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Alcoa Posts $223 Million Loss; Shares Drop More Than 10% Clare Ansberry, Staff Reporter The Wall Street Journal, January 9, 2003

Firm Plans Job Cuts, Overhaul as Glut Stifles Aluminum Prices

PITTSBURGH -- Alcoa Inc., struggling with "lingering weaknesses" in its key markets, posted an unexpectedly wide fourth-quarter net loss of $223 million in part because of costs of trimming 8,000 more jobs and selling a number of slow-growing businesses.

The magnitude of the loss helped send shares of Alcoa, the first of the Dow Jones Industrial Average components to report year-end earnings, down $2.53, or 10%, to $21.85 in 4 p.m. New York Stock Exchange composite trading.

The net loss amounted to 27 cents a share, compared with a loss of $142 million, or 17 cents a share, a year earlier, for which the world's largest aluminum maker reported its first quarterly loss in nearly a decade. The day before the earnings announcement, metals analysts still expected an improved quarter from a year earlier despite lower average aluminum prices. Instead, Alcoa hit Wall Street with a handful of items the company said it needed to accelerate cost-cutting initiatives to combat persistent weakness in certain markets, such as aerospace and turbines.

Alcoa said it was taking a charge of $221 million to cover costs associated with its planned sale of underperforming and nonstrategic operations in sectors such as specialty chemicals, packaging and automotive. The company said it plans to use the proceeds to reduce debt. The businesses targeted for sale generated about $1.3 billion in total revenue in 2002. Alcoa's total sales for the year were $20.26 billion, down nearly 10% from $22.50 billion a year earlier. Sales for the fourth quarter were down slightly to $5.06 billion from $5.1 billion.

The big aluminum maker also reported restructuring costs of $95 million to cut 6% of its work force, mainly at aerospace, automotive and industrial-gas-turbine units in Europe and South America, as well as at U.S. smelter operations. The company, which cut 10,000 jobs last year, had 127,000 employees at the end of 2002.

Excluding these items, which are considered part of ordinary operations under generally accepted accounting principles, the company said it earned 16 cents a share. That was well below Wall Street's expectations of 25 cents a share, excluding items, according to Thomson First Call. For the year, net income fell 54% to $420 million, or 49 cents a share, from $908 million, or $1.05 a share.

Prices world-wide for aluminum have remained at a relatively low 61 cents a pound throughout 2002, five cents less than the average 2001 price. Weak prices largely resulted from too much capacity in the market and the recent shift in China's status to net exporter, rather than net importer, of aluminum. That put more aluminum into other markets and caused a sizable buildup of inventories.

In the final three months of 2002, the London Metal Exchange reported inventories in the range of 1.24 million to 1.29 million tons. In the final three months of 2001, the range was 698,125 tons to 819,175 tons.

The price of aluminum did inch up one cent in December to 62 cents a pound, but that was not reflected in the company's fourth quarter results because of the one-month lag between the actual change in price and the impact of the change on aluminum makers. Nor is the slight increase considered a signal that prices will rebound significantly this year.

"Global manufacturing weakness has persisted longer than we anticipated," said Alain Belda, Alcoa's chairman and chief executive.

Lower prices affected all of Alcoa's businesses, some of which were already experiencing soft demand. Alcoa's aerospace-related business saw volume fall as troubled airline companies ordered fewer new planes. Likewise, the industrial gas-turbine business has been hurt as power companies cancel or delay investments, and as nonresidential construction remains soft.

Strengths in other markets, such as residential construction, automotive and consumer packaging, haven't been enough to offset the weakness elsewhere. Moreover, the housing and automotive markets aren't expected to be able to maintain the same growth rate as last year.

Analysts, while surprised at the charges and persistent weakness in key markets, said Alcoa was moving quickly to address the problems. "Management is well aware of the problem and trying to address it," says Wayne Atwell, metals analyst for Morgan Stanley Dean Witter. Such action is crucial because Mr. Atwell doesn't see much price improvement this year. Although the price of aluminum has been relatively flat, it is still too high to encourage producers to cut back capacity enough to strengthen prices, he says.