Alcoa Corp quarterly report, Q3 FY2019

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Alcoa Corporation — Q3 2019 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2019. Amounts are in millions of U.S. dollars unless stated otherwise. Alcoa produces bauxite, alumina, and aluminum; reported results consolidate its controlled operations, including AWAC, with a 40% noncontrolling interest held by Alumina Limited in certain entities.

Financial performance

  • Q3 revenue: $2.567 billion, down 24% from $3.390 billion. Nine-month revenue: $7.997 billion, down 21% from $10.059 billion.
  • Net result attributable to Alcoa: Q3 loss of $221 million, or $1.19 per diluted share, versus a $6 million loss, or $0.03 per share, in Q3 2018. Nine-month loss of $822 million, or $4.43 per diluted share, versus income of $199 million, or $1.06 per diluted share.
  • Pre-tax result: Q3 loss of $52 million versus income of $455 million; nine-month loss of $137 million versus income of $1.235 billion. Income tax provision was $95 million in Q3 and $361 million for nine months; losses in jurisdictions where no tax benefit was recognized contributed to the unusually high effective tax rate.
  • Costs and margins: Cost of goods sold was 83% of sales in Q3 and 81% for nine months, versus 73% and 75% in 2018. Q3 gross profit before other operating expenses was $447 million, about 17% of sales, versus $905 million, about 27%, in Q3 2018. Restructuring and other charges were $185 million in Q3 and $668 million for nine months.
  • Segment Adjusted EBITDA: Q3 was $400 million versus $850 million; nine-month total was $1.286 billion versus $2.507 billion. Q3 Bauxite, Alumina, and Aluminum were $134 million, $223 million, and $43 million, respectively. Nine-month results were $372 million, $964 million, and a loss of $50 million.
  • Cash flow: Nine-month operating cash flow was $424 million, compared with cash used of $87 million in 2018. Investing used $334 million, including $245 million of capital expenditure; financing used $351 million, principally reflecting distributions to Alumina Limited. Cash and cash equivalents were $841 million at September 30, down from $1.113 billion at year-end; cash including restricted cash was $844 million.
  • Balance sheet and liquidity: Total debt was approximately $1.806 billion, nearly all long-term; cash less debt was approximately negative $965 million. Current assets were $3.643 billion and current liabilities $2.455 billion. Total liabilities were $8.260 billion and equity $6.410 billion. The filing also describes existing and newly entered credit facilities as liquidity options, without stating a single total available borrowing amount here.

Material changes versus prior comparable periods

  • Lower alumina and aluminum prices were the primary drivers of weaker sales and earnings. Q3 realized alumina price fell to $324 per metric ton from $493; primary aluminum price fell to $2,138 from $2,465.
  • Alumina segment EBITDA fell to $223 million in Q3 from $660 million, chiefly from lower alumina prices and higher bauxite costs. Aluminum segment EBITDA fell to $43 million from $84 million; the nine-month segment moved from $501 million of EBITDA to a $50 million loss.
  • Sales and shipments were also affected by the end of the Arconic flat-rolled tolling arrangement, the Spanish smelter divestiture, and lower aluminum volumes. Alumina and bauxite production increased, including quarterly production records for both segments.
  • Operating cash flow improved year over year, aided by working-capital movements and substantially lower pension contributions; the comparison also reflects large discretionary pension contributions made in 2018.
  • Effective January 1, 2019, Alcoa changed certain U.S. and Canadian inventory accounting from LIFO to average cost and retrospectively adjusted prior periods. The company said the change improved consistency and comparability.

Outlook, management commentary, and risks

  • In October, Alcoa announced plans to pursue non-core asset sales over 12–18 months and review 1.5 million metric tons of smelting capacity and 4 million metric tons of alumina refining capacity over five years for improvement, curtailment, closure, or divestiture opportunities.
  • A new operating model took effect November 1, 2019, eliminating business units and streamlining the Executive Team from 12 to seven direct reports to the CEO. Management expects about $60 million in annual operating-cost savings beginning in Q2 2020; approximately 260 employee terminations were associated with the change, with restructuring actions expected to conclude by Q1 2020.
  • Segment outlook for Q4 2019 included higher Bauxite production and realized intersegment pricing, partly offset by planned maintenance; increased Alumina production and lower caustic-soda unit costs; and lower Aluminum production costs, partly offset by lower metal prices. Bécancour’s restart was expected to be completed in Q2 2020.
  • Alcoa completed the sale of its Avilés and La Coruña facilities in Spain in July. It expects to make up to $95 million in contributions to the buyer, with remaining payments scheduled through Q2 2021. The nine-month restructuring charge also included $319 million related to divestiture of Alcoa’s interest in the Ma’aden Rolling Company; Alcoa retained its 25.1% interest in the MBAC and MAC businesses and was released from future MRC obligations, including a debt guarantee.
  • Key exposures include commodity-price and premium volatility, energy costs and supply, foreign exchange, labor matters, pension assumptions, environmental remediation, and legal and tax proceedings. Environmental remediation reserves were $269 million. A Spanish tax dispute had an estimated overall assessment range of $25–$61 million, with Alcoa responsible for 49% if unfavorable; a Brazilian tax-credit matter had a reasonably possible loss range of $0–$53 million. Management stated outcomes remain uncertain.
  • Derivative liabilities, including Level 3 contracts, were material and sensitive to forecast commodity and energy prices. Alcoa reported $427 million of Level 3 derivative liabilities at September 30, 2019, against $119 million of Level 3 derivative assets.

Most important facts for investors to verify

  • Whether weaker alumina and aluminum pricing continues to pressure segment EBITDA, cash generation, and margins.
  • Progress and cash costs of the Spanish-facility obligations, MRC transaction, restructuring, and the expected $60 million annual cost savings.
  • Outcomes of the portfolio review and any resulting curtailments, closures, divestitures, or capital requirements.
  • Execution of the Bécancour restart and Q4 operating assumptions, including production, maintenance, energy, and raw-material costs.
  • Liquidity and debt capacity, as well as changes in environmental, Spanish tax, Brazilian tax-credit, pension, and derivative exposures.
  • Effects of the average-cost inventory method on comparisons; Q3 2019 reported EPS was $0.12 per share lower than it would have been under LIFO, according to the filing’s comparison.