Business context and reporting period
Filing identity: The supplied filing is Alcoa Inc.’s Form 10-Q for the quarter ended September 30, 2011, not a filing by Howmet Aerospace Inc. The figures and commentary below therefore describe Alcoa as reported in this filing. Dollar amounts are in millions unless stated otherwise.
Alcoa reported four segments: Alumina, Primary Metals, Flat-Rolled Products, and Engineered Products and Solutions. The filing covers the third quarter and first nine months of 2011, with comparisons to the corresponding 2010 periods.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Sales | $6,419 | $5,287 | $18,962 | $15,361 |
| Income before income taxes | $280 | $60 | $1,302 | $200 |
| Net income attributable to Alcoa | $172 | $61 | $802 | $(4) |
| Diluted EPS | $0.15 | $0.06 | $0.71 | $(0.01) |
| Cash provided from operations | Not presented for quarter | Not presented for quarter | $1,051 | $891 |
- Sales increased 21% in Q3 and 23% year to date. Management attributed growth principally to higher alumina and aluminum prices and stronger midstream and downstream volumes.
- Cost of goods sold was 82.4% of sales in Q3 and 80.4% year to date, versus 83.5% and 82.3%, respectively, in 2010. SG&A was 4.1% of Q3 sales and 4.0% year to date, down from 4.4% in both comparable 2010 periods.
- At September 30, cash was $1,332, current assets $7,670, and current liabilities $5,623; the current ratio was approximately 1.36x. Cash was $1,543 at year-end 2010. Inventories increased to $3,172 from $2,562.
- Debt, calculated from reported short-term borrowings, commercial paper, current maturities, and long-term debt, totaled approximately $9,311 at September 30, compared with $9,165 at December 31, 2010. The company had a $3,750 revolving credit facility, with no borrowings outstanding at quarter-end.
- Year-to-date operating cash flow rose $160, but working capital absorbed more cash, particularly inventories, and pension contributions increased. Capital expenditures were $801 versus $650 a year earlier; investing cash outflow was $1,269.
- Segment after-tax operating income (ATOI) for Q3 was $154 Alumina, $110 Primary Metals, $60 Flat-Rolled Products, and $138 Engineered Products and Solutions. Flat-Rolled Products’ ATOI declined from $66; the other three segments improved from the prior-year quarter.
Material changes versus prior periods
- Q3 income attributable to Alcoa increased $111 year over year; nine-month income improved by $806, moving from a loss to profit. Higher realized prices, stronger volumes, and favorable year-over-year derivative mark-to-market changes were important contributors.
- Input-cost inflation and unfavorable foreign currency movements partly offset operating gains. Management cited energy and other input costs across the business, including caustic and fuel oil in Alumina and carbon and energy in Primary Metals.
- Nine-month restructuring charges fell to $49 from $219, largely reflecting the absence of 2010 impairment and exit charges for permanently shut facilities. Q3 restructuring charges were $9 versus $2.
- Interest expense was $125 in Q3 versus $139, but $399 year to date versus $376. The 2011 year-to-date figure included a $74 debt tender/redemption premium, partly offset by a $33 gain on terminated interest-rate swaps.
- The $240 acquisition of TransDigm’s aerospace fastener business closed in March 2011 and contributed to Engineered Products and Solutions. Alcoa also issued $1,250 of 5.40% notes due 2021 and retired certain 2013 notes.
Outlook, commentary, risks, and contingencies
- Management’s segment commentary anticipated productivity improvements in Alumina and Primary Metals in Q4, while noting continuing caustic and carbon cost inflation and higher seasonal energy costs. Flat-Rolled Products expected strong aerospace demand, seasonal packaging declines, and continued weakness across European markets. Engineered Products and Solutions expected improvement in most end markets, with specified exceptions in European commercial transportation and building and construction.
- The filing does not provide a clear consolidated full-year earnings or revenue guidance figure. The forward-looking statements identify aluminum supply, demand and prices; global economic conditions; end-market demand; currency movements; energy and raw-material costs; execution of growth projects; and political, regulatory, legal, and environmental matters as risks.
- Alcoa estimated a $300–$500 payment related to the European Commission’s Italian electricity-tariff decision; timing was uncertain and the decision was under appeal. A separate Spanish tariff investigation had an estimated potential pretax impact of approximately $100 if unfavorable.
- Alcoa reported a $327 environmental remediation reserve at September 30. It noted that the eventual remedy for the Grasse River site could require an additional $20–$100 beyond its recommended alternative, depending on the EPA’s selection.
- Other material contingencies included the Alba lawsuit and related government investigation, ongoing St. Croix litigation appeals, and other environmental, product-liability, and safety matters. Management said outcomes or loss ranges could not be reliably estimated for certain matters.
- Alcoa’s Saudi Arabia joint-venture financing included guarantees; a downgrade below investment grade by at least two agencies could require a letter of credit or escrow for part or all of its remaining equity commitment. A further guarantee was issued in October 2011, after quarter-end.
Important facts for investors to verify
- Confirm the issuer and filing: this is Alcoa Inc.’s 2011 10-Q, not Howmet Aerospace’s.
- Review whether price and volume gains were durable and whether higher energy, raw-material, and currency costs continued to pressure margins.
- Assess working-capital and cash-flow trends, especially the inventory build, alongside capital spending and pension funding.
- Check debt maturities, credit-facility terms and covenants, and exposure from project-financing guarantees.
- Track the Italian and Spanish power-tariff matters, environmental remediation estimates, and significant litigation for changes in expected exposure.
- Distinguish recurring operating performance from restructuring, tax, derivative, and debt-retirement effects when assessing earnings.