Alcoa Corporation — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Amounts are in millions of U.S. dollars unless stated otherwise. Alcoa produces bauxite, alumina and aluminum products, with operations reported in Bauxite, Alumina and Aluminum segments.
Financial performance
- Revenue: Q3 sales were $3.390 billion, up 14% from $2.964 billion. Nine-month sales were $10.059 billion, up 19% from $8.478 billion. Higher realized alumina and aluminum prices were the main drivers.
- Profit: Q3 consolidated net income was $155 million, but $196 million was attributable to noncontrolling interests, leaving an Alcoa Corporation net loss of $41 million, or $0.22 per diluted share. The prior-year quarter produced attributable income of $113 million, or $0.60 per diluted share. Nine-month attributable income fell to $184 million, or $0.97 per diluted share, from $413 million, or $2.21.
- Segment Adjusted EBITDA: Q3 totaled $839 million, versus $630 million. Alumina rose to $660 million from $203 million; Aluminum declined to $73 million from $315 million; Bauxite was $106 million versus $112 million. Nine-month total was $2.463 billion, up from $1.812 billion.
- Costs and margins: Cost of goods sold was 74.7% of sales in Q3, versus 78.9%; for nine months it was 75.0%, versus 78.5%. Better pricing and, in Q3, favorable currency effects outweighed higher costs for energy, caustic soda and carbon materials in this measure. Aluminum segment costs and tariffs pressured its results.
- Cash flow: Nine-month operating cash flow was negative $87 million, compared with positive $769 million a year earlier. The period included $940 million of pension contributions and $660 million of unfavorable working-capital changes. Capital expenditures were $251 million; investing cash outflow was $257 million.
- Liquidity and debt: Cash and cash equivalents were $1.022 billion at quarter-end, down from $1.358 billion at year-end 2017. Current assets were $4.193 billion and current liabilities $3.004 billion. Debt totaled $1.824 billion, including $500 million of 6.125% notes due 2028 issued in May; the proceeds principally funded pension contributions. Cash exceeded debt by approximately $802 million at quarter-end, compared with approximately $46 million at year-end.
Material changes and notable items
- Q3 attributable results turned to a loss despite higher sales, reflecting higher input and operating costs, pension-related charges, increased taxes and a larger share of AWAC earnings allocated to Alumina Limited. Nine-month results also reflected the absence of a prior-year $120 million gain on asset sales.
- Alumina pricing strengthened substantially: Q3 average realized price was $493 per metric ton, compared with $314; nine-month price was $447, compared with $318. Aluminum realized prices also rose, but Aluminum segment Adjusted EBITDA fell, in part because of higher alumina, carbon and energy costs, Section 232 tariffs and realized losses on embedded energy-contract derivatives.
- Restructuring and other charges were $177 million in Q3 and $389 million for nine months, versus Q3 income of $10 million and nine-month charges of $12 million in 2017. The 2018 charges included pension and postretirement plan settlements/curtailments and a $73 million Wenatchee smelter charge. Alcoa decided not to restart that smelter within its power-agreement window and permanently closed one potline.
- Alcoa made $705 million of unscheduled pension contributions during the first nine months, including $600 million to U.S. plans. The $492 million net proceeds from the new notes, plus available cash, funded the U.S. contributions. Pension liability balances fell materially during the period.
Outlook, risks and contingencies
- No consolidated full-year numerical guidance is provided in the supplied filing text. Management expected higher Bauxite production and shipments in Q4; Alumina faced expected higher caustic soda, bauxite and maintenance costs; Aluminum faced higher alumina and carbon costs and Section 232 tariff expense.
- After quarter-end, the board authorized a share repurchase program of up to $200 million, subject to cash availability, market conditions and other factors, with no predetermined expiration date.
- On October 31, 2018, Alcoa began a 30-day consultation process concerning potential dismissal of all employees at its Avilés and La Coruña smelters in Spain (317 and 369 employees, respectively). Any resulting restructuring charge would be recognized in a future period.
- Alcoa recorded a $30 million tax charge for its 49% share of an estimated Spanish tax liability. The underlying assessment was expected to be $25–$61 million after consideration of available tax losses and credits; an appeal was being prepared. Other exposures include Brazilian tax-credit disputes and environmental remediation. Environmental remediation reserves totaled $285 million at September 30, 2018.
- Key business risks include commodity prices and premiums, energy and raw-material costs, currency movements, operating disruptions, labor disputes, trade and regulatory changes, pension obligations, legal and environmental matters, and derivative valuation and counterparty risks. The filing notes that some litigation outcomes cannot be reasonably predicted.
Important facts for investors to verify
- Whether alumina pricing and Alumina segment performance can offset cost inflation and weakness in Aluminum segment profitability.
- How recurring operating cash generation develops after the unusually large pension contributions and working-capital outflow.
- The amount, timing and funding of any share repurchases, in light of reduced cash and higher debt following the 2028 note issuance.
- Developments in the Spain tax appeal and potential smelter closures, including any future charges or cash obligations.
- Changes in environmental reserves, other legal contingencies, and the significant assumptions underlying long-dated energy and commodity derivatives.