Filing summary
Entity and period: The supplied filing is Alcoa Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2009, filed October 23, 2009. This does not match the request metadata identifying Howmet Aerospace Inc.; the filing itself reports Alcoa’s consolidated results and includes Howmet only in a legal proceeding.
Financial performance
Amounts are in millions of dollars except per-share data, shipment volumes, and prices.
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Sales | $4,615 | $6,970 | $13,006 | $21,213 |
| Income (loss) from continuing operations attributable to Alcoa common shareholders | $73 | $306 | $(719) | $1,158 |
| Net income (loss) attributable to Alcoa | $77 | $268 | $(874) | $1,117 |
| Diluted EPS | $0.08 | $0.33 | $(0.95) | $1.35 |
| Cash provided from operations | Not separately stated | Not separately stated | $241 | $626 |
- Sales fell 34% in the quarter and 39% year to date, driven chiefly by lower realized alumina and aluminum prices and weak downstream demand.
- Cost of goods sold was 84.2% of sales in Q3 and 92.2% year to date, versus 81.0% and 79.7% in the comparable 2008 periods. Corresponding gross margins were approximately 15.8%, 7.8%, 19.0%, and 20.3%.
- Q3 continuing-operations income declined 76%. The company attributed the deterioration mainly to price and volume declines, partly offset by cost reductions, favorable inventory adjustments, foreign currency movements, tax effects, and a Suriname acquisition gain.
- Q3 results included a $112 pretax benefit from liquidation of lower-cost LIFO inventory. Other income also included an $89 gain related to acquiring BHP’s Suriname interests. Year-to-date results included an $188 gain from the Elkem/Sapa exchange and a $182 loss on the Shining Prospect investment sale.
Financial position and liquidity
- At September 30, 2009, cash was $1,066; current assets were $7,032 and current liabilities $5,017, for a current ratio of about 1.40. At December 31, 2008, those balances were $8,150 and $7,279, respectively, for a ratio of about 1.12.
- Total debt, including short-term borrowings and current maturities, was approximately $10,073 at September 30, compared with approximately $10,578 at year-end 2008. Commercial paper declined from $1,535 to zero. Long-term debt was $9,067, with $663 due within one year.
- Nine-month operating cash flow was $241; capital expenditures were $1,254. Cash and cash equivalents increased by $304 to $1,066, aided by financing and investment proceeds.
- Financing included $876 net proceeds from issuing common stock and proceeds from $575 of convertible notes. Together, the equity and note offerings generated $1,438 net proceeds and helped repay a $1,300 revolving-credit borrowing. The quarterly common dividend was cut from $0.17 to $0.03 per share in March.
- Alcoa reported $16,218 in total equity and $21,881 in total liabilities at quarter-end. Accrued pension and postretirement benefits totaled $5,552.
Material changes and operating developments
- Alcoa curtailed annualized aluminum output by 750 kmt and planned alumina output reductions of 1,500 kmt per year in response to the downturn; the announced curtailments were completed by the end of Q1, with additional curtailments subsequently including Massena East and Suralco.
- Q3 aluminum-product shipments declined to 1,230 kmt from 1,342 kmt, while alumina shipments rose to 2,191 kmt from 2,010 kmt. Alcoa’s average realized aluminum price fell to $1,972 per metric ton from $2,945.
- Year-to-date restructuring and other charges were $168, versus $76 a year earlier, including workforce reductions, held-for-sale asset adjustments, acquisition-cost write-offs, and pension curtailment costs. Approximately 4,200 employees were associated with 2009 reduction programs; about 2,900 had been terminated by quarter-end.
- Alcoa acquired BHP’s 45% interest in Suriname operations, bringing its ownership to 100%, and acquired full ownership of Elkem through an exchange of its Sapa stake. It also completed the sale of the wire harness and electrical portion of EES, recording a $116 loss in discontinued operations.
Outlook, risks, and contingencies
- Management expected cost-savings benefits to continue. For Q4, it anticipated weak downstream markets and year-end shutdown effects; commercial transportation was expected to improve. Alumina results were expected to benefit from lower caustic prices but incur about $13 in start-up costs for Brazilian projects. Primary Metals faced expected energy-cost increases, including uncertainty around Italian power tariffs.
- Management stated that operating cash flow and financing activities were expected to cover current operating and business needs. No consolidated earnings or revenue guidance was provided in the supplied filing text.
- Credit ratings were downgraded by S&P, Moody’s, and Fitch in February 2009 amid weak earnings, leverage, and liquidity concerns. S&P and Fitch outlooks were negative; Moody’s outlook was stable.
- Alcoa disclosed significant legal and regulatory uncertainties, including the Alba fraud/bribery allegations and related DOJ investigation; a retiree-benefits class action with estimated potential exposure of about $300 in added liability and roughly $40 annual expense for 11 years if unfavorable; and European Commission investigations of Italian and Spanish electricity tariffs. Termination of the Italian tariff could add up to $22 pretax per month in power costs, with possible retroactive recovery also described.
- Environmental remediation reserves were $298 at September 30. The filing cautions that EPA decisions and site remediation requirements could require further reserve adjustments. Other notable exposures include Brazilian power-project guarantees and ongoing litigation and environmental proceedings.
- Management expected adoption of new financial-asset transfer accounting in 2010 to add $250 to both receivables and short-term borrowings, assuming renewal of its receivables securitization program, then due to expire in November 2009.
Most important facts to verify
- Confirm the intended issuer: this is Alcoa’s 2009 Form 10-Q, not a Howmet Aerospace filing.
- Review whether the large year-to-date loss, falling realized prices, weaker segment results, and cash-flow decline persist in subsequent reporting periods.
- Assess debt maturities, refinancing access, rating outlooks, and the effects of the receivables securitization renewal and its planned accounting treatment.
- Track the outcomes and potential financial exposure of the retiree-benefits litigation, Alba-related proceedings, power-tariff investigations, and environmental remediation matters.
- Separate recurring operating performance from LIFO benefits, acquisition/exchange gains, investment-sale losses, restructuring charges, and discontinued operations.