Issuer and reporting period
Important identity note: The supplied filing is Alcoa Inc.’s Form 10-Q for the quarter ended June 30, 2014, not a filing by Howmet Aerospace Inc. The summary below reflects Alcoa’s filing; verify the issuer before using it for Howmet research. Figures are in millions of dollars unless noted.
Financial performance and position
- Revenue: Second-quarter sales were $5,836, essentially unchanged from $5,849 a year earlier. First-half sales were $11,290, down 3% from $11,682.
- Profit: Second-quarter net income attributable to Alcoa was $138, versus a loss of $119; diluted EPS was $0.12 versus a loss of $0.11 per share. First-half net loss attributable to Alcoa was $40, compared with net income of $30; diluted EPS was $(0.04) versus $0.03.
- Margins and segment results: Cost of goods sold was 81.6% of sales in Q2 and 82.0% for the first half, improving from 84.3% and 83.7%, respectively. Total segment after-tax operating income (ATOI) rose to $418 in Q2 from $304, and to $743 for the first half from $655.
- Cash flow: First-half cash used for operations was $33, versus $444 provided in the prior-year period. Capital expenditures were $467; operating cash flow less capital expenditures was therefore approximately negative $500. Cash declined by $254 to $1,183.
- Liquidity and debt: Current assets were $7,387 and current liabilities $5,842 at June 30. Reported outstanding debt was $7,832, excluding $223 of commercial paper; cash was $1,183. Long-term debt was $7,612, with $87 due within one year. The filing reports $4,990 of revolving-credit capacity, including a $3,750 facility and eleven other facilities.
- Other balance-sheet items: Total assets were $36,309, total liabilities $21,603, and total equity $14,706. Inventory increased to $3,227 from $2,705 at year-end 2013. Pension and other postretirement benefit costs remained significant; first-half pension contributions were $282.
Changes versus the prior comparable period
- Q2 earnings improved substantially, primarily from productivity gains, higher energy sales from excess power following smelter curtailments, and the absence of a prior-year legal charge. Higher input costs and a higher tax provision partly offset these benefits.
- First-half earnings declined despite higher segment ATOI, principally because restructuring charges rose to $571 from $251, aluminum and alumina realized prices were lower, and input costs increased.
- First-half restructuring charges included permanent closures, temporary curtailments, impairments, and related exit costs. The prior-year Q2 included a $103 legal charge.
- Aluminum production and shipments fell following capacity reductions. Alumina shipments increased, while aluminum-product shipments declined.
Outlook, significant developments, and risks
- Restructuring: Alcoa planned to close the Point Henry smelter in Australia in August 2014 and the Point Henry and Yennora rolling mills by year-end. It expected approximately $110 of additional shutdown-related charges during the remainder of 2014. Further demolition and remediation work was expected to continue for several years.
- Acquisition: Alcoa agreed to acquire aerospace-component maker Firth Rixson for $2,850, comprising $2,350 cash and $500 in Alcoa shares, with a potential $150 earn-out. Closing was expected by year-end 2014, subject to approvals. Management projected more than $100 of cost savings by 2019, earnings neutrality in 2015, and accretion thereafter. A $2,500 bridge-loan commitment was arranged to help finance the cash consideration.
- Tax: A Brazilian subsidiary’s 10-year tax holiday took effect July 12, 2014, lowering its tax rate from 34% to 15%. Remeasurement of deferred taxes was expected to create an approximately $60 noncash charge in Q3.
- Market and credit risks: Results were exposed to aluminum prices and regional/product premiums, energy and raw-material costs, foreign exchange, and end-market demand. Moody’s and Fitch had rated Alcoa below investment grade; S&P rated it BBB- with a negative outlook. Further downgrades could raise financing costs, constrain market access, or require additional collateral.
- Contingencies: The filing describes environmental remediation reserves of $571, Italian electricity-tariff recovery litigation, Spanish tax assessments totaling $330, and other tax and legal matters with uncertain outcomes. Alcoa stated it could not reasonably predict outcomes for several matters. The independent accountant performed an interim review, not an audit.
- Management’s near-term commentary: Q3 commentary anticipated stronger alumina production at Australian refineries, continued productivity improvements, and strong commercial-aerospace demand; aluminum output was expected to decline due to closures and curtailments. The filing does not provide consolidated full-year earnings or revenue guidance.
Investor verification priorities
- Confirm issuer identity and that this Alcoa 2014 filing is relevant to the intended Howmet Aerospace analysis.
- Track the Firth Rixson acquisition’s closing, financing, integration, and delivery of projected synergies.
- Assess the cash and earnings impact of shutdowns, expected additional charges, and reduced production capacity.
- Monitor operating cash flow, inventory growth, pension contributions, debt, and credit-rating actions.
- Review developments in environmental reserves and material legal and tax contingencies, including the Italian and Spanish matters.