Howmet Aerospace / Alcoa Inc. — 2013 Form 10-K summary
Entity and period: The supplied filing is Alcoa Inc.’s Form 10-K for the fiscal year ended December 31, 2013, filed February 13, 2014. It is not a Howmet Aerospace filing; Howmet appears as a product/brand within Alcoa’s engineered-products business. The filing includes fourth-quarter results, but reports primarily on a full-year basis. Dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
Alcoa operated across alumina, primary metals, global rolled products, and engineered products and solutions. Aluminum and alumina accounted for approximately 80% of revenue, leaving results exposed to aluminum prices, energy costs, and cyclical end markets. The company operated in 30 countries; the U.S. and Europe represented 51% and 26% of 2013 sales, respectively.
Financial performance and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Sales | $23,032 | $23,700 |
| Net income (loss) attributable to Alcoa | $(2,285) | $191 |
| Diluted earnings (loss) per share | $(2.14) | $0.18 |
| Cash from operations | $1,578 | $1,497 |
| Capital expenditures | $1,193 | $1,261 |
| Cash and cash equivalents at year-end | $1,437 | $1,861 |
| Total debt | $8,319 | $8,829 |
| Debt-to-capital ratio | 38.1% | Not stated here |
- Revenue fell 3%; the company cited lower aluminum prices and primary-metal volumes, partly offset by higher volumes in alumina, rolled products, and engineered products.
- Cost of goods sold was 83.7% of sales, versus 86.1% in 2012. The implied gross margin was approximately 16.3%, versus 13.9%.
- The net loss reflected, among other items, a $1,731 goodwill impairment, a $372 tax valuation-allowance charge, and significant charges related to legal matters and smelter restructuring. Cash operating performance remained positive.
- Operating cash flow less capital expenditures was approximately $385. Cash from operations included $462 of pension contributions.
- Year-end current assets were $6,969 and current liabilities $6,105, a current ratio of approximately 1.14. The company also reported $4,940 of revolving-credit capacity, with no borrowing under its $3,750 five-year facility at year-end.
- Alcoa reported $8,319 in debt and $1,437 in cash. Management said total debt declined $510 during the year.
Segment performance
- Alumina: ATOI (after-tax operating income) was $259, up from $90; productivity, currency, and alumina pricing changes supported improvement.
- Primary Metals: ATOI was a loss of $20, versus income of $309. Lower realized prices, reduced output, restructuring, and Saudi joint-venture start-up costs weighed on results.
- Global Rolled Products: ATOI was $252, down from $346, despite higher shipments; pricing, mix, and input costs pressured results.
- Engineered Products and Solutions: ATOI was $726, up from $612, supported by volume and productivity improvements.
- Total segment ATOI was $1,217, down from $1,357; 80% came from midstream and downstream operations.
Material changes versus the prior comparable period
- Alcoa moved from $191 of attributable net income in 2012 to a $2,285 attributable net loss in 2013. The main unusual drivers were goodwill impairment, tax valuation allowances, and the legal resolution charge.
- Fourth-quarter 2013 sales were $5,585 and attributable net loss was $2,339, compared with fourth-quarter 2012 sales of $5,898 and attributable net income of $242.
- Average realized aluminum price declined to $2,243 per metric ton from $2,327; the LME aluminum price averaged 9% lower year over year, according to management.
- Alcoa permanently shut or approved permanent shutdowns of capacity, including lines at Baie-Comeau and Massena East and the Fusina smelter; it also temporarily curtailed capacity in Brazil. The company had 655 kmt of idle smelting capacity at year-end.
- Debt declined, but cash fell by $424 during the year. Cash from operations rose 5%, while capital spending was $1,193.
Outlook, management commentary, risks, and contingencies
- 2014 outlook: Management projected 7% growth in global primary-aluminum consumption, with China forecast to grow 10%; alumina consumption was forecast to rise 9%, with supply slightly exceeding demand. Management expected a balanced aluminum market and improving conditions in several value-added end markets.
- Financial targets: Management aimed to generate operating cash flow greater than capital spending, achieve a debt-to-capital ratio of 30%–35%, and deliver incremental savings. 2014 capital expenditures were expected to be approximately $1,250. Management estimated a 2014 effective tax rate of approximately 45%.
- Capacity and investment: A review of a further 183 kmt of smelting capacity was expected to conclude in the first half of 2014. The Saudi integrated aluminum project was expected to bring its mine and refinery into production in 2014; total project investment was estimated at $10.8 billion, with Alcoa’s equity commitment approximately $1.1 billion.
- Credit and market risks: Moody’s had downgraded Alcoa’s long-term debt to Ba1, below investment grade; S&P and Fitch rated it BBB- with negative outlooks. Further downgrades could increase collateral requirements, financing costs, or restrict market access. Commodity prices, energy supply and cost, foreign exchange, demand, and competition remain significant risks.
- Legal resolution: In January 2014, Alcoa and its subsidiary resolved DOJ and SEC investigations related to the Alba matter. The settlements provided for $223 payable under the DOJ resolution and $161 payable to the SEC after a credit for a $14 forfeiture; the first installments were paid in January 2014, with remaining installments scheduled through 2018. The filing reports no DOJ case against Alcoa Inc. and no SEC finding that anyone at Alcoa Inc. knowingly engaged in the conduct.
- Other contingencies: The filing identifies unresolved Italian power-tariff claims with a stated reasonably possible loss range of $0–$97; Spanish tax assessments totaling $334; a Brazilian VAT assessment of $53; and environmental remediation reserves of $509. Outcomes and potential additional costs were uncertain. A $542 maximum potential guarantee related to Saudi project financing was also disclosed.
- Other risks and unusual items: Environmental obligations, pension funding, global operations and political risk, cybersecurity, union negotiations, and execution of major growth projects could affect results. The U.S. Steelworkers agreement covering about 6,100 employees was due to expire in May 2014. In January 2014, Alcoa also approved shutdown of the remaining Massena East potlines and expected $90–$110 of first-quarter restructuring charges.
Most important facts for investors to verify
- Confirm the filing entity and period: this is Alcoa Inc.’s FY2013 10-K, not a Howmet Aerospace filing or a standalone quarterly 10-K.
- Review the drivers and cash/noncash mix of the $2,285 attributable loss, especially the $1,731 goodwill impairment, $372 deferred-tax valuation charge, and legal charges.
- Assess whether operating cash flow, working capital, pension contributions, and planned capital spending support management’s 2014 cash-flow and leverage targets.
- Check debt maturities, the $575 convertible notes due in March 2014, expiring credit lines, and the effects of below-investment-grade Moody’s ratings on collateral and financing.
- Track the remaining smelter-capacity decisions, Saudi project ramp-up, and actual demand, price, energy-cost, and segment-margin performance against management’s outlook.
- Follow settlement payments and the status and exposure of unresolved tax, environmental, and other legal matters.