Business context and reporting period
Entity mismatch: The supplied filing is Alcoa Inc.’s Form 10-Q for the quarter ended September 30, 2012, not a filing by Howmet Aerospace Inc. The financial information below therefore describes Alcoa and its subsidiaries. Figures are in millions of U.S. dollars unless stated otherwise.
Alcoa reported results for the third quarter and first nine months of 2012. The interim statements are unaudited; the independent accountant’s review did not express an audit opinion.
Financial results and condition
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Sales | $5,833 | $6,419 | $17,802 | $18,962 |
| Net income (loss) attributable to Alcoa | $(143) | $172 | $(51) | $802 |
| Diluted EPS | $(0.13) | $0.15 | $(0.05) | $0.71 |
| Cash provided from operations | Not separately presented | $564 | $1,051 |
- Margins: Cost of goods sold was 90.3% of sales in Q3 and 87.2% for the nine-month period, versus 82.4% and 80.4%, respectively, in 2011. The filing attributes deterioration chiefly to lower realized prices, higher input costs, environmental reserve adjustments and litigation charges.
- Cash flow and investment: Nine-month capital expenditures were $863. Cash and cash equivalents fell to $1,432 at September 30, from $1,939 at year-end 2011; net cash decreased $507. The company reported $224 of restricted cash separately.
- Liquidity and debt: Current assets were $7,775 and current liabilities $6,531. Debt-related balance-sheet lines included $591 short-term borrowings, $43 commercial paper, $540 long-term debt due within one year, and $8,350 long-term debt. Cash was lower than year-end while short-term borrowings increased.
- Dividends: Common dividends paid were $0.03 per share in Q3 and $0.09 per share for the nine-month period, unchanged from the comparable 2011 periods.
Material changes versus prior periods
- Q3 sales declined 9%; nine-month sales declined 6%. Alcoa cited lower LME-driven aluminum and alumina prices, unfavorable midstream pricing and foreign-exchange movements, partly offset by higher shipments in certain downstream businesses.
- Alcoa moved from profit to loss: Q3 results attributable to Alcoa declined by $315 year over year; nine-month results declined by $853 on the consolidated attributable-income figures (the MD&A describes an $858 decline in continuing-operations income).
- Segment after-tax operating income (ATOI) fell to $235 in Q3 from $462 and to $806 for nine months from $1,652. Global Rolled Products and Engineered Products and Solutions improved ATOI in both periods; Alumina and Primary Metals declined sharply.
- Cash from operations decreased $487 for nine months, principally reflecting lower operating results and $298 of additional pension contributions, partly offset by improved working-capital cash outflow and higher noncurrent-liability cash inflows.
- Environmental remediation reserves rose to $535 at September 30 from $347 at year-end 2011. The quarter’s increase included a $128 charge for the proposed Massena West remedy.
Outlook, commentary, risks and unusual items
- Outlook: Management expected the Tapoco hydroelectric project sale for $600 cash, subject to adjustments and regulatory approvals, to close by year-end 2012; a significant gain was expected. The filing does not provide a clear numerical company-wide earnings or revenue forecast.
- Alcoa expected the Portovesme smelter in Italy to be fully curtailed by year-end 2012; curtailments were expected to reduce Primary Metals ATOI by about $15 in Q4. Additional restructuring charges were considered likely upon full curtailment.
- Segment commentary anticipated continued productivity improvements, but noted potential weakness in industrial products, building and construction, and commercial transportation markets; aerospace and automotive were expected to remain strong. Alumina shipments were shifting partly from LME-linked contracts to index or spot pricing.
- Alba litigation: A settlement was reached October 9, 2012, after quarter-end. Alcoa recorded $45 in Q2 and an additional $40 in Q3; the agreement required $85 in total payments, with $42.5 paid in October 2012 and $42.5 due October 9, 2013. DOJ and SEC investigations remained ongoing; Alcoa said any settlement could be material and it could not estimate a loss range.
- Italian electricity state-aid recovery: The Italian Government requested $310, with five quarterly installments of $62 planned beginning October 31, 2012; acceleration or lump-sum payment remained possible. Alcoa’s reserve was $204, with a stated reasonably possible loss range of $204 to $375.
- Other contingencies: The filing describes environmental, litigation and regulatory exposures, including an estimated $90 pretax potential impact from an unfavorable Spanish electricity-tariff decision. Environmental reserve estimates may change as remedies are finalized. The Massena West EPA proposal could require further reserve changes.
- Cybersecurity: Alcoa disclosed a third-quarter systems breach involving removal of information from company servers. It did not believe the known theft was material, but said the effects could become clearer over time.
- Market risks: Key exposures include aluminum and alumina prices, energy and raw-material costs, foreign exchange, pension assumptions, legal and environmental outcomes, and global economic and end-market conditions.
Important facts for investors to verify
- Confirm the intended issuer: this source is Alcoa Inc., not Howmet Aerospace Inc.
- Review the status and terms of the DOJ and SEC investigations, including any settlement, penalties or related reserve reallocation.
- Track payment timing and final exposure for the Italian state-aid recovery, and the outcome of related appeals.
- Verify completion and proceeds of the Tapoco sale, including any adjustments and the gain recognized.
- Monitor environmental reserve revisions, particularly Massena West, and cash requirements for remediation and pension contributions.
- Assess the effects of smelter curtailments, aluminum and alumina pricing, and the stated end-market outlook on segment profitability and liquidity.