The loss in the fourth quarter of 2002 included restructuring charges, goodwill impairment and losses on divestitures totaling $258 million. (See attached schedule.) Income from continuing operations was $184 million or $0.22 per diluted share in the first quarter of 2002.
"We are focused on managing what is under our control in a challenging business environment," said Alain Belda, Chairman and CEO of Alcoa. "Despite significantly higher energy prices which offset more favorable metal prices, we achieved solid cost savings results from the restructuring undertaken over the last two years as well as synergies from acquired businesses. Every segment of the business demonstrated improved profitability except for Packaging and Consumer, which experienced typical seasonal declines. Given the uncertain economic and geopolitical outlook today, we will keep our focus on controlling costs, improving productivity, and building closer connections to our customers."
The company achieved $52 million in savings in the quarter. Consistent with Alcoa's approach since its first cost challenge in 1998, the savings number includes the effect of higher benefit costs, but excludes changes in energy prices due to volatility. Energy costs in the first quarter of 2003 were $75 million higher than the fourth quarter 2002 and $110 million higher than first quarter 2002. Benefit costs were $25 million higher than the previous quarter.
The cost savings were driven in large part by accelerating the benefits of prior years' restructurings and the continued implementation of the Alcoa Business System. Despite higher energy and raw material costs, the company's margin improved 110 basis points to 20.3% of sales in the quarter. Alcoa has now achieved $808 million toward its $1 billion cost savings goal by the end of 2003 and remains solidly on track to meet that challenge.
Sales were $5.11 billion up from $5.06 billion in the fourth quarter of last year - and up 4% from $4.9 billion in the first quarter of 2002. Sequentially, higher upstream pricing and the inclusion of Fairchild Fasteners revenues offset seasonal declines in the packaging and consumer markets. While the aerospace, industrial gas turbine and commercial building markets remain soft, the company benefited from aggressive cost cutting in businesses serving those markets. Automotive markets remained strong in the quarter while residential construction weakened due to severe winter weather in the U.S.
Acquisitions and Divestitures
Fairchild Fasteners, a part of Alcoa Fastening Systems since December 2002, has already achieved $19 million in annualized synergies. These savings are excluded from the $1 billion cost challenge. Alcoa continues to pursue the divestiture of non-core businesses announced earlier this year, and expects to use proceeds from those sales to pay down debt.
Alcoa continues to strengthen its performance by developing innovative products that add value for its customers. Introduced last summer, Reynolds Wrap(R) Release(R), an innovative new non-stick foil, has now established a strong presence in the North American market. Almost five million households throughout the United States have already tried Reynolds Wrap(R) Release(R) and almost 50% of these consumers have plans to come back for more -- twice the number of consumers who typically make a repeat purchase of a new product in this market.
Alcoa Dura-Bright(R) wheels continue to gain acceptance in the market and are on track to triple sales from the previous year. Dura-Bright(R) wheels have been used primarily in transit bus and motor home applications, and are now being rapidly adopted in trucks and trailers. They were named as one of the top 50 new products for 2002 by Heavy Duty Trucking magazine.
Alcoa was also selected to supply metallic solutions for regional and business jets to Bombardier.
Accounting Change and Other Items
In the first quarter of 2003, Alcoa adopted Financial Accounting Standard No. 143, "Accounting for Asset Retirement Obligations." The cumulative effect of adopting this standard was a one-time, non-cash charge of $47 million. Including this charge, Alcoa's net income for the quarter was $151 million. Net income in the first quarter of 2002 included a one time, non-cash gain of $34 million upon adoption of FAS No. 142.
Sequentially, the negative impact of foreign currency translation and lower non-operating income were partially offset by higher equity earnings.
Alcoa is the world's leading producer of primary aluminum, fabricated aluminum and alumina, and is active in all major aspects of the industry. Alcoa serves the aerospace, automotive, packaging, building and construction, commercial transportation and industrial markets, bringing design, engineering, production and other capabilities of Alcoa's businesses to customers.