Filing identity and reporting period
Important issuer mismatch: The supplied filing is Alcoa Inc.’s Form 10-Q for the quarter and six months ended June 30, 2011. It is not a filing by Howmet Aerospace Inc.; the filing’s financial information should not be attributed to Howmet without verifying the issuer and corporate history.
Amounts are in millions of dollars except per-share data, shipment volumes, and prices. The interim statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Sales | $6,585 | $5,187 | $12,543 | $10,074 |
| Income from continuing operations before tax | $517 | $228 | $1,022 | $140 |
| Net income (loss) attributable to Alcoa | $322 | $136 | $630 | $(65) |
| Diluted EPS, net income (loss) | $0.28 | $0.13 | $0.55 | $(0.06) |
| Cash provided from operations | — | $562 | $499 |
- Sales increased 27% in Q2 and 25% for the six-month period. Management attributed the gains mainly to higher alumina and aluminum realized prices and stronger volumes.
- Cost of goods sold was 79.7% of sales in Q2 and 79.4% for the first half, versus 81.2% and 81.6% in the comparable 2010 periods. The implied gross margins were 20.3% and 20.6%, respectively, compared with 18.8% and 18.4%.
- Segment after-tax operating income for Q2 was $186 Alumina, $201 Primary Metals, $99 Flat-Rolled Products, and $149 Engineered Products and Solutions; total segment ATOI was $635. Q2 segment ATOI was $381 in 2010. The first-half totals were $1,190 versus $687.
- Operating cash flow rose to $562 from $499. Capital expenditures were $476; operating cash flow less capital expenditures was approximately $86, a simple derived measure. Working-capital outflows, including inventory investment, constrained cash generation.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $1,260, current assets $7,868, and current liabilities $5,800. The current ratio was approximately 1.36, calculated from reported balances.
- Reported borrowings totaled approximately $9,348: $65 short-term borrowings, $510 long-term debt due within one year, and $8,773 long-term debt. This compares with approximately $9,165 at December 31, 2010. Cash less reported borrowings was approximately $(8,088).
- Cash declined $283 during the first half to $1,260. Investing activities used $902, including $476 of capital expenditures, $240 for the fastener acquisition, and $199 of investment additions. Financing activities provided $40.
- Alcoa issued $1,250 of 5.40% notes due 2021 and used proceeds in part to retire debt. Early retirement of notes generated a net $41 interest expense charge, including tender premiums partly offset by a gain on terminated interest-rate swaps.
- Equity increased to $19,369 from $17,086 at year-end 2010. The company issued $600 of common shares to fund U.S. pension plans.
Material changes and management commentary
- Q2 net income attributable to Alcoa more than doubled year over year; first-half results moved from a loss to a profit. Higher realized metal prices and volumes were partly offset by rising input costs, unfavorable currency movements, and higher interest expense.
- Alcoa acquired TransDigm’s aerospace fastener business for $240 in March 2011. The acquired business had 2010 sales of $61 and was included in Engineered Products and Solutions. Purchase-price allocation remained preliminary.
- Management expected third-quarter alumina production to rise by 85 kmt and Primary Metals production by 30 kmt as capacity restarts continued. It expected fuel-oil and caustic inflation, as well as higher energy and coke/pitch costs, to persist. Segment outlook also noted strong aerospace and commercial transportation demand, seasonal shutdown effects, and a potential slowdown in Chinese demand growth.
- Management reported that credit-rating outlooks had shifted from negative to stable at S&P, Moody’s, and Fitch, while the stated long-term ratings remained investment grade.
Risks, contingencies and unusual items
- Alcoa recorded $34 of Q2 restructuring and other charges, including a $20 charge related to litigation over its former St. Croix refinery and employee layoffs. First-half charges were $40, versus $217 in the prior-year period, which included major asset impairments and shutdown costs.
- The St. Croix court award resulted in a $20 charge; Alcoa appealed and the plaintiffs cross-appealed. The filing also describes the Alba fraud/RICO lawsuit and DOJ investigation; Alcoa said it could not predict the outcome or estimate a reasonably possible loss.
- For the Italian electricity-tariff state-aid matter, Alcoa estimated a potential repayment of $300–$500, with timing uncertain, after having recorded a $250 charge in 2009. The filing also describes a separate Spanish tariff investigation, with potential pretax impact estimated at approximately $100 if adverse.
- Environmental remediation reserves were $332 at June 30. The filing notes that final regulatory decisions at certain sites could require additional reserves; at the Grasse River site, alternatives could involve an additional estimated $20–$100.
- Alcoa’s Saudi Arabia joint venture financing included guarantees of $1,004, with additional potential funding commitments. The filing also discloses significant project and counterparty exposures associated with Brazilian hydroelectric projects and an Australian gas pipeline investment.
- Commodity, energy, currency, interest-rate, and market risks remain material. Derivative liabilities measured at fair value totaled $904, including $824 classified as Level 3; the filing highlights estimation uncertainty in long-dated power-related contracts.
Key facts for investors to verify
- Confirm the issuer: this is an Alcoa Inc. 2011 10-Q, not a Howmet Aerospace Inc. filing.
- Assess whether revenue and profit growth was sustained after metal-price increases, and monitor the effect of energy, raw-material, and currency costs on margins.
- Review cash conversion and working-capital needs, especially inventory growth, capital spending, and investment commitments.
- Track the outcome and cash timing of the Italian tariff recovery, St. Croix litigation, Alba investigation, and environmental matters.
- Verify acquisition accounting, debt maturities and refinancing costs, and the scale of guarantees and joint-venture funding obligations.