Filing context
The supplied filing is Alcoa Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2016—not a Howmet Aerospace filing. It reports Alcoa’s five segments: Alumina, Primary Metals, Global Rolled Products, Engineered Products and Solutions, and Transportation and Construction Solutions. The interim financial statements received an accountant’s review, not an audit.
Key financial results
Amounts are in millions of dollars except per-share data and operating measures.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Sales | $5,295 | $5,897 | $10,242 | $11,716 |
| Net income attributable to Alcoa | $135 | $140 | $151 | $335 |
| Diluted EPS | $0.09 | $0.10 | $0.09 | $0.24 |
| Cash from (used for) operations | Not provided for quarter | Not provided for quarter | $(98) | $297 |
- Sales declined 10% in Q2 and 13% in the first half. Management cited lower aluminum and alumina prices, weaker pricing in midstream and downstream businesses, lower upstream volume, curtailed or closed capacity, and lower energy sales.
- Q2 pretax income was $330 versus $282; first-half pretax income was $371 versus $763. The first-half effective tax rate was 49.1%, compared with 39.4% a year earlier; management estimated a 51.6% full-year 2016 effective rate.
- Cost of goods sold was 79.6% of sales in Q2 and 80.6% for the first half, compared with 79.1% and 77.7%, respectively, in 2015. Lower pricing pressured the ratio; productivity gains partly offset the impact.
- Segment after-tax operating income (ATOI) was $444 in Q2, down from $567, and $735 for the first half, down from $1,223. First-half Alumina ATOI fell to $117 from $436 and Primary Metals to $55 from $254; Engineered Products and Solutions rose to $342 from $321, while Global Rolled Products and Transportation and Construction Solutions were comparatively steady.
- At June 30, cash and cash equivalents were $1,929. Total current assets were $8,093 and current liabilities $5,488. Total debt, including current maturities, was $9,052; $774 was due within one year. Total liabilities were $21,610 and equity $14,529.
- Capital expenditures were $528 in the first half. Investing activities provided $310, mainly reflecting proceeds from asset and business sales and investment sales. Cash declined by $566 in the comparable 2015 period; cash at June 30, 2016 was $1,929.
- Common dividends remained $0.03 per share per quarter. The company reported $990 of combined capacity among nine revolving credit facilities, excluding its separate Five-Year Revolving Credit Facility.
Material changes and unusual items
- Restructuring and other charges fell to $23 in Q2 and $116 for the first half, from $217 and $394 in 2015. 2016 charges included costs for the Warrick smelter closure and curtailments at Wenatchee and Point Comfort, employee reductions, and separation-related actions. Additional closure and curtailment charges may arise.
- Alcoa incurred planned-separation costs of $45 in Q2 and $63 in the first half. It targeted separation into Alcoa Corporation and a company to be renamed Arconic in the second half of 2016, subject to approvals and other conditions.
- Other income included a $27 gain on selling a 20% interest in an Australian natural-gas pipeline and a $14 arbitration recovery related to a 2010 Iceland smelter fire. Alcoa also received $457 from redeeming company-owned life insurance policies; management said the redemptions contributed to the higher estimated tax rate.
- The company completed the sale of its Remmele Medical business in April for $102 gross proceeds. It also announced a proposed sale of the Yadkin Hydroelectric Project, subject to regulatory approvals.
- Cash used for operations swung from $297 provided in the first half of 2015 to $98 used in 2016, principally due to lower operating results. Receivables, payables, and accrued expenses also affected cash flow.
Outlook, commentary and risks
- Management expected lower third-quarter alumina production, including approximately 680 kmt attributable to Point Comfort and Suralco curtailments, and anticipated productivity improvements.
- For Primary Metals, management expected third-quarter production to be about 100 kmt lower year over year due to capacity closures and curtailments. It canceled a planned Intalco curtailment after securing a new power contract.
- Segment outlook was mixed: automotive sheet demand was expected to strengthen, while aerospace inventory destocking, commercial transportation softness, and can-sheet pricing pressure were cited. Management anticipated improved commercial aerospace and industrial gas turbine demand for Engineered Products and Solutions, but also pricing pressure.
- Material risks include the separation’s completion, timing, costs, and conditions; aluminum and alumina prices, premiums, and demand; energy costs, foreign exchange, execution of restructuring and growth initiatives, and geopolitical and regulatory conditions.
- Alcoa reported a $606 environmental remediation reserve. Significant matters include environmental cleanup projects, an Italian energy-tariff dispute with reasonably possible losses stated as $0–$97, Spanish tax assessments totaling $269, and other tax and legal disputes. The filing says outcomes for several proceedings cannot be reasonably predicted.
- A dispute with Alumina Limited over consent and other rights relating to the proposed separation was pending in Delaware, with trial set for September 20, 2016. Alcoa also faced a Glencore appeal in an indemnity dispute and potential exposure connected with the Sherwin refinery bankruptcy; the latter was described as neither estimable nor probable.
Most important facts for investors to verify
- Confirm the intended issuer: this source is Alcoa Inc., not Howmet Aerospace Inc.
- Review the separation’s conditions, timing, costs, and litigation, and determine how the proposed transaction would allocate assets, liabilities, and ownership.
- Assess whether operating cash generation can recover, given first-half cash used for operations, debt maturities, capital spending, and dividends.
- Evaluate the sensitivity of earnings and cash flow to aluminum and alumina prices, energy contracts, foreign exchange, and curtailment decisions.
- Track environmental reserves and the Italian, Spanish, Brazilian, and other legal or tax matters for changes in estimated exposure.