Business context and reporting period
This is Alcoa Inc.’s unaudited Form 10-Q for the three months ended March 31, 2016—not a filing under the Howmet Aerospace name. Alcoa reported five segments and was planning a separation into upstream and value-add companies, targeted for the second half of 2016, subject to approvals and other conditions. Unless stated otherwise, figures are in U.S. dollars millions.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Sales | $4,947 | $5,819; down 15% |
| Income before taxes | $41 | $481 |
| Net income attributable to Alcoa | $16 | $195 |
| Net income (loss) attributable to common shareholders | $(2); diluted EPS $0.00 | $178; diluted EPS $0.14 |
| Cost of goods sold as a share of sales | 81.7%; implied gross margin 18.3% | 76.4%; implied gross margin 23.6% |
| Cash used for operations | $(430) | $(175) |
| Capital expenditures | $251 | $247 |
| Cash and cash equivalents at quarter-end | $1,384 | $1,919 at December 31, 2015 |
| Total current assets / current liabilities | $7,665 / $5,555; current ratio about 1.38 | $7,953 / $5,211 at December 31, 2015 |
| Debt, including short-term borrowings | About $9.1 billion | About $9.1 billion at December 31, 2015 |
Cash decreased $535 during the quarter. Operating cash use reflected weak earnings and working-capital movements; investing cash use was only $1, including proceeds from asset and insurance-contract sales. Financing cash use was $107. The effective tax rate was 73.2%, versus 47.0% a year earlier.
Material changes and segment performance
- Management attributed the $179 decline in Alcoa-attributable net income principally to lower realized aluminum and alumina prices, partly offset by productivity gains and lower restructuring charges. Primary aluminum realized price fell to $1,793 per metric ton from $2,420.
- Total segment after-tax operating income (ATOI) fell to $291 from $656. Alumina ATOI declined to $8 from $221 and Primary Metals to $14 from $187; Global Rolled Products rose to $68 from $54, Engineered Products and Solutions to $162 from $156, and Transportation and Construction Solutions to $39 from $38.
- Restructuring and other charges were $93, versus $177. Q1 2016 charges included the Warrick smelter closure, layoffs, and Point Comfort refinery and Wenatchee smelter curtailments. Approximately 320 of 560 employees associated with 2016 programs had been separated by quarter-end.
- Cash from operations deteriorated by $255 year over year. Cash balances also reflected $57 of shareholder dividends and $50 of distributions to noncontrolling interests.
- Long-term debt due within one year rose to $772 from $21, principally because $750 of 5.55% notes maturing in February 2017 was reclassified as current. Total reported debt remained approximately $9.1 billion.
Outlook, management commentary, and risks
- The company expected Q2 alumina production to be down 16% year over year because of Suralco and Point Comfort curtailments; aluminum production was expected to be about 100 kmt lower due to announced closures and curtailments. Management also anticipated productivity improvements.
- Management described mixed end-market conditions: commercial aerospace remained strong but next-generation platform ramp-ups were slower; oil and gas, some industrial gas turbine, and commercial transportation markets were weak. Packaging pricing pressure and lower aerospace and heavy-truck demand were also noted.
- The planned separation was targeted for H2 2016, but could be delayed, changed, or abandoned. Alcoa recorded $18 of separation-related expenses in Q1. Moody’s changed its outlook to negative; Fitch changed its outlook to evolving; S&P maintained a stable outlook.
- Key risks include aluminum and alumina prices and premiums, foreign exchange and energy costs, global economic and end-market conditions, execution of restructuring and separation plans, and environmental, legal, tax, and other contingencies.
- Environmental remediation reserves were $605 at March 31, 2016. Disclosed unresolved matters included a Spanish tax assessment totaling $273, an Italian energy-tariff dispute with a reasonably possible loss range of $0–$97, and other tax and litigation matters for which outcomes could not be reasonably predicted. The filing also described Alcoa’s Saudi joint-venture debt guarantees.
- Alcoa agreed to sell Remmele Medical for $102; the sale closed April 29, 2016. It also completed the sale of its 20% DBNGP interest in April for $154. These transactions followed quarter-end.
Important facts for investors to verify
- Confirm the issuer and period: this supplied filing is Alcoa Inc.’s Q1 2016 10-Q, not a Howmet Aerospace filing.
- Review the price and volume drivers behind the sharp decline in upstream earnings, and whether reported productivity gains offset them.
- Assess operating cash burn, working-capital needs, available credit facilities, debt maturities, and the effect of credit-rating outlook changes.
- Track execution, costs, approvals, tax treatment, and timing of the proposed separation, along with the status of facility closures and curtailments.
- Update the potential exposure and timing of environmental remediation, tax disputes, litigation, and joint-venture guarantees.