Alcoa Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Alcoa is a standalone, publicly traded producer spanning bauxite mining, alumina refining, aluminum smelting and casting, and related energy operations. It separated from Arconic on November 1, 2016; Q1 2016 results therefore reflect historical carve-out reporting and allocated parent-company costs, and are not fully comparable to standalone 2017 results.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Sales | $2.655 billion | $2.129 billion |
| Net income (loss) attributable to Alcoa | $225 million | $(210) million |
| Diluted EPS | $1.21 | $(1.15) |
| Cash provided from (used for) operations | $74 million | $(359) million |
| Capital expenditures | $71 million | $86 million |
- Sales increased 25%, primarily from higher realized alumina and aluminum prices and higher shipment volumes. COGS was 76.9% of sales, versus 87.6% a year earlier.
- Segment Adjusted EBITDA was $613 million, versus $257 million: Bauxite $110 million ($77 million prior year), Alumina $297 million ($15 million), and Aluminum $206 million ($165 million). The company changed its segment profit measure to Adjusted EBITDA and reorganized segments; the measure may not be comparable with similarly named measures at other companies.
- Q1 net income includes a $120 million gain on the sale of the Yadkin hydroelectric project. The $246 million sale price included $5 million deferred; $238 million of proceeds was remitted to Arconic under the separation agreement.
- Cash and equivalents were $804 million at March 31, down from $853 million at year-end. Current assets were $3.404 billion and current liabilities $2.623 billion. Total debt was $1.451 billion ($20 million current and $1.431 billion long-term); long-term debt fair value was reported at $1.568 billion.
- Operating cash flow improved by $433 million year over year, reflecting improved results and a favorable working-capital change. Financing used $260 million, including the Arconic payment and $33 million net cash paid to Alumina Limited; investing provided $131 million, largely from Yadkin sale proceeds.
Material changes and unusual items
- Alumina’s average realized price rose to $325 per metric ton from $229; aluminum’s average realized primary-metal price rose to $2,080 from $1,815. Alumina shipments increased to 2,255 kmt from 2,168 kmt; aluminum shipments increased to 801 kmt from 764 kmt.
- Production was lower in alumina (3,211 kmt versus 3,330 kmt) and primary aluminum (559 kmt versus 600 kmt). Alumina output reflected the full curtailment of Point Comfort; aluminum output was affected by a December 2016 power outage at Portland, where a potline was being restarted.
- Restructuring charges declined to $10 million from $84 million. Q1 2017 charges primarily included $13 million of additional contract costs at the curtailed Wenatchee smelter, partly offset by a $5 million reserve reversal. Q1 2016 included major closure and curtailment costs.
- Interest expense fell to $26 million from $64 million, mainly because Q1 2016 included allocated ParentCo interest costs; this was partly offset by interest on Alcoa debt issued in September 2016.
- Cash-flow hedges and other derivatives were material: Alcoa reported a $308 million after-tax OCI loss on cash-flow hedges attributable to Alcoa shareholders, while foreign-currency translation contributed $239 million of OCI income. Derivative valuations include significant unobservable inputs.
Outlook, commentary and risks
- Management did not provide a clear consolidated full-year earnings or revenue guidance figure in the supplied filing text. It anticipated higher Q2 costs for bauxite energy and maintenance, alumina bauxite/caustic and maintenance, and aluminum alumina and energy, partly offset by expected aluminum productivity improvements.
- Alcoa expected approximately $30 million of pretax higher energy costs and/or mark-to-market losses for April–July 2017 after changes to power hedges associated with the Portland smelter. A replacement power hedge was arranged for August 2017 through July 2021.
- Key exposures include commodity prices and premiums, energy costs, foreign exchange, pension assumptions, operating and restart execution, political and regulatory conditions, environmental remediation, litigation and tax disputes. The company’s forward-looking statements caution that actual results may differ materially.
- Environmental remediation reserves were $324 million, including $60 million current. Contingencies include a $140 million Spanish tax assessment for 2006–2009 (including interest), Brazilian tax disputes, and other matters whose outcomes or losses may not be predictable. The filing says the ultimate outcome of these matters cannot presently be reasonably predicted.
- Alcoa guaranteed portions of financing for its Saudi joint venture; disclosed debt-service coverage includes principal and potential interest payments. The company also reported Fitch’s April 24, 2017 long-term debt rating of BB+ with a stable outlook.
- The interim financial statements were reviewed by PwC, not audited. Management concluded disclosure controls were effective and reported no material Q1 changes in internal control over financial reporting.
Most important facts for investors to verify
- How much of the earnings improvement and segment EBITDA growth is recurring, versus the $120 million Yadkin gain, higher commodity prices, and the prior-year carve-out cost allocations.
- Whether Portland’s potline restart and power arrangements proceed as planned, and whether the estimated $30 million near-term energy impact is realized.
- Cash conversion and working-capital trends, including the inventory increase, alongside capital spending and Saudi joint-venture funding needs.
- Developments in the Spanish and Brazilian tax matters, environmental remediation obligations, and Saudi joint-venture guarantees.
- Comparability of segment results following the reporting-segment realignment and adoption of Adjusted EBITDA as the segment performance measure.