Alcoa 2012 Annual Report Download - page 65

In late 2011, management approved the permanent shutdown and demolition of the smelter located in Tennessee
(215 kmt-per-year) and two potlines (capacity of 76 kmt-per-year) at the smelter located in Rockdale, TX (remaining
capacity of 191 kmt-per-year composed of four potlines). This decision was made after a comprehensive strategic
analysis was performed to determine the best course of action for each facility. Factors leading to this decision were in
general focused on achieving sustained competitiveness and included, among others: lack of an economically viable,
long-term power solution; changed market fundamentals; cost competitiveness; required future capital investment; and
restart costs.
Also, at the end of 2011, management approved a partial or full curtailment of three European smelters as follows:
Portovesme, Italy (150 kmt-per-year); Avilés, Spain (46 kmt out of 93 kmt-per-year); and La Coruña, Spain (44 kmt
out of 87 kmt-per-year). These curtailments were completed by the end of 2012. The curtailment of the Portovesme
smelter may lead to the permanent closure of the facility, while the curtailments at the two smelters in Spain are
planned to be temporary. These actions were the result of uncompetitive energy positions, combined with rising
material costs and falling aluminum prices (mid-2011 to late 2011).
In December 2012, the Spanish Government issued a Ministerial Order that modified the interruptibility regime
previously in place in the Spanish power market. The interruptibility regime allows certain industrial customers who
are willing to be subject to temporary interruptions in the supply of power to sell interruption rights to the high voltage
transmission system operator. In January 2013, Alcoa applied for and was granted rights to sell interruption services
under the modified regime from its San Ciprian, Avilés, and La Coruña smelters in Spain. The commitment is taken for
a one-year period. Alcoa understands that the Spanish Government intends to notify the European Commission of the
modification in the interruptibility regime for review under European state aid rules. As a result of the modification to
the interruptibility regime, Alcoa has commenced the restart of a portion (25 kmt combined for Avilés and La Coruña)
of the capacity previously curtailed in the first half of 2012 in order to meet the requirements of the modified
interruptibility regime.
Sales—Sales for 2012 were $23,700 compared with sales of $24,951 in 2011, a decrease of $1,251, or 5%. The decline
was mainly the result of a drop in realized prices for aluminum and alumina, driven by lower London Metal Exchange
(LME) prices, unfavorable pricing in the midstream segment due to a decrease in metal prices, and unfavorable foreign
currency movements, mostly due to a weaker euro, somewhat offset by higher volumes in the midstream and
downstream segments and favorable product mix in the midstream segment.
Sales for 2011 were $24,951 compared with sales of $21,013 in 2010, an improvement of $3,938, or 19%. The increase
was primarily due to a rise in realized prices for alumina and aluminum, better pricing in the midstream segment, and
higher volumes in the Primary Metals segment and virtually all businesses in the midstream and downstream segments.
Cost of Goods Sold—COGS as a percentage of Sales was 86.4% in 2012 compared with 82.1% in 2011. The percentage
was negatively impacted by the previously mentioned lower realized prices in the upstream and midstream segments,
higher input costs, a net charge for adjustments to certain environmental reserves ($194), and a charge for a civil litigation
reserve ($85). These items were somewhat offset by net productivity improvements, net favorable foreign currency
movements due to a stronger U.S. dollar, and a change in LIFO adjustments from unfavorable to favorable, primarily due
to lower prices for alumina and metal and lower costs for calcined coke.
COGS as a percentage of Sales was 82.1% in 2011 compared with 81.7% in 2010. The percentage was negatively impacted
by higher energy and raw materials costs and net unfavorable foreign currency movements due to a weaker U.S. dollar,
mostly offset by the previously mentioned higher realized prices and net productivity improvements.
Selling, General Administrative, and Other Expenses—SG&A expenses were $997, or 4.2% of Sales, in 2012
compared with $1,027, or 4.1% of Sales, in 2011. The decline of $30 was mostly due to lower stock-based
compensation expense, a decrease in bad debt expense (see below), a decline in travel expense, and less spending
across various other expenses. These items were partially offset by higher pension costs, due to the recognition of
higher net actuarial losses, and increased professional expenses, due to consulting fees associated with productivity
initiatives and higher legal expenses.
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