Alcoa Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Dollar amounts are in millions unless noted. Alcoa mines bauxite, refines alumina, and produces primary and flat-rolled aluminum and energy; its consolidated results include AWAC, in which Alumina Limited holds a 40% noncontrolling interest.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Sales | $3,579 | $2,859 | $6,669 | $5,514 |
| Income before taxes | $410 | $237 | $822 | $655 |
| Net income attributable to Alcoa | $75 | $75 | $225 | $300 |
| Diluted EPS | $0.39 | $0.40 | $1.19 | $1.61 |
| Segment Adjusted EBITDA | $969 | $558 | $1,624 | $1,182 |
- Sales increased 25% in Q2 and 21% in the first half, primarily from higher realized alumina and aluminum prices. Q2 alumina and primary aluminum realized prices were $467/ton and $2,623/ton, versus $314 and $2,199 a year earlier.
- Q2 cost of goods sold was 73.5% of sales, compared with 80.0%; first-half ratio was 75.2%, versus 78.2%. Higher prices helped, partly offset by higher carbon-material and caustic-soda costs, maintenance, and unfavorable currency movements.
- Despite higher sales and segment EBITDA, Q2 attributable net income was flat, and first-half attributable net income fell 25%. Higher restructuring charges and pension-related costs weighed on earnings; first-half 2017 also included a $120 gain on sale of energy operations.
- Q2 segment Adjusted EBITDA: Alumina $638 (prior year $227), Aluminum $231 ($234), and Bauxite $100 ($97). Alumina pricing drove most of the improvement.
Cash, debt and liquidity
- Six-month operating cash flow was a use of $375, versus generation of $385 in 2017. Drivers included a $731 unfavorable working-capital change and $692 pension contributions; net income and noncash adjustments partly offset these outflows.
- Capital expenditures were $169. Investing cash use was $174. Financing provided $286, including $553 of debt additions and $109 of noncontrolling-interest contributions, partly offset by $385 of distributions to noncontrolling interests.
- At June 30, cash and cash equivalents were $1,089 (plus $6 restricted cash); current assets were $4,281 and current liabilities $3,013 (current ratio approximately 1.42). Cash was $1,358 at year-end 2017.
- Total debt was approximately $1,929, including $13 due within one year, versus $1,404 at December 31, 2017. In May, Alcoa issued $500 of 6.125% senior notes due 2028, receiving $492 net proceeds; proceeds and cash funded discretionary pension contributions. Debt fair value was $2,043 at quarter-end.
Material changes, outlook and risks
- Pensions: Q2 included a $167 settlement charge related to transferring obligations for about 2,100 Canadian retirees to insurers. Alcoa made $605 of unscheduled pension contributions in Q2, including $500 to U.S. plans. The company said these U.S. payments were intended to reduce near-term pension funding risk.
- Wenatchee: Management decided not to restart the fully curtailed Washington smelter within the electricity-contract period and permanently closed one 38-kmt potline. The decision generated a $73 charge, including a $62 contractual payment and asset-related charges. Three other curtailed potlines, with 146 kmt capacity, remain.
- Operations: Bécancour labor negotiations led to a lockout and curtailment of two potlines (207 kmt). Alcoa expected lower Q3 aluminum output from this curtailment, partly offset by the Warrick restart; it also expected higher alumina, carbon-material and energy costs. The third Warrick potline restart was expected by year-end 2018. Alumina management anticipated higher Q3 caustic-soda, energy and maintenance costs. No overall numerical earnings guidance is provided in the text.
- Trade and markets: U.S. Section 232 tariffs applied to imports from the segment’s foreign operations, primarily Canada, from June 1, 2018. Key risks include aluminum and alumina prices and premiums, energy and input costs, foreign exchange, trade and regulatory changes, pension assumptions, operational disruptions, and environmental and legal outcomes.
- Contingencies: After quarter-end, Spain’s National Court denied an appeal concerning a former tax group. Alcoa expected to record a $30 charge in Q3 for its 49% share of the estimated loss; the companies’ total reassessment was estimated at $25–$61, subject to clarification and a new tax assessment. The $29 Boskalis arbitration award was paid in June. Environmental remediation reserves were $291 at June 30.
- The Portovesme smelter ownership transfer was completed; the company received notice that Invitalia would exercise an option to release Alcoa from specified future decommissioning obligations in exchange for staged payments. A $15 net benefit was recorded in restructuring charges.
- Fitch affirmed BB+ and raised its outlook to positive; Moody’s upgraded Alcoa to Ba1, stable outlook; S&P upgraded to BB+, stable outlook.
Investor verification priorities
- Reconcile the strong sales and segment EBITDA growth with flat Q2 and lower first-half earnings attributable to Alcoa, including the treatment of pension and restructuring charges.
- Assess whether negative operating cash flow, working-capital requirements, and large pension contributions are likely to persist.
- Review debt maturities, interest costs, and the use of debt proceeds for pension funding, alongside cash and liquidity needs.
- Track Bécancour labor and production developments, the Warrick restart, and the status of the remaining curtailed Wenatchee capacity.
- Monitor the Spanish tax reassessment and expected Q3 charge, environmental liabilities, and other legal or regulatory contingencies.
- Evaluate sensitivity to alumina/aluminum prices, regional premiums, tariffs, raw-material and energy costs, and foreign exchange.