Filing identity and reporting period
Important identification note: The supplied filing is Alcoa Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2010, not a filing by Howmet Aerospace Inc. The financial and operating information below is for Alcoa and its subsidiaries. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial and operating results
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Sales | $5,287 | $4,615 | $15,361 | $13,006 |
| Income (loss) from continuing operations attributable to Alcoa common shareholders | $61 | $73 | $4 | $(719) |
| Net income (loss) attributable to Alcoa | $61 | $77 | $(4) | $(874) |
| Diluted EPS, net income (loss) | $0.06 | $0.08 | $(0.01) | $(0.95) |
| Cash provided from operations | Not provided for quarter | Not provided for quarter | $891 | $241 |
Q3 sales rose 15% year over year; nine-month sales rose 18%. Management attributed the increase mainly to higher realized alumina and aluminum prices and stronger alumina and downstream volumes, partly offset by divestitures and, in Q3, unfavorable foreign exchange. Cost of goods sold was 83.5% of sales in Q3 and 82.3% for the nine months, versus 84.2% and 92.2%, respectively, in the comparable 2009 periods. Segment after-tax operating income (ATOI) for Q3 was $70 million in Alumina, $78 million in Primary Metals, $66 million in Flat-Rolled Products, and $114 million in Engineered Products and Solutions.
Nine-month operating cash flow increased to $891 million from $241 million, while capital expenditures were $650 million versus $1,254 million. Cash and cash equivalents declined to $843 million at September 30, 2010 from $1,481 million at year-end 2009. Current assets were $6,519 million and current liabilities $4,682 million. Debt comprised $119 million short-term borrowings, $200 million current long-term debt, and $8,990 million long-term debt. The filing reports no quarter-end liquidity or credit-facility availability figure in the supplied text.
Material changes and unusual items
- Q3 Alcoa-attributable income declined by $16 million despite higher sales. Management cited higher energy costs, unfavorable LIFO inventory effects, foreign currency movements, higher depreciation and startup costs at growth projects, and the absence of a prior-year acquisition gain; cost savings, stronger realized prices, and discrete tax benefits partly offset these items.
- Nine-month results improved substantially from the 2009 loss, reflecting higher realized prices, cost savings, productivity gains, and the absence of certain prior-year losses. The 2010 nine-month result still included $219 million of restructuring and other charges and $8 million of discontinued-operation losses.
- Restructuring charges included $128 million of asset impairments and $46 million of other exit costs tied to permanent shutdown and planned demolition of idled facilities at five U.S. locations. Approximately 830 employees were associated with 2010 restructuring programs; about 480 had been terminated by September 30.
- Alcoa issued $1.0 billion of 6.150% notes due 2020 and used proceeds principally to retire or repay debt. It repaid $511 million of 7.375% notes at maturity and paid $42 million in premiums to retire other notes early. Reported interest expense includes the premium and a $28 million gain from terminated interest-rate swaps.
- A $79 million noncash tax charge in Q1 reflected a change in the tax treatment of federal subsidies for retiree prescription-drug benefits. Q3 tax benefits included discrete items, including reversal of a valuation allowance.
- Alcoa acquired Traco’s commercial building and construction business for $77 million in July 2010. It also contributed $600 million of newly issued shares to a pension-plan trust to satisfy part of future funding obligations.
Outlook, risks, and contingencies
The filing does not provide a single consolidated earnings or revenue forecast. Segment commentary anticipated continued cost-saving benefits; Q4 alumina production growth from the São Luís ramp-up; higher Primary Metals production as Avilés restarted, alongside expected higher carbon costs; continued strong demand in most Flat-Rolled Products regions, partly offset by seasonal can-sheet declines; and seasonal customer shutdowns in Engineered Products and Solutions. Management cautioned that results depend on aluminum and alumina prices, demand, energy and raw-material costs, foreign exchange, project execution, and other factors.
Major exposures disclosed include an estimated $300–$500 million potential Italian tariff-benefit recovery, for which Alcoa had recorded a $250 million charge and was pursuing appeals; possible Spanish tariff exposure estimated at $30–$100 million pretax; and $330 million of environmental remediation reserves. The filing notes that alternative Grasse River remedies could cost an additional estimated $20–$100 million beyond the recommended remedy, with an EPA decision expected in 2011 or later. A retiree-benefits class action had estimated maximum exposure of approximately $300 million if the outcome were unfavorable; Alcoa said it could not reasonably predict the outcome. The Alba lawsuit and related government investigation also remained unresolved, with loss not reasonably estimable. The filing additionally describes other environmental, product-liability, safety, and legal matters.
In the subsidiary proceedings described in Part II, Howmet expected to pay a $309,091 EPA penalty after its appeal was denied and not pursued further. Separately, Alcoa of Australia pleaded guilty to an environmental-license charge and was fined A$45,000 plus A$5,000 in costs.
Key facts for investors to verify
- Confirm the issuer: this is Alcoa Inc.’s 2010 filing, not a Howmet Aerospace filing.
- Review the drivers of the gap between higher sales and lower Q3 attributable earnings, especially energy, LIFO, foreign exchange, project costs, and discrete tax items.
- Assess cash generation, working-capital needs, cash decline, capital spending, and debt maturities after the refinancing.
- Track outcomes and cash timing for the Italian and Spanish tariff matters, environmental remediation, and retiree-benefits litigation.
- Check whether shutdown, restructuring, and growth-project plans and the segment outlook were realized; the interim financial statements were reviewed, not audited, and management stated results may not indicate full-year performance.