Alcoa Corporation — 2016 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unless otherwise stated, figures are in millions of dollars. The unaudited statements are combined carve-out financials prepared while Alcoa Corporation was part of Alcoa Inc. (renamed Arconic); allocations and cash flows may not reflect results as a standalone company. The separation was completed November 1, 2016.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total sales | $2,329 | $2,679 | $6,781 | $8,748 |
| Net income (loss) | $14 | $(63) | $(203) | $151 |
| Net loss attributable to Alcoa Corporation | $(6) | $(124) | $(261) | $(37) |
| Pro forma diluted loss per share | $(0.04) | $(0.68) | $(1.43) | $(0.20) |
| Cash from (used for) operations | Not stated for quarter | $(550) | $822 |
- Sales fell 13% in Q3 and 22% for the nine-month period. Cost of goods sold was 84.3% of sales in Q3 and 85.0% for the nine months, versus 83.6% and 78.7%, respectively, in 2015.
- Q3 results improved year over year, in part due to productivity gains, lower restructuring charges, and a $118 gain on sale of Intalco-area wharf property. Nine-month attributable loss widened, principally reflecting lower pricing across operations.
- Segment after-tax operating income (ATOI) was $139 in Q3 versus $179 a year earlier and $328 for nine months versus $927. Alumina ATOI fell to $16 in Q3 and $21 for nine months, from $133 and $457, respectively; Aluminum improved to $10 in Q3 from a loss of $96, but declined to a nine-month loss of $16 from income of $89.
- At September 30, cash and cash equivalents were $241; restricted cash was $1,228. Current assets were $3,622 and current liabilities $2,206. The restricted funds were escrowed in connection with the debt offering and should not be treated as freely available liquidity.
- Debt on the balance sheet totaled approximately $1,478, including $21 due within one year. The company issued $750 of 6.75% notes due 2024 and $500 of 7.00% notes due 2026; net proceeds of $1,228 were held in escrow at quarter-end. A $1.5 billion secured revolver was undrawn. The company reported it would have met the facility’s financial covenants at September 30.
- Nine-month capital expenditures were $258. Total equity fell to $9,126 from $11,513 at year-end 2015, including a $2,528 reduction associated with establishing defined-benefit plans and a $2,878 increase in accumulated other comprehensive loss.
Material changes and operating developments
- Lower alumina prices were a major headwind: the realized price averaged $248 per metric ton in Q3 and $247 for nine months, versus $314 and $328 in 2015. Alumina shipments declined 16% in both periods.
- Primary aluminum production fell 16% in Q3 and 13% for nine months, reflecting the Warrick closure and curtailments at Wenatchee and São Luís. The realized primary aluminum price was $1,873 per metric ton in Q3 and $1,847 for nine months, down from $1,906 and $2,190.
- Cash used for operations swung to $550 from $822 provided in the first nine months of 2015. Management cited weaker operating results and a $677 unfavorable working-capital change, partly offset by lower gas-contract prepayments.
- In April, Alcoa sold its 20% interest in an Australian gas pipeline for $145 and recorded a $27 pretax gain. It retained access to pipeline capacity. The company also recorded the $118 wharf-property gain in Q3.
Outlook, risks, and unusual items
- No overall company earnings or revenue guidance is provided. Management expected Q4 bauxite third-party shipments and productivity to improve; alumina production to reflect the Point Comfort and Suralco curtailments, alongside productivity improvements; and aluminum output to be about 90 kmt lower year over year. It also expected lower Brazilian energy prices and continued pressure in rolled-products packaging pricing and Warrick cold-metal operating costs.
- Restructuring charges were $17 in Q3 and $109 for nine months, down from $54 and $297 in 2015. Nine-month 2016 charges included costs from the Warrick smelter closure and Wenatchee smelter and Point Comfort refinery curtailments. The filing says further charges may occur.
- The Q3 income-tax provision was $92 on pretax income of $106; the nine-month provision was $178 despite a pretax loss of $25. Management attributed the high effective rates largely to U.S. losses and tax credits for which no benefit was realizable.
- Environmental remediation reserves were $231 at September 30; the company participates in assessments or cleanups at more than 100 locations. Other disclosed exposures include Spanish tax assessments totaling $274, disputed Brazilian tax matters, and litigation and remediation matters whose outcomes may be uncertain. The filing states some outcomes cannot reasonably be predicted.
- Alcoa’s share of Saudi joint-venture project debt was approximately $1,616 across the mine/refinery and smelting/rolling companies; related guarantees are contingent on default. The filing describes annual interest coverage and leverage covenants, and restrictions on dividends and other payments.
- After quarter-end, the separation became effective November 1, with Arconic retaining 19.9% of Alcoa. On December 1, a power outage halted one of two potlines at the Portland, Australia smelter; the other potline could be unstable. The financial impact was not yet known.
- Other significant risks identified include aluminum and alumina prices and premiums, foreign exchange, energy costs, pension assumptions and returns, restructuring execution, environmental and legal contingencies, and political, regulatory, and market conditions.
Important facts for investors to verify
- Post-separation cash, debt, and liquidity after the approximately $1.1 billion payment to Arconic, and the availability and conditions of the revolving facility.
- Whether lower alumina prices, reduced volumes, and capacity changes continue to weigh on segment results, and whether announced productivity gains materialize.
- The ongoing cash requirements and final costs of restructuring, environmental remediation, pension plans, and the identified tax and legal contingencies.
- The operational and financial consequences of the Portland smelter outage and any other developments after the reporting date.
- The extent to which standalone expenses differ from the parent-company allocations used in these combined financial statements.