Howmet Aerospace Inc. — 2013 Q2 10-Q Summary
Entity mismatch: The supplied filing is for Alcoa Inc., not Howmet Aerospace Inc. It reports the quarter and six months ended June 30, 2013. The interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Business context and reporting period
Alcoa reported results across Alumina, Primary Metals, Global Rolled Products, and Engineered Products and Solutions. The company cited lower aluminum prices and volumes, partly offset by productivity gains and stronger performance in some downstream businesses.
Financial results and liquidity
| Metric (US$ millions, except per-share amounts) | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Sales | 5,849 | 5,963 | 11,682 | 11,969 |
| Income (loss) attributable to Alcoa | (119) | (2) | 30 | 92 |
| Diluted EPS attributable to Alcoa | (0.11) | — | 0.03 | 0.08 |
| Cash provided from operations | Not provided quarterly | Not provided quarterly | 444 | 301 |
| Capital expenditures | Not provided quarterly | Not provided quarterly | 521 | 561 |
- Q2 gross margin, calculated as sales less cost of goods sold divided by sales, was approximately 15.7%, versus 13.6% a year earlier. For the first half it was approximately 16.3%, versus 14.3%.
- Cash from operations less capital expenditures was negative $77 million in the first half of 2013, compared with negative $260 million in the first half of 2012; this is a simple calculation, not a company-defined free-cash-flow measure.
- At June 30, cash and cash equivalents were $1.202 billion; total debt was $8.359 billion, including $604 million due within one year. Current assets were $7.237 billion and current liabilities $6.147 billion.
- Cash declined $659 million from year-end 2012. Total assets were $38.551 billion and total equity $15.858 billion.
- Common dividends were $0.03 per share for the quarter. The effective tax rate was 16.5% on the Q2 loss and 79.4% for the first-half income, affected by nondeductible legal charges and other discrete items.
Material changes versus the prior comparable period
- Q2 sales decreased 2% year over year; first-half sales decreased 2%. Management attributed the declines mainly to lower primary aluminum volumes, lower LME-linked prices, and unfavorable midstream pricing.
- Q2 attributable net loss widened to $119 million from $2 million; first-half attributable income fell to $30 million from $92 million.
- Restructuring and other charges rose to $244 million in Q2 and $251 million for the first half, versus $15 million and $25 million, respectively, in 2012. Charges included a $103 million legal provision, shutdown and demolition costs, impairments, accelerated depreciation, and employee reductions.
- First-half operating cash flow increased to $444 million from $301 million, principally due to improved operating results and $171 million lower pension contributions. Lower capital spending also reduced investing cash use.
- Primary Metals segment Q2 after-tax operating income (ATOI) declined to a $32 million loss from a $3 million loss; Engineered Products and Solutions ATOI increased to $193 million from $157 million. Segment ATOI is a company measure and excludes certain corporate and restructuring items.
Outlook, management commentary, risks, and unusual items
- No consolidated full-year earnings or revenue guidance is stated in the supplied filing text. Segment commentary anticipated continued alumina index/spot pricing, productivity gains, and higher mining costs; Primary Metals faced shutdowns and energy-cost pressure; aerospace demand in Global Rolled Products was expected to soften temporarily; and aerospace demand in Engineered Products and Solutions was expected to remain strong.
- Alcoa approved permanent shutdowns of 105,000 metric tons per year of Soderberg capacity at Baie-Comeau, Canada, and the previously idled 44,000-metric-ton-per-year Fusina, Italy smelter. Management said further charges of about $140 million, or $100 million after tax, could arise for Baie-Comeau.
- DOJ settlement negotiations concerning the Alba matter continued. Alcoa recorded a $103 million charge based on its proposed offer, but disclosed a reasonably possible additional charge of up to approximately $200 million. The SEC rejected the company’s most recent $60 million offer; no SEC charge was recorded, and a settlement could be material. Trial remained possible if settlements failed.
- Other exposures include a disputed Italian electricity-benefit repayment request with a stated range of $0–$97 million; Brazilian tax-credit assessments with potential losses described in separate ranges; and environmental remediation reserves of $535 million. The filing says outcomes for several matters could not be predicted.
- Moody’s downgraded Alcoa below investment grade in May 2013; S&P and Fitch maintained BBB- ratings but moved outlooks to negative. Downgrade-related counterparties required $167 million of letters of credit and $18 million of cash collateral. The company warned further downgrades could increase collateral needs, borrowing costs, and restrict financing access.
- Alcoa reported $4.815 billion of revolving credit capacity available at June 30, 2013, unaffected by the Moody’s downgrade. It also noted the possibility of up to $150 million in cash collateral requested under a vendor lease.
- Environmental, legal, aluminum-price, energy-cost, currency, pension, and market-demand risks remain material. The filing describes its forward-looking statements as subject to significant uncertainties.
Most important facts for investors to verify
- Confirm the intended issuer: this document is Alcoa Inc.’s 2013 Q2 filing, not a Howmet Aerospace filing.
- Review the subsequent resolution and total cost of the DOJ and SEC investigations, including any allocation with Alumina Limited.
- Track actual shutdown-related costs and production effects at Baie-Comeau and Fusina, as well as the broader smelting-capacity review.
- Check debt maturities, liquidity, collateral requirements, ratings, and the status of revolving facilities after the reporting date.
- Assess operating cash conversion, working-capital movements, pension funding, and the sustainability of capital spending and dividends.
- Follow developments in Italian power-related claims, Brazilian tax assessments, and environmental remediation obligations.