Alcoa: Happy Talk Aside, There’s Real Danger In That Recently-Closed RTI International Metals Acquisition by Probes Reporter
- Investors need to raise their skepticism regarding Alcoa’s Jul-2015 deal to acquire RTI International Metals. While we fully expect management to deliver a bunch of post-deal happy talk, you need to look deeper.
- In a letter of 08-Sep-2015, the SEC confirmed enforcement proceedings remain on-going at RTI International Metals.
- Studies show most acquisitions fail. Further, our earlier research suggests Alcoa brought quite the dog-with-fleas into the house with the RTI deal.
In the balance of today’s report we re-post a report we wrote on RTI International Metals back on 12-Feb-2015. The full text of that original report follows. It’s worth reading if you have an interest in Alcoa.
Facts of Interest or Concern: New Data Suggests a Disclosed SEC Investigation Remains a Risk – No Meaningful Updates from Company.
In a letter dated 24-Dec-2014, we received information from the SEC suggesting this company was involved in unspecified SEC investigative activity. The company’s disclosed an array of internal controls problems, a restatement that took place in Mar-2014, and an SEC probe.
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From the 10-Q filed on 06-Nov-2014 (This was first disclosed in Aug-2014) —
In May 2014, the Enforcement division of the SEC notified us that it was conducting a non-public, fact-finding investigation of the Company and made a request for production of documents and information. The request focused on our recent restatements of our financial statements. We are cooperating fully with the SEC in this matter. We cannot predict the length or scope of the investigation, what action, if any, might be taken in the future by the SEC as a result of the matters that are subject of the investigation or what impact, if any, the investigation might have on our results of operations.
Our Take: This is what we call an unanalyzable disclosure of a material event. We think you’re not getting the full story and this is much worse than company filings suggest. Here’s why –
Company disclosures talk of an SEC investigation supposedly focused on a restatement. What’s that mean? Is that all it’s about? We don’t know the time period covered by the probe, or whether it is now formal.
We think it may be formal. We say this because the company left out the words ‘informal’ and voluntary’ from their disclosure (above). Companies love to pretend investigations aren’t serious by including those words. When those words are missing there’s usually a reason; that is, they can’t use them because the probe is formal.
Next, we are troubled by some of the timing here. For example, the restatement took place in Mar-2014. The company says the SEC contacted it in May. We know restatements are cat-nip for enforcement officials.
- It strikes us as curious that the SEC would wait three months to make first contact on a restatement so big it delayed the 10-K?
- Also, why did the company wait until Aug-2014 to tell us about a probe [supposedly] starting in May?
Always, we say, think materiality; that is, until August the company did not believe the exposure sufficiently material to be disclosed. But then they did think it material. You have to ask why. It’s a concern.
Last, there have been no meaningful updates on what is now a protracted probe. These are situations best avoided.
Update added 07-Oct-2015:
The 10-Q filed on 30-Apr-2015 repeated in form and substance (almost verbatim, actually) what was disclosed earlier regarding this exposure.
In May 2014, the Enforcement division of the SEC notified us that it was conducting a non-public, fact-finding investigation of the Company and made a request for production of documents and information. The request focused on the prior restatements of our financial statements. We are cooperating fully with the SEC in this matter. We cannot predict the length or scope of the investigation, what action, if any, might be taken in the future by the SEC as a result of the matters that are subject of the investigation or what impact, if any, the investigation might have on our results of operations.
Even absent a change in text, its presence tells you management judged the exposure remained material and, therefore, had to be disclosed. This adds complications for Alcoa management tasked with making this deal work.