Filing identity and reporting period
Important metadata discrepancy: The supplied filing is Alcoa Inc.’s Form 10-Q for the quarter ended March 31, 2013, not a Howmet Aerospace Inc. filing. The financial and operating information below therefore describes Alcoa, not Howmet. Amounts are in millions of dollars unless otherwise stated. The interim statements are unaudited and were reviewed by the independent accountant.
Financial and operating performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Sales | $5,833 | $6,006 |
| Income before income taxes | $234 | $138 |
| Net income attributable to Alcoa | $149 | $94 |
| Diluted EPS | $0.13 | $0.09 |
| Cash used for operations | $70 | $236 |
| Cash used for investing | $285 | $350 |
| Cash provided by financing | $47 | $394 |
Net income attributable to Alcoa rose $55 despite sales declining 3%. Management attributed the earnings improvement mainly to productivity gains, favorable foreign-exchange movements, and higher realized alumina prices, partly offset by lower aluminum prices and unfavorable midstream mix. Cost of goods sold was 83.1% of sales versus 84.9%; SG&A was 4.3% versus 4.0%. The effective tax rate was 27.4% versus 28.3%; Q1 2013 included a $19 discrete tax benefit related to U.S. tax legislation.
Segment after-tax operating income (ATOI) was $351 versus $304: Alumina $58 versus $35; Primary Metals $39 versus $10; Global Rolled Products $81 versus $102; and Engineered Products and Solutions $173 versus $157. These segment measures do not equal consolidated net income and exclude specified corporate and other items.
Liquidity, debt and balance-sheet position
At March 31, 2013, cash and cash equivalents were $1,555, down from $1,861 at year-end 2012. Current assets were $7,768 and current liabilities $6,500, compared with $7,700 and $5,942 at year-end. Long-term debt was $8,770, including $1,025 due within one year; short-term borrowings were $51 and commercial paper was $104. Total liabilities were $23,332 and total equity was $16,774.
Operating cash use improved from $236 to $70, principally due to stronger operating results and $130 lower pension contributions, partly offset by a $130 unfavorable working-capital change. Capital expenditures were $235. Alcoa paid $33 in shareholder dividends. The filing describes several short-term credit facilities entered into, drawn, repaid, or amended during the quarter; the $150 revolving facility was stated to expire in February 2014 and the $200 facility in July 2013.
Material changes, outlook and management commentary
Aluminum production, shipments and realized price were lower year over year: aluminum production was 891 kmt versus 951 kmt, third-party aluminum shipments 1,224 kmt versus 1,295 kmt, and average realized aluminum price $2,398 per metric ton versus $2,433. Alumina shipments increased to 2,457 kmt from 2,293 kmt. Curtailments, including the fully curtailed Portovesme smelter in Italy, contributed to lower primary-metal volumes.
For Q2 2013, management expected alumina production to rise by 150 kmt and continued productivity gains, but forecast approximately $20 of alumina mining costs. Primary Metals expected approximately $25 of combined negative ATOI impact from planned power-plant maintenance outages, alongside Saudi smelter startup costs. Global Rolled Products expected strong aerospace and automotive demand but pricing pressures in certain industrial markets and China. Engineered Products and Solutions expected strong aerospace demand and continued productivity improvements. The filing provides no consolidated full-year earnings or revenue guidance.
Fitch affirmed Alcoa’s ratings on April 11, 2013 and changed its outlook from stable to negative. Risks highlighted include aluminum and alumina prices, end-market conditions, energy and raw-material costs, currencies, execution of productivity and growth initiatives, legal and environmental matters, and pension assumptions.
Contingencies and unusual items
Alcoa continued to negotiate with the DOJ and SEC over investigations related to the Alba matter; it could not estimate a reasonably possible loss range and warned that a settlement, if reached, could be material. A separate Alba civil settlement required a further $42.5 payment in October 2013; $42.5 had already been paid.
For Italian electricity-related state-aid recovery, Alcoa had paid two of five quarterly installments toward a requested net $310, and noted that accelerated or lump-sum payment remained possible. Its recorded reserve was $75 at quarter-end, while its stated reasonably possible loss range remained $203–$387. A separate Italian power-drawback demand was $97, with a stated reasonably possible loss range of $0–$97; Alcoa disputed the demand.
Environmental remediation reserves were $524. The EPA issued a final decision after quarter-end on the Grasse River remedy, consistent with a remedy estimated at $243 that was fully accrued at March 31. Alcoa also disclosed a Brazilian tax-credit dispute with potential loss ranges of $0–$75 for export-related credits and $0–$90 for fixed-asset credits. These matters, other litigation, and commitments and guarantees for joint ventures may affect future results or cash requirements.
Most important facts for investors to verify
- Confirm the intended issuer: this source is Alcoa Inc., not Howmet Aerospace Inc.
- Review the cash-flow and working-capital drivers, particularly receivables, accrued expenses, pension contributions and the Italian government payments.
- Assess the timing and potential cash impact of the Alba, Italian electricity, Brazilian tax-credit and environmental matters.
- Check the status and terms of short-term credit facilities, upcoming maturities, and the effect of Fitch’s negative outlook.
- Compare segment trends and Q2 commentary with subsequent reported results; the filing gives no consolidated full-year guidance.