Alcoa Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparative period is Q1 2019. Amounts are in U.S. dollars, millions, except per-share and operating data. Alcoa produces bauxite, alumina, and aluminum.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Sales | $2,381 | $2,719 |
| Cost of goods sold | $2,025 (85% of sales) | $2,180 (80% of sales) |
| Income (loss) before taxes | $219 | $92 |
| Net income (loss), consolidated | $139 | $(58) |
| Net income (loss) attributable to Alcoa | $80; diluted EPS $0.43 | $(199); diluted EPS $(1.07) |
| Cash from (used for) operations | $(90) | $168 |
| Capital expenditures | $91 | $69 |
| Cash and cash equivalents at period end | $829 | $879 at Dec. 31, 2019 |
| Long-term debt, including current portion | $1,802 | $1,800 at Dec. 31, 2019 |
| Total assets / total liabilities | $13,651 / $7,840 | $14,631 / $8,745 at Dec. 31, 2019 |
Cash, cash equivalents, and restricted cash totaled $832 at quarter-end. Cash used in financing was $44; investing activities provided $107, principally from $199 of asset-sale proceeds, including the Gum Springs transaction. The filing reports approximately $1,430 of additional borrowing capacity under the $1.5 billion revolving facility at March 31; Alcoa was compliant with its covenants. Management said cash on hand, expected operating cash flows, credit options, and preservation measures were adequate for near-term operating and investing needs.
Material changes versus Q1 2019
- Sales declined $338, or 12%, mainly from lower alumina and aluminum prices, lower flat-rolled shipments, and the prior-year comparison including Spanish facilities divested in 2019.
- Alcoa-attributable earnings improved by $279, from a $199 loss to $80 of income. The principal benefit was the $180 gain on sale of the Gum Springs waste-processing business, along with favorable currency, lower raw-material and energy costs, lower taxes, and lower noncontrolling-interest earnings. Lower metal prices were a partial offset.
- The $180 gain was reported in other income; other income and expenses, net, was $(132), compared with expense of $41 a year earlier. Restructuring charges fell to $2 from $113, largely because Q1 2019 included charges for the Spanish smelter curtailments.
- Operating cash flow swung from $168 provided to $90 used. The company cited working-capital movements, payment timing, and higher pension contributions as factors.
- Segment Adjusted EBITDA was $375 versus $402. Bauxite was $120 versus $126; Alumina was $193 versus $372; Aluminum improved to $62 from a loss of $96. The Alumina decline reflected lower realized prices; Aluminum improved mainly with lower raw-material costs, Spanish divestitures, and Portland state-grant revenue.
Outlook, management commentary, and risks
- Alcoa said COVID-19 had not significantly affected Q1 financial and operating results, and all mines, refineries, and manufacturing facilities remained operating at the reporting date. However, demand weakness reduced demand for value-added aluminum products and pressured margins as sales shifted toward commodity-grade products.
- The Bécancour smelter restart was slowed, leaving it at about 85% of nameplate capacity at March 31; completion, previously expected by Q2-end, could be delayed. For Q2 comparisons, management expected lower bauxite intersegment prices, lower Alumina unit costs and improved maintenance, and Aluminum benefits from the restart and lower raw-material costs, partly offset by weaker value-added margins.
- Alcoa targeted approximately $900 of 2020 cash actions. Measures included reducing planned non-critical capital spending by $100, deferring $25 of certain environmental and asset-retirement payments, deferring approximately $220 of pension contributions to January 1, 2021, and approximately $35 of savings or deferrals from other measures. Separate 2020 programs targeted a $75–$100 working-capital benefit and about $100 of productivity and cost improvements.
- Alcoa announced after quarter-end that it would fully curtail Intalco’s 279,000 metric tons of capacity by July 2020. The smelter had a Q1 net loss of $24; the company expected approximately $25 of Q2 restructuring charges, primarily cash costs. The action would raise total curtailed smelting capacity to 880,000 metric tons, about 30% of global capacity.
- The Gum Springs sale was valued at $250: Alcoa received $200 at closing, with $50 held in escrow subject to post-closing conditions. The company recognized a $180 gain and anticipated approximately $10 of annual net-income improvement.
- Environmental remediation reserves were $327 at March 31. Disclosed tax matters include a potential Australian assessment of approximately $129, excluding interest and penalties, which management disputes and for which it had recorded no liability; and a Brazilian tax-credit matter with a stated reasonably possible loss range of $0–$43. Other legal and environmental proceedings may also affect results, although management did not expect other pending matters to have a material adverse effect based on information then available.
- Key risks include the duration and economic effects of COVID-19, aluminum and alumina prices and demand, liquidity and covenant headroom, customer and supplier credit, pension assets and contributions, asset recoverability, and environmental and tax contingencies. Management reported no Q1 impairment or additional deferred-tax valuation allowance, but said conditions could change.
Most important facts for investors to verify
- Whether the $180 Gum Springs gain and other favorable one-offs obscure underlying operating performance and cash generation.
- How quickly COVID-19 affects demand, product mix, realized prices, shipments, and the Bécancour restart.
- Whether Alcoa achieves its approximately $900 cash-action target and working-capital and productivity goals, and the effects of deferred pension contributions.
- Intalco curtailment timing, cash restructuring costs, and the resulting capacity and earnings effects.
- Available liquidity, actual facility usage, and ongoing compliance with debt covenants under the amended leverage terms.
- Developments in the Australian and Brazilian tax matters and environmental remediation estimates.