Alcoa Corp quarterly report, Q1 FY2018

Alcoa Corporation — Q1 2018 Form 10-Q

Reporting period: Three months ended March 31, 2018. Alcoa mines and refines bauxite and alumina and produces primary and flat-rolled aluminum and energy. Results are unaudited; the filing notes that interim results are not necessarily indicative of full-year performance. Unless stated otherwise, financial amounts are in millions of U.S. dollars.

Financial performance and liquidity

Metric	Q1 2018	Q1 2017 / comparison
Sales	$3,090	$2,655; up 16%
Income before taxes	$412	$418
Net income attributable to Alcoa	$150	$225; down $75
Diluted EPS	$0.80	$1.21
Cash provided from operations	$55	$74
Capital expenditures	$74	$71

• Sales growth reflected higher realized prices for primary aluminum, alumina and flat-rolled aluminum, and higher alumina volume. Primary aluminum sales were $1,647 versus $1,352; alumina sales were $913 versus $731.
• Cost of goods sold was 77.1% of sales, compared with 76.2%. Higher carbon-material and caustic-soda costs, maintenance expense and unfavorable currency movements offset much of the benefit from higher prices.
• Management attributed the lower attributable income mainly to the absence of the prior-year gain on the sale of energy operations, higher input and maintenance costs, and unfavorable currency movements. Improved aluminum and alumina pricing partly offset these pressures. The prior-year period included a $120 gain on energy-asset sales.
• Segment Adjusted EBITDA was $655 versus $624: Bauxite $110 (flat), Alumina $392 (up from $297), and Aluminum $153 (down from $217). Aluminum’s decline reflected higher alumina, carbon and energy costs, derivative losses, maintenance and transportation costs, and currency effects.
• Operating cash flow fell to $55, principally reflecting a $332 unfavorable working-capital change, including inventory growth of $169, plus pension contributions of $40. Cash and cash equivalents were $1,196 at quarter-end, down from $1,358 at year-end; cash plus restricted cash was $1,203. Current liabilities were $2,976 versus current assets of $4,149.
• Debt totaled $1,460 at March 31 ($15 current and $1,445 long-term), compared with $1,404 at year-end. Interest expense was $26, unchanged year over year. Financing cash outflow was $147, including $267 of distributions to noncontrolling interests, partly offset by contributions and borrowings.
• Total assets were $17,096 and total liabilities $9,579 at March 31, compared with $17,447 and $10,649, respectively, at December 31, 2017. Alcoa shareholders’ equity was $5,368.

Material changes and operating developments

• Alumina Adjusted EBITDA improved by $95, supported by higher realized prices and favorable sales mix; production was down 1%, while third-party shipments rose 5%. The average realized third-party alumina price increased to $385 per metric ton from $325.
• Aluminum Adjusted EBITDA declined by $64 despite a 19% increase in the average realized primary aluminum price, to $2,483 per metric ton from $2,080. Aluminum production was down 1% and shipments down 1%.
• A labor lockout at the Bécancour, Canada smelter began in January and led to curtailment of two of three potlines, adding 207 kmt of idle capacity. At quarter-end, 1,063 kmt of smelting capacity was idle out of 3,211 kmt.
• Cash distributions to Alumina Limited, which owns 40% of relevant AWAC entities, contributed to higher noncontrolling-interest income ($124 versus $83) and the quarter’s financing outflow.
• Alcoa adopted new revenue-recognition guidance in 2018; it reported no financial-statement impact other than additional disclosures. Other accounting changes included reclassifying non-service pension costs to other expenses and including restricted cash in cash-flow statement cash totals.

Outlook, risks and unusual items

• No consolidated full-year earnings or cash-flow guidance is stated in the provided filing text. For Q2, management anticipated higher alumina prices, but also higher caustic soda and bauxite costs and planned maintenance. Aluminum production was expected to be flat year over year: Warrick’s partial restart and higher Portland production were expected to be offset by Bécancour’s curtailed potlines. Higher carbon and alumina costs were also expected.
• Management expected higher bauxite production at Juruti, Huntly and Willowdale in Q2, alongside increased maintenance expense for rescheduled overhauls in Australia and Brazil.
• In April 2018, Alcoa completed a Canadian pension annuity transfer involving approximately $555 of plan obligations and assets, paid a $25 transaction fee and contributed approximately $95 to the plans. It expected to record a non-cash second-quarter settlement charge of about $175 pre-tax, or $128 after tax ($0.68 per share).
• Commodity-price, energy, currency, global economic, political and trade-policy changes may affect results. The filing specifically flags uncertainty from U.S. tariffs and proposed quotas, possible retaliatory trade measures, U.S. sanctions on Russian entities including Rusal, and supply or regulatory developments in Brazil and China.
• Material contingencies include a $284 environmental remediation reserve at March 31; a Spanish tax assessment of $161, which Alcoa is contesting; and Brazilian tax-credit disputes with stated reasonably possible loss ranges. Alcoa says outcomes are uncertain. It also reported guarantees connected with Saudi joint-venture project financing.
• The filing describes Level 3 derivative valuations with significant unobservable inputs. At March 31, disclosed Level 3 derivative assets were $124 and liabilities were $531; Alcoa expects a $67 realized loss in sales and a $46 realized gain in cost of goods sold over the next 12 months, assuming market rates remain unchanged.
• A net $19 restructuring benefit in Q1 included a $23 pension and postretirement curtailment gain and a $4 Wenatchee contract charge. The filing also notes the April 2018 Sherwin/Copano environmental settlement agreements; management considered the $29 reserve sufficient, subject to changes in facts or circumstances.

Investor verification priorities

1. Check whether higher aluminum and alumina prices continue to offset rising input, maintenance, energy and currency costs, particularly in the Aluminum segment.
2. Monitor the Bécancour labor dispute and the timing and economics of planned Warrick and other capacity restarts.
3. Assess cash conversion and working-capital needs, including inventory builds, pension contributions and planned capital spending.
4. Review the assumptions and earnings effects of Level 3 derivatives and hedges, including expected future realized gains or losses.
5. Track the Canadian pension settlement charge, the Spanish and Brazilian tax matters, environmental reserves and Saudi project-financing guarantees.
6. Evaluate the effects of tariffs, sanctions and potential retaliatory trade actions on aluminum and alumina markets and Alcoa’s operating footprint.