Alcoa Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Alcoa produces bauxite, alumina, and aluminum through three reportable segments. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2021 | Prior comparable period |
|---|---|---|
| Sales | $2,833 | $2,148 in Q2 2020; up 32% |
| Income (loss) attributable to Alcoa | $309 | $(197) in Q2 2020 |
| Diluted EPS | $1.63 | $(1.06) in Q2 2020 |
| Segment Adjusted EBITDA | $625 | $185 in Q2 2020 |
| Cash from operations | $(80) for first half | $198 provided in first half 2020 |
- For the first half, sales were $5,703 versus $4,529; net income attributable to Alcoa was $484 versus a loss of $117; diluted EPS was $2.56 versus a loss of $0.63.
- Q2 sales were slightly below Q1 2021 sales of $2,870, while income attributable to Alcoa rose from $175 to $309. Management cited higher aluminum prices and the Eastalco site-sale gain as major contributors to the sequential earnings improvement.
- Cost of goods sold was 76.1% of Q2 sales, compared with 89.9% in Q2 2020. Higher realized aluminum prices supported the improvement, partly offset by higher production and raw material costs.
- First-half operating cash use chiefly reflected a $500 discretionary U.S. pension contribution and higher working capital, including receivables and inventories. Capital expenditures were $154; investing activities provided $548, mainly from asset-sale proceeds.
- At June 30, cash and cash equivalents were $1,652; current assets were $4,201 and current liabilities $2,671. Long-term debt was $2,216, with $1 due within one year; the debt note separately reports $77 of short-term borrowings. The $1,500 revolving facility was undrawn, and Alcoa reported covenant compliance and access to the full facility.
Material changes and notable items
- Aluminum segment Adjusted EBITDA increased to $460 in Q2 from $(34) a year earlier, principally reflecting stronger metal prices. Alumina Adjusted EBITDA was $124 versus $88; Bauxite was $41 versus $131.
- Alcoa sold the Eastalco site for $100, received $94 cash, and recorded a $90 gain. The Warrick Rolling Mill sale closed in March for approximately $670 of consideration, including assumed postretirement liabilities; Alcoa retained the site’s smelter and power plant.
- Alcoa issued $500 of 4.125% notes due 2029 and redeemed $750 of 6.75% notes due 2024 at a premium. The redemption resulted in a $32 debt-extinguishment loss included in interest expense. The new-debt proceeds and cash also funded the $500 pension contribution.
- Environmental remediation reserves were $298 at June 30. Other significant exposures include an Australian tax dispute with assessed tax, interest, and proposed penalties, and Spanish employee-severance litigation; the company says outcomes or potential losses cannot be reliably predicted. Alcoa is appealing a Spanish court ruling finding it liable for severance related to divested facilities.
Outlook, commentary, and risks
- For Q3 versus Q2, management expected Bauxite results to be consistent; Alumina operations broadly stable but with higher raw material and energy costs; and Aluminum to benefit from sustained strong shipments and value-added demand, partly offset by input-cost inflation.
- After quarter-end, structural damage to one of two Alumar refinery ship unloaders reduced production by about one-third, to approximately 7 kmt per day, until unloading capacity is restored.
- San Ciprián operations continued during a temporary strike suspension through August 2, 2021; renewed labor action could reduce refinery production and metal shipments. Alcoa also disputes a Spanish ministry request for repayment of $41 in CO2 compensation credits.
- On July 28, Alcoa decided to permanently close its previously curtailed Lake Charles anode facility. It expected Q3 charges of approximately $25–$30, including impairments and cash closure/asset-retirement costs.
- Management reported no impairment or additional deferred-tax valuation allowance was required through June 30 despite COVID-19 uncertainty. Disclosed risks include commodity prices and premiums, energy and raw-material costs, currency movements, COVID-19, labor and regulatory matters, pensions, and contingencies.
Important facts for investors to verify
- How much of earnings growth reflects ongoing segment performance versus the $90 Eastalco gain and other one-time items; review the non-GAAP Adjusted EBITDA reconciliation.
- Whether higher aluminum prices and value-added demand persist, and whether rising energy, raw-material, and production costs pressure margins.
- The timing and extent of Alumar’s production recovery, the San Ciprián labor situation, and costs or obligations arising from the Spanish CO2-credit and employee claims.
- Potential outcomes of the Australian tax assessment and Spanish litigation, including exposures not accrued because management cannot estimate a probable loss.
- Cash generation after the pension contribution, future pension funding requirements, and continued compliance with debt covenants and access to financing.