Filing summary
Entity and period: The supplied filing is Alcoa Inc.’s Form 10-Q for the quarter and six months ended June 30, 2012—not a filing by Howmet Aerospace Inc. The interim financial statements are unaudited.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Sales | $5.963B | $6.585B | $11.969B | $12.543B |
| Net income (loss) attributable to Alcoa | $(2)M | $322M | $92M | $630M |
| Diluted EPS attributable to Alcoa | Reported as — | $0.28 | $0.08 | $0.55 |
| Cash provided from operations | — | $301M | $562M |
- Sales declined 9% in Q2 and 5% for the first half. Management attributed the decreases primarily to lower aluminum and alumina realized prices, lower LME prices, and unfavorable currency movements; higher midstream and downstream volumes partly offset the declines.
- Cost of goods sold was 86.4% of sales in Q2 and 85.7% for the first half, versus 79.7% and 79.4% in the comparable 2011 periods. Lower realized prices, higher input costs, litigation and environmental reserve charges weighed on the ratio; productivity, currency and LIFO effects provided offsets.
- Segment after-tax operating income (ATOI) totaled $275M in Q2 versus $635M a year earlier, and $571M for the first half versus $1.190B. Q2 ATOI was $23M in Alumina, $(3)M in Primary Metals, $95M in Global Rolled Products and $160M in Engineered Products and Solutions.
- Cash from operations fell by $261M year over year for the first half, principally due to lower operating results and $352M of pension contributions. Capital expenditures were $561M; cash used for investing activities was $704M.
Balance sheet and liquidity
- At June 30, cash and cash equivalents were $1.712B, current assets $7.767B and current liabilities $6.151B.
- Debt, including short-term borrowings, commercial paper and current maturities, totaled approximately $9.542B, compared with approximately $9.371B at December 31, 2011. Short-term borrowings rose to $559M from $62M.
- Alcoa reported $301M of operating cash flow against $561M of capital expenditures for the first half. Cash declined by $227M from year-end to $1.712B.
- Common dividends remained $0.03 per share per quarter.
Material changes, outlook and key risks
- Profitability deteriorated materially year over year, mainly reflecting weaker metal and alumina pricing and higher input costs. Interest expense declined, partly because the prior-year period included a charge related to early debt retirement.
- Q2 restructuring and other charges were $15M; first-half charges were $25M. The filing also identifies a $45M Q2 litigation charge for the Alba matter and $51M of environmental reserve increases, partly offset by a $30M reserve reduction for the Sherwin site.
- Alcoa agreed to sell the Tapoco hydroelectric project for $600M cash, subject to adjustments and regulatory approvals. The filing does not report completion of the sale.
- Management expected Alumina production reductions to continue, and noted an approximately $10M additional Q3 ATOI impact from a Massena West cast-house fire in Primary Metals and approximately $5M in Engineered Products and Solutions. The filing gives segment-level expectations, but no consolidated earnings or revenue guidance.
- Alcoa expected to begin paying Italy’s $310M net electricity-tariff recovery request in five quarterly installments of $62M starting in Q4 2012; payment acceleration or a lump sum remained possible. The recorded reserve was $197M, with a disclosed reasonably possible range of $197M–$375M.
- Alba litigation and related DOJ and SEC investigations remained unresolved. Alcoa recorded a $45M charge based on its proposed cash settlement and disclosed up to $75M of additional reasonably possible charge; it said a government settlement could be material and it could not estimate the range of loss for those investigations.
- Other significant uncertainties include environmental remediation (including the Grasse River site), Italian and Spanish power-related matters, aluminum and energy prices, raw-material costs, currency movements, pension funding, and global market conditions. Management expected MAP-21 to reduce minimum pension funding estimates by $100M–$130M in 2012 and $225M–$250M in 2013.
Most important facts to verify
- Confirm the intended issuer: this filing is for Alcoa Inc., not Howmet Aerospace Inc.
- Review the Alba case and government investigations, including the recorded charge, potential additional exposure, and settlement status.
- Track the Italian tariff recovery payments, reserve, and possible acceleration of the payment schedule.
- Assess whether operating cash generation can support capital spending, pension contributions, debt maturities and other commitments.
- Verify the status and proceeds of the proposed Tapoco sale, and monitor reserve developments for environmental matters.