
ATOI in the second quarter was a negative $32 million compared to positive ATOI of $39 million in first quarter 2013 and negative ATOI of $3 million in second quarter 2012. The sequential decline was driven by lower LME prices and higher costs, including the previously announced maintenance costs tied to power plant outages in Australia and the U.S., partially offset by favorable mix, productivity gains, and a favorable impact from foreign exchange rates. Third-party realized price in the second quarter was $2,237 per metric ton, down 7 percent sequentially and 4 percent lower than second quarter 2012. Adjusted EBITDA per metric ton decreased to $88 from $205 in first quarter 2013.
As previously disclosed, over five years ago, the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) commenced investigations of alleged corrupt payments in connection with contracts for the sale of alumina to Alba.
In the past year Alcoa has been seeking settlements of both investigations. During the second quarter of 2013, Alcoa proposed to settle the DOJ matter by offering a cash payment of $103 million and has recorded a charge of $103 million ($62 million after non-controlling interest). There is currently the potential of an additional possible charge of up to approximately $200 million to settle the DOJ matter. Settlement negotiations are continuing. Based on negotiations to date, Alcoa expects any such settlement will be paid over several years. Alcoa has also exchanged settlement offers with the SEC. However, the SEC staff has rejected Alcoas most recent offer of $60 million and no charge has been recorded. Alcoa expects that any resolution through settlement with the SEC would be material to results of operations for the relevant fiscal period.
Although Alcoa seeks to resolve the Alba matter with the DOJ and the SEC through settlements, there can be no assurance that settlements will be reached. If settlements cannot be reached, Alcoa will proceed to trial. Under those circumstances, the final outcome cannot be predicted and there can be no assurance that it would not have a material adverse effect on Alcoa. If settlements with both the DOJ and the SEC are reached, based on an agreement between Alcoa and Alumina Limited, Alcoas $62 million after non-controlling interest share of the second quarter $103 million charge recorded with respect to the DOJ matter would be approximately $25 million higher.