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Understanding The Special Items In Alcoa’s Earnings

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Jan. 21 2015, Updated 5:42 p.m. ET

Special items

Alcoa (AA) is implementing a strategy to transform into a multimaterial powerhouse, including exiting several of its high-cost production facilities. These curtailments and closures help Alcoa improve its positioning on the cost curve. However, these measures come with a cost. Alcoa reported several special items, which resulted from higher charges related to restructuring in the last several quarters.

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Special items drag 4Q earnings

The above chart shows the special items in Alcoa’s financial results, which totaled $273 million in 4Q14. However, this is only a fraction of what the company reported in 4Q13. Alcoa reported a goodwill impairment of $1.72 billion in 4Q13, which forced its special items to surge past $2.3 billion.

Breakup of special items

Alcoa incurred restructuring-related charges of $200 million in 4Q14, 80% of which are non-cash in nature. With no actual cash outgo from the company, this is simply an accounting entry to reflect the true value of a company’s assets.

Alcoa also recorded gains by selling its Mt. Holly smelter to Century Aluminum (CENX). Alcoa’s restructuring charges were offset to some extent by the Mt. Holly divestiture. Currently, both Alcoa and Century Aluminum are top holdings for the SPDR S&P Metals and Mining ETF (XME). Allegheny Technologies (ATI) is another significant holding of XME, as is top-quartile aluminum producer Rio Tinto (RIO).

The special items also included $22 million for acquisition-related fees, which Alcoa paid to advisers for the Firth Rixson transaction. These special items led to a higher tax rate for Alcoa in 2014, which we will discuss in our next section.

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