Business context and reporting period
This is Alcoa Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The filing predates Howmet Aerospace’s later identity; it reports Alcoa and its subsidiaries, across Alumina, Primary Metals, Global Rolled Products, and Engineered Products and Solutions. Financial amounts are in millions of U.S. dollars unless otherwise stated.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Sales | $5,897 | $5,836 | $11,716 | $11,290 |
| Net income (loss) attributable to Alcoa | $140 | $138 | $335 | $(40) |
| Diluted EPS | $0.10 | $0.12 | $0.24 | $(0.04) |
| Cash from (used for) operations | Not separately stated | Not separately stated | $297 | $(33) |
- Q2 net margin was approximately 2.4%, versus 2.4% in Q2 2014; six-month net margin was approximately 2.9%, versus a loss in the prior-year period.
- Cost of goods sold was 79.1% of sales in Q2 and 77.7% for the first half, improving from 81.6% and 82.0%, respectively. Management cited productivity, foreign exchange, and higher midstream/downstream volumes, partly offset by higher energy costs.
- Six-month segment after-tax operating income (ATOI) was $1,224, up from $725. Q2 ATOI was $568, up from $407. Q2 segment ATOI increases in Alumina and Engineered Products and Solutions outweighed declines in Primary Metals and Global Rolled Products.
- At June 30, cash was $1,311, current assets $7,829, and current liabilities $5,206 (current ratio approximately 1.50). Total debt was approximately $8,789, including short-term borrowings and current maturities; cash less total debt was approximately $(7,478). Long-term debt fair value exceeded carrying value: $9,215 versus $8,713, excluding current maturities.
- Cash declined $566 in the first half to $1,311. Investing used $685, including $514 of capital expenditures and $204 for the TITAL acquisition; financing used $159. Capital expenditures were 45% growth-related, per management.
- Common dividends were $0.03 per share in Q2 and $0.06 for the first half.
Material changes versus the prior comparable period
- Q2 sales rose 1% and first-half sales rose 4%. Earnings attributable to Alcoa were nearly flat in Q2 but improved by $375 for the first half, moving from a loss to profit. Management attributed the changes chiefly to foreign exchange, productivity, volumes and, for the first half, higher upstream realized aluminum prices and lower restructuring charges.
- Q2 restructuring and other charges increased to $217 from $110. First-half charges fell to $394 from $571, primarily reflecting fewer prior-year portfolio actions; the 2015 first-half total included $159 related to the Russian rolling-mill divestiture and prior divestiture adjustments.
- Cash from operations improved by $330 year over year for the first half, supported by better operating results, working-capital changes and lower pension contributions. A $300 gas-supply prepayment in Australia was a significant use of cash and contributed to an unfavorable change in noncurrent assets.
- Segment mix shifted: Q2 Engineered Products and Solutions third-party sales rose 15%, substantially reflecting acquired businesses; Global Rolled Products sales fell 10%, mainly due to closed or divested mills and pricing/foreign-exchange effects.
Outlook, commentary, risks and unusual items
- No consolidated full-year financial guidance is provided in the supplied filing text. Segment-specific Q3 commentary included lower expected Alumina production, lower Primary Metals production and sales following closures and curtailments, continued automotive strength for Global Rolled Products, and expected strength in commercial aerospace for Engineered Products and Solutions. Management also anticipated productivity improvements in several segments.
- Alcoa approved permanent shutdowns of the 96-kmt-per-year Poços de Caldas smelter in Brazil and the Anglesea power station and related coal mine in Australia. The Anglesea station was expected to close by the end of August 2015. Associated charges included $86 in asset impairments and $82 in other exit costs; remediation and demolition work extends over several years.
- Management continued reviews of refining and smelting capacity to improve cost-curve positions. It had curtailed 443 kmt per year at the Suriname refinery and 74 kmt per year at the São Luís smelter, and was discussing Suralco’s long-term future with the Suriname government.
- The RTI International Metals acquisition, valued at approximately $1.1 billion in Alcoa shares, had received regulatory and shareholder approvals and was expected to close July 23, 2015, subject to remaining conditions. Alcoa estimated approximately $100 of annual cost savings by 2019 and approximately $1.2 billion of RTI sales by 2019. These are expectations, not guaranteed outcomes.
- Significant contingencies included environmental remediation reserves of $574, appeals and disputes involving Italian energy subsidies, Spanish tax assessments totaling $253, Brazilian tax-credit matters, and the North Carolina Yadkin hydropower property dispute. Management could not reasonably predict outcomes for several matters; the filing notes that contingencies could affect liquidity or results in a particular period.
- Other items include an $85 discrete tax charge at AWAC for a deferred-tax-asset valuation allowance (partly offset by a $51 deferred-tax-liability write-off at Alcoa’s share), and a $434 first-half after-tax gain in Alcoa’s cash-flow-hedge OCI line, largely reflecting derivative revaluation rather than current-period operating earnings.
- Principal forward-looking risks identified include aluminum prices and premiums, end-market demand, foreign exchange, energy and raw-material costs, restructuring and acquisition execution, environmental and legal outcomes, pension assumptions, and operational or supply disruptions.
Important facts for investors to verify
- Whether operating cash generation remains adequate after capital spending, acquisitions, dividends, and the planned $200 second gas-prepayment installment in January 2016.
- How much of reported earnings and segment improvement is recurring versus restructuring, divestiture, tax, foreign-exchange, and derivative effects.
- Completion and integration of RTI, including assumed debt, share issuance, expected synergies, and sales targets; also confirm TITAL and Firth Rixson purchase accounting.
- Progress, cash costs, and possible further charges from plant closures, capacity reviews, and environmental remediation.
- Developments in the Italian, Spanish, Brazilian, and Yadkin proceedings, and any changes to recorded reserves or potential exposures.
- Debt maturities, borrowing costs, and covenant or rating developments; the filing reports a $4 billion revolving facility extended to July 2020 after quarter-end.