Alcoa Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise. Alcoa produces bauxite, alumina, and aluminum through three reportable segments.
Financial performance and liquidity
- Sales: $2,870, up 21% from $2,381 in Q1 2020 and up from $2,392 in Q4 2020. Higher aluminum and alumina prices were major drivers; shipments also increased.
- Profit: Income before taxes was $312, versus $219 a year earlier and $37 in Q4 2020. Net income attributable to Alcoa was $175, compared with $80 and a Q4 loss of $4, respectively. Diluted EPS was $0.93, versus $0.43 and a Q4 loss of $0.02.
- Costs and margins: Cost of goods sold was $2,292. Management said cost of goods sold as a percentage of sales declined 5.2 percentage points year over year, chiefly reflecting higher realized aluminum and alumina prices. Segment Adjusted EBITDA rose to $569 from $375; it is a non-GAAP measure and may not be comparable with similarly titled measures at other companies.
- Segment Adjusted EBITDA: Bauxite $59 (down from $120); Alumina $227 (up from $193); Aluminum $283 (up from $62). Higher alumina and aluminum prices supported the gains; bauxite was affected by lower realized prices and equity-investment earnings.
- Cash flow: Operations provided $6, compared with $90 used in Q1 2020. Investing provided $514, including $591 of asset-sale proceeds, mainly from Warrick. Financing provided $428, principally reflecting net proceeds from the 2029 notes. Capital expenditures were $75. Cash and cash equivalents ended the quarter at $2,544, versus $1,607 at year-end 2020; the cash-flow statement reports $2,547 including restricted cash.
- Liquidity and debt: Long-term debt was $2,959, including $745 due within one year; the filing also reports $77 of short-term borrowings in its financial-instrument table. In March, Alcoa issued $500 of 4.125% notes due 2029. It had no borrowings under its revolving facility and was in covenant compliance. Facility commitments were $1,255, with the company stating it could access the full commitment while remaining covenant-compliant.
- Balance sheet: Total assets were $14,931 and total liabilities $10,058 at March 31, 2021. Current assets were $4,891 and current liabilities $3,221.
Material changes and significant transactions
- Alcoa completed the Warrick Rolling Mill sale to Kaiser on March 31 for approximately $670 of consideration, including Kaiser’s assumption of $72 of other postretirement benefit liabilities. Alcoa recorded a $27 gain and estimated about $70 of future site-separation and transaction-cost liabilities. Alcoa retained the site’s 269,000-ton-per-year smelter and power plant.
- After quarter-end, Alcoa contributed $500 to U.S. defined-benefit pension plans on April 1 and redeemed $750 of 6.75% notes due 2024 on April 7. The company expects to record a $32 debt-extinguishment loss in Q2.
- Q1 included $7 of restructuring and other charges, versus $2 a year earlier and $60 in Q4 2020. Items included postretirement benefit settlement and curtailment costs, take-or-pay costs at curtailed smelters, and a reserve reversal for a former Tennessee site.
- Other income was $24, compared with $132 in Q1 2020; the prior-year period included a substantial gain on the Gum Springs business sale. Q1 2021 included the Warrick sale gain.
Outlook, management commentary, and risks
- Q2 outlook: Bauxite operations were expected to be consistent with Q1. Alumina operations were expected to remain stable, with higher costs from seasonal maintenance and energy. Aluminum management expected sustained strong shipments and value-added demand, partly offset by the absence of Warrick rolling-mill results, seasonal maintenance, lower hydro sales, and energy-market conditions. No clear full-year earnings guidance is provided in the filing text.
- Operations and labor: Alcoa reported that its mines, refineries, and manufacturing facilities remained operational during the COVID-19 pandemic, with no significant supply interruption. The San Ciprián labor strike in Spain was temporarily suspended through May 11, 2021, after a subsequent extension; Alcoa was pursuing a sale process with Spanish state-owned SEPI. A renewed strike could reduce production and shipments.
- Energy and hedging: Derivative liabilities totaled $1,104 at quarter-end, including $1,080 classified as Level 3. Significant power-contract valuations depend on unobservable inputs and market assumptions. Assuming rates stayed at March 31 levels, the filing expected $145 of power-contract losses and $14 of financial-contract losses to be recognized over the next 12 months.
- Contingencies: Alcoa disputed Australian tax assessments involving approximately $162 of tax, $537 of compounded interest, and proposed penalties of approximately $97. It had paid about $74 and recorded an $81 tax-assessment deposit and a $170 liability associated with interest deductions. Management believed its tax position was more likely than not to be sustained, but said the possible loss could not be predicted and could materially affect results or financial condition. In Brazil, authorities issued fines of approximately $380,000 following soil-erosion events; Alcoa’s subsidiary disputed them, and additional notices remained under review.
- Other risks: The filing highlights exposure to commodity prices, energy and raw-material costs, currency movements, pension obligations, environmental remediation, legal and tax proceedings, labor disruptions, COVID-19, and access to financing. Management reported no material change to the risk factors disclosed in the 2020 Form 10-K.
Important facts for investors to verify
- Whether post-closing adjustments, site-separation costs, and required capital expenditures change the final economics of the Warrick sale.
- Progress on the San Ciprián labor agreement and SEPI sale discussions, including any effects on production or shipments.
- Developments and potential financial exposure in the Australian tax dispute and the Brazilian environmental-fine proceedings.
- How aluminum and alumina prices, energy costs, and currency movements affect segment profitability and operating cash flow.
- Changes in the valuation and expected earnings impact of the large Level 3 power-contract liabilities.
- Completion and accounting effects of the pension contribution and 2024-note redemption, including the expected Q2 extinguishment loss.