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Alcoa's Third-Quarter Net Fell 43% on Lower Prices Robert Guy Matthews, Staff Reporter The Wall Street Journal, October 4, 2002

PITTSBURGH -- Alcoa Inc.'s profit fell 43% in the third quarter on lower aluminum prices and scaled-back production.

The company also cited continued weakness in the aerospace, industrial gas turbine and telecommunications industries.

The company on Friday reported net income of $193 million, or 23 cents a share, compared with $339 million, or 39 cents a share, a year earlier.

Alcoa took an after-tax charge of $23 million, or three cents a share, in the latest quarter related to the shutdown of production at the company's primary-smelting operations. Excluding the charge, profit for the third quarter came to $216 million, or 26 cents a share, in line with analysts' consensus estimate, according to a survey from Thomson First Call.

Revenue fell 5.2% to $5.22 billion from $5.51 billion.

"Despite lower aluminum prices and idle capacity, our alumina and primary-metals businesses performed well. These upstream businesses partially offset continued weakness in the aerospace, industrial gas turbine and telecommunications markets. We are looking beyond the challenging global economy, and are focused on managing those things that are in our control," Alcoa Chairman and Chief Executive Alain Belda said in a prepared statement.

Weak Prices, Soft Demand Hit Aluminum Sector
Alcoa's shares have been trading near 52-week lows, amid global overcapacity, which has sent prices to a near three-year low, and soft demand in some of its important markets. The price of aluminum, about 58 cents a pound, is near three-year lows with no short-term rebound in sight.

The problem is overcapacity, caused by the soft economy world-wide, and complicated by the fact that China, once a strong importer, is now a net exporter. In 2000, China imported 700,000 tons of aluminum. But in the first six months of the year, China has become a net exporter of 200,000 tons. At the same time, aluminum smelters have been restarting in North America and Brazil, exacerbating global overcapacity.

Also, some of Alcoa's important markets, aerospace and gas turbines, aren't expected to recover anytime soon, hurting profit, said Michael Gambardella, metals analyst for J.P. Morgan Securities Inc.

Still, he believes stocks of Alcoa and other aluminum makers are close to the bottom. "While we see more downside risk in the stocks following third-quarter earnings releases, we believe the evaluations could bottom after earnings expectations are reduced following third-quarter earnings results," Mr. Gambardella said.

One lingering concern among analysts is Alcoa's debt levels, which have risen with acquisitions by 10% in the first half of 2002 to $7.3 billion. Because of Alcoa's "aggressive debt levels," Standard & Poor's metals credit analyst Thomas Watters posted a negative outlook on the company's short-term credit. A negative outlook signifies a stronger chance of a reduction in credit rating.

In the third quarter, Alcoa completed its purchase of Ivex Packaging Corp. It also has announced that it intends to acquire Fairchild Fasteners from Fairchild Corp. Earlier this week, Alcoa offered cash for 3.5 million shares to control Elkem ASA, Norway's second-largest aluminum company.

But much of Alcoa's debt relates to large purchases in 2000 when the company bought Reynolds Metals Co. for $5.8 billion and Cordant Technologies for $2.9 billion.