Business context and reporting period
This is Alcoa Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2009—not a filing by Howmet Aerospace Inc. The statements cover Alcoa and its subsidiaries; interim results are not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Sales | $4.244 billion | $7.245 billion | $8.391 billion | $14.243 billion |
| Continuing-operations income (loss) attributable to Alcoa common shareholders | $(312) million | $553 million | $(792) million | $852 million |
| Net income (loss) attributable to Alcoa | $(454) million | $546 million | $(951) million | $849 million |
| Diluted EPS | $(0.47) | $0.66 | $(1.06) | $1.03 |
- Sales declined 41% in both comparison periods. Management attributed the downturn chiefly to lower alumina and aluminum prices and weak downstream demand and volumes. Alcoa’s realized aluminum price fell to $1,667 per metric ton in Q2 from $3,058 a year earlier.
- Cost of goods sold was 93.4% of sales in Q2 and 96.6% for the half, versus 79.0% in both 2008 periods. Segment after-tax operating income was a loss of $132 million in Q2 and $275 million for the half, compared with income of $838 million and $1.506 billion, respectively.
- Cash provided from operations was $57 million for the half, down from $719 million. Capital expenditures were $884 million. Cash and equivalents were $851 million at June 30, up from $762 million at year-end.
- Total debt, including short-term borrowings and current maturities, was approximately $10.2 billion at June 30, compared with approximately $9.0 billion at December 31. Current assets were $7.459 billion and current liabilities $5.055 billion. Equity totaled $15.581 billion.
Material changes and unusual items
- Alcoa recorded $82 million of restructuring and other charges in Q2 and $151 million for the first half, including workforce reductions, adjustments to businesses held for sale, pension curtailment charges, and acquisition-cost write-offs. Approximately 4,060 employees were associated with 2009 restructuring programs.
- The EES wire-harness and electrical business was divested to Platinum Equity; the transaction generated a $120 million loss in discontinued operations. EES’ reported discontinued-operations loss was $142 million in Q2.
- The exchange of Alcoa’s Sapa AB stake for full ownership of Elkem produced a $188 million gain. The sale/redemption of the Shining Prospect investment produced a $182 million loss. These items affected other income and the six-month comparison.
- On March 24, Alcoa issued 172.5 million common shares for net proceeds of $876 million and $575 million of convertible notes, using proceeds in part to repay a $1.3 billion revolving-credit-facility borrowing. The quarterly dividend was reduced from $0.17 to $0.03 per share.
- Production curtailments continued amid low prices and demand: management announced a full curtailment of the Massena East smelter and a partial curtailment at the Suralco refinery during Q2.
Outlook, risks and contingencies
- No consolidated earnings or revenue guidance is provided. Management expected cost savings to continue; it also anticipated weak downstream end markets and seasonal European shutdowns in Q3. Alumina outlook included approximately $12 million of start-up costs for the São Luís expansion and Juruti mine.
- Management said operating cash flow and financing activities were expected to cover current operational and business needs. Credit ratings were downgraded by S&P, Moody’s and Fitch in February 2009; Fitch and S&P outlooks were negative, while Moody’s outlook was stable.
- Contingencies include Alba’s fraud and RICO litigation, for which Alcoa could not estimate a reasonably possible loss; a retiree healthcare class action with estimated maximum exposure of about $300 million in additional postretirement liability and average annual expense of about $40 million for 11 years if unfavorable; and environmental remediation. Environmental reserves were $303 million at June 30. EPA remedy decisions could increase costs.
- Alcoa disclosed material commodity, currency and interest-rate exposures, including $426 million of net Level 3 derivative liabilities; valuation depends partly on unobservable assumptions, including long-term aluminum prices. The filing’s interim financial statements received a review, not an audit.
Investor verification priorities
- Confirm the issuer identity: the supplied filing is Alcoa Inc.’s 2009 10-Q, not Howmet Aerospace Inc.’s filing.
- Assess whether liquidity and debt remain manageable given low operating cash flow, increased debt, credit-rating changes and planned capital spending.
- Verify the durability and cash realization of cost reductions, restructuring plans and production curtailments as market conditions evolve.
- Track the EES sale adjustments, Elkem integration and other investment-related gains and losses, separating them from recurring operating results.
- Monitor outcomes and possible exposure from litigation, environmental remediation, electricity-tariff investigations and derivative valuations.