Alcoa Corporation — 2016 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2016; it is not a standalone fourth-quarter filing. Alcoa became an independent, publicly traded company on November 1, 2016, after separating from Alcoa Inc., renamed Arconic. The 2016 statements include the businesses that became Alcoa, but pre-separation periods are carve-out financials with allocated parent-company costs and are not necessarily representative of standalone results. Alcoa produces bauxite, alumina, aluminum, cast and rolled products, and energy.
Financial performance
| Metric | 2016 | 2015 |
|---|---|---|
| Sales | $9.318 billion | $11.199 billion |
| Net loss attributable to Alcoa | $400 million | $863 million |
| EPS attributable to common shareholders | $(2.19) | $(4.73) |
| Cash from operations | $(311) million | $875 million |
| Capital expenditures | $404 million | $391 million |
| Year-end cash and cash equivalents | $853 million | $557 million |
| Total debt | $1.445 billion | $225 million |
| Cost of goods sold as a percentage of sales | 84.8% | 80.7% |
Sales fell 17%, mainly from lower realized prices for alumina, aluminum and energy, lower alumina volume, and the absence of output from curtailed or closed capacity; higher bauxite sales partly offset the decline. The smaller attributable net loss reflected substantially lower restructuring charges, productivity gains, asset-sale gains, lower overhead and R&D, and a smaller tax provision, partly offset by weaker pricing and separation costs. The effective tax rate was 113.6% despite a pretax loss, largely because U.S. losses and credits did not generate a tax benefit. Interest expense was $243 million.
Fourth-quarter 2016 sales were $2.537 billion, net loss attributable to Alcoa was $125 million, and EPS was $(0.68). Fourth-quarter restructuring and other charges were $209 million, primarily tied to the Suriname closure and the Australian gas-asset impairment.
Segment after-tax operating income (ATOI), Alcoa’s segment performance measure, was $506 million versus $1.010 billion in 2015. Bauxite ATOI was $212 million ($258 million in 2015); Alumina $102 million ($476 million); Aluminum $(19) million ($1 million); Cast Products $176 million ($110 million); Energy $76 million ($145 million); and Rolled Products $(41) million ($20 million).
Liquidity, debt and cash flow
Operating cash flow swung to a use of $311 million, a $1.186 billion deterioration, driven by lower operating results and a $648 million adverse working-capital change. Cash ended the year at $853 million, including $818 million held outside the United States. Current assets were $3.181 billion and current liabilities $2.821 billion.
Alcoa issued $1.25 billion of senior notes: $750 million of 6.75% notes due 2024 and $500 million of 7.00% notes due 2026. It also established a $1.5 billion secured revolving credit facility maturing in 2021; no amounts were drawn at year-end, and Alcoa reported compliance with its financial covenants. The company forecast cash from operations and financing access would cover operating and investing needs over the next 12 months. Planned 2017 capital expenditures were approximately $450 million.
Material changes, outlook and notable items
- Restructuring and other charges declined to $318 million from $983 million. In December 2016, Alcoa approved permanent closure of the fully curtailed Suralco refinery and related Suriname bauxite mines; demolition and remediation were expected to begin in mid-2017 and finish by 2021. It also recorded a $72 million impairment of Western Australian gas exploration assets.
- Alumina production fell to 13.251 million metric tons from 15.720 million; aluminum production fell to 2.423 million metric tons from 2.811 million. The average alumina realized price declined to $254 per metric ton from $311; average realized primary aluminum price declined to $1,862 from $2,092.
- Management expected 2017 bauxite shipments of 47.5–48.5 million bone-dry metric tons, with incremental volumes from Juruti and Huntly. Alumina production would reflect about 200,000 metric tons less output from Point Comfort curtailment; productivity improvements were anticipated. Management estimated a 2017 effective tax rate of 30%–40%, subject to business and tax factors.
- Effective in 2017, Alcoa planned to combine smelting, cast products, rolled products and most energy operations into a single Aluminum segment, alongside Bauxite and Alumina; segment profitability would be reported using Adjusted EBITDA.
- Balance-sheet pension and other postretirement liabilities increased substantially after benefit plans were separated from the former parent. At year-end, accrued pension benefits were $1.851 billion and other postretirement benefits were $1.166 billion; the reported pension-plan net liability was also affected by plan scope and measurement changes.
- Major risks include volatile aluminum and alumina prices, energy costs and supply, global demand and competition, foreign-exchange and geopolitical exposure, environmental obligations, and execution of the separation and standalone systems. The filing reports $15.298 billion of energy-related purchase obligations over multiple years.
Contingencies and unusual items
Environmental remediation reserves were $324 million at year-end; recorded asset retirement obligations were $708 million in the related note. Alcoa assumed a remaining $148 million obligation under the prior Foreign Corrupt Practices Act resolution, payable in two $74 million installments; the first was paid in January 2017. Notable unresolved matters include a Brazilian VAT assessment of $43 million, a remaining Spanish tax assessment of $136 million, and an Italian energy matter with a previously disclosed reasonably possible loss range of $0–$97 million. Alcoa said outcomes for several matters could not be reasonably predicted. The filing also disclosed $354 million of maximum potential guarantees for third-party project financing and $444 million of outstanding bank guarantees and letters of credit.
Asset-sale gains contributed to 2016 other income, including $118 million from wharf property and $27 million from a natural-gas pipeline interest. Alcoa’s planned Yadkin hydroelectric project sale closed in February 2017; the company reported net proceeds of $241 million, of which $238 million was remitted to Arconic, and expected a pretax gain of approximately $120 million in first-quarter 2017.
Important facts for investors to verify
- Whether the 2016 cash-flow decline, price pressure and higher cost-of-sales ratio reverse, and how working capital performs.
- Whether the $1.445 billion debt load, interest costs, restrictive covenants and substantial long-term energy commitments remain manageable.
- Progress, costs and cash timing for Suriname closure and remediation, other environmental work, and pension funding.
- Outcomes of the Brazilian and Spanish tax assessments, Italian energy dispute, and other contingencies, including separation-related indemnities.
- Whether management’s 2017 shipment, productivity, tax-rate and capital-spending expectations are achieved; note that the filing’s historical results are not fully comparable with standalone-company results.