Business context and reporting period
The supplied filing is Alcoa Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2015—not a filing by Howmet Aerospace Inc. The results below therefore describe Alcoa, the registrant identified in the filing. Amounts are in millions of U.S. dollars unless noted.
Alcoa reported five segments: Alumina, Primary Metals, Global Rolled Products, Engineered Products and Solutions, and Transportation and Construction Solutions. The filing describes acquisitions, facility closures and a proposed separation into two public companies.
Financial results and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Sales | $5,573 | $6,239 | $17,289 | $17,529 |
| Income before taxes | $206 | $330 | $969 | $263 |
| Net income attributable to Alcoa | $44 | $149 | $379 | $109 |
| Diluted EPS | $0.02 | $0.12 | $0.26 | $0.09 |
| Cash provided from operations | Not separately stated | Not separately stated | $717 | $216 |
- Q3 cost of goods sold was 81.8% of sales, versus 78.6% a year earlier; nine-month COGS was 79.0% of sales, versus 80.8%.
- At September 30, cash and cash equivalents were $1,739. Total current assets were $8,592 and current liabilities $5,147.
- Debt comprised $50 in short-term borrowings, $136 of long-term debt due within one year, and $9,091 in long-term debt thereafter. Total liabilities were $21,896.
- Nine-month capital expenditures were $782. Cash used for investing was $603, and cash used for financing was $211. Cash declined $138 from year-end 2014 to $1,739.
- Common dividends were $0.03 per share in Q3 and $0.09 per share for the nine-month period.
Material changes versus prior comparable periods
- Q3 sales fell 11% and Alcoa-attributable income fell $105 year over year. Management attributed the earnings decline chiefly to lower realized aluminum prices, partly offset by favorable currency movements, productivity gains and lower restructuring charges.
- Nine-month sales declined 1%, while attributable income increased $270. Management cited favorable currency movements, productivity, lower restructuring charges and higher realized alumina prices; lower aluminum prices, taxes and unfavorable downstream price/product mix offset some gains.
- Average realized primary aluminum price fell to $1,901 per metric ton in Q3 from $2,538, and to $2,163 for nine months from $2,345. Aluminum product shipments were also lower year over year in both periods.
- Operating cash flow improved by $501 to $717 for nine months, principally on working-capital changes, lower pension contributions and higher operating results. Capital spending exceeded operating cash flow by $65 for the period.
- Segment after-tax operating income (ATOI) in Q3 was $212 for Alumina, negative $59 for Primary Metals, $62 for Global Rolled Products, $151 for Engineered Products and Solutions, and $44 for Transportation and Construction Solutions. Primary Metals weakened sharply; Alumina improved substantially. Comparisons reflect segment realignment and acquisitions.
- Alcoa issued 87 million shares to acquire RTI in July. The acquisition was noncash consideration and increased the weighted-average share count; acquired RTI contributed $127 in sales and a $7 after-tax operating loss through September 30.
Outlook, management commentary, risks and unusual items
- Alcoa targeted completion of its proposed separation into an Alumina/Primary Metals company and a company comprising the rolled, engineered-products and transportation/construction businesses in the second half of 2016. Completion was conditional, including board approval, tax treatment and SEC registration; Alcoa could modify or abandon the plan.
- Management expected commercial aerospace demand to remain strong, citing significant order backlog, and anticipated productivity improvements. It also flagged pricing pressure. Its segment outlook noted lower Q4 Primary Metals production and sales, continued can-sheet pricing pressure, and mixed transportation and construction market conditions.
- Alcoa continued capacity reviews and restructuring. It decided to curtail the remaining 887,000-ton-per-year capacity at the Suriname refinery and permanently close the 96,000-ton-per-year Poços de Caldas smelter and Australia’s Anglesea power station. Q3 restructuring and other charges were $66; nine-month charges were $460. Q3 charges included Suriname curtailment, layoffs, shutdown costs and a land-sale gain. Nine-month charges also included $161 associated with a Russian rolling-mill divestiture and related divestiture adjustments.
- Key risks include aluminum and energy prices, foreign exchange, execution and costs of the separation and acquisitions, restructuring outcomes, environmental remediation, and legal and tax disputes. The filing reported environmental remediation reserves of $558 at September 30.
- Contingencies include a Glencore/Lockheed Martin indemnity dispute with a stated reasonably possible loss range of $0–$76; Italian power-tariff recovery litigation with a $0–$97 reasonably possible range; and Spanish tax assessments totaling $268. Management said outcomes could not be reasonably predicted for these matters.
- The interim financial statements were reviewed by the independent auditor, not audited; the auditor reported no material modifications needed based on its review.
Important facts for investors to verify
- Confirm the filing issuer: the text is Alcoa Inc., despite the request metadata naming Howmet Aerospace Inc.
- Review whether the proposed 2016 separation’s conditions, timing, tax treatment and expected costs were ultimately met.
- Assess exposure to falling aluminum prices and regional premiums, lower Primary Metals results, and the economics of continuing capacity and closure decisions.
- Track acquisition integration and returns from RTI, TITAL and Firth Rixson, including RTI’s assumed convertible debt and anticipated synergies.
- Monitor cash conversion, working-capital needs, capital spending, debt maturities and liquidity, including the $200 gas-supply prepayment scheduled for January 2016.
- Follow developments in the disclosed litigation, tax assessments, environmental reserves and other contingencies; amounts and outcomes may change.