Business context and reporting period
Alcoa Corporation’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2021. Alcoa produces bauxite, alumina and aluminum through three reportable segments: Bauxite, Alumina and Aluminum. Unless otherwise noted, amounts are in millions of U.S. dollars.
Financial and operating performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Sales | $3,109 | $2,365 | $8,812 | $6,894 |
| Income (loss) before tax | $497 | $22 | $1,270 | $136 |
| Net income (loss) attributable to Alcoa | $337 | $(49) | $821 | $(166) |
| Diluted EPS | $1.76 | $(0.26) | $4.32 | $(0.89) |
| Segment Adjusted EBITDA | $784 | $359 | $1,978 | $919 |
Q3 gross profit, calculated as sales less cost of goods sold, was $787, or approximately 25.3% of sales, versus $327, or approximately 13.8%, a year earlier. Cost of goods sold was $2,322 in the quarter and $6,770 year to date. Q3 tax expense was $127 (25.6% of pretax income); the nine-month provision was $331.
Q3 segment Adjusted EBITDA was $613 for Aluminum, $148 for Alumina and $23 for Bauxite. The main year-over-year drivers were higher aluminum and alumina prices and regional premiums. The Aluminum segment benefited most from stronger metal pricing; Bauxite results were lower, including because of weaker realized prices and currency effects year to date.
Cash provided by operations was $355 for the first nine months, nearly unchanged from $356 in 2020. Investing activities provided $471, including $715 of asset-sale proceeds, while capital expenditures were $237. Financing activities used $966, largely reflecting debt redemptions and distributions to the noncontrolling interest. Cash and cash equivalents were $1,452 at September 30, versus $1,607 at year-end 2020.
Total current assets were $4,285 and current liabilities $2,929 at September 30. Long-term debt was $1,724, with $1 due within one year; the filing also reports $77 of short-term borrowings in its financial-instruments disclosure. The $1.5 billion revolving credit facility was undrawn, and Alcoa reported covenant compliance and access to the full facility.
Material changes versus comparable periods
- Q3 sales rose about 31% year over year; nine-month sales rose about 28%. Higher realized aluminum and alumina prices were central contributors.
- Alcoa moved from losses in the comparable 2020 periods to profitability in 2021. Nine-month net income attributable to Alcoa improved by $987.
- Nine-month cash from operations remained essentially flat despite much higher earnings. Higher receivables and inventories used cash, as did a $500 discretionary U.S. pension contribution.
- Alcoa issued $500 of 4.125% notes due 2029, then redeemed $750 of 6.75% notes due 2024 and $500 of 7.00% notes due 2026. Redemption premiums and write-offs produced $54 of debt-extinguishment losses in 2021.
- Asset sales included the Warrick Rolling Mill, completed in March for approximately $670 of total consideration, and the Eastalco site, sold in June for $100. The sales generated reported gains, while Alcoa retained the Warrick smelter and power plant.
Outlook, commentary, risks and unusual items
- San Ciprián strike: The strike at the Spanish refinery and smelter resumed September 27. Alcoa estimated a potential approximately $90 adverse impact on attributable net income in Q4, alongside working-capital and operating-cash-flow pressure. The Spanish Supreme Court subsequently confirmed the ruling rejecting Alcoa’s appeal of a labor-related decision; the full ruling was pending at filing.
- Alumar: Damage to a ship unloader reduced refinery output and affected all three segments; the Q3 attributable net-income impact was $18. Temporary cranes restored production to approximately 95% of capacity in early October. Alcoa also began restarting its 268-kmt share of previously curtailed smelting capacity; first metal was expected in Q2 2022 and full operation in Q4 2022. Estimated restart cost was about $75, including $10 of capital expenditure.
- Segment outlook: Management expected Q4 Bauxite results to partially recover as Alumar unloading improved, and expected higher Alumina shipments and Alumar production to help offset higher input costs. Aluminum faced raw-material inflation, higher production costs and seasonally weaker hydro-related results; San Ciprián strike conditions were expected to add costs and shipment delays.
- Other operating items: Alcoa permanently closed the previously curtailed Lake Charles anode facility, recording $27 of Q3 charges. The Portland smelter began new five-year power agreements in August. Alcoa entered fixed-price commitments to protect the Alumar restart economics and mitigate some San Ciprián strike-related price risk.
- Capital returns: After quarter-end, the board declared a $0.10-per-share quarterly dividend and authorized a new $500 share-repurchase program, bringing total authorized repurchases to $650. No shares were repurchased in Q3.
- Contingencies: The company disclosed significant unresolved tax and legal matters, including an Australian tax assessment of approximately $154 plus $509 of assessed interest and proposed penalties of approximately $92; Alcoa disputes the claims and says the loss range cannot be predicted. A Spanish court ruling found Alcoa liable for employee severance relating to divested facilities; Alcoa appealed and had not recorded a reserve. Environmental remediation reserves were $297.
- Market and financial risks: Commodity prices and premiums, energy and raw-material costs, currency movements, supply-chain constraints, COVID-19, labor disruptions, tax and environmental matters, and derivative exposures may affect results. At September 30, derivative liabilities totaled $1,577, largely Level 3 power contracts; assuming market rates remained constant, a $273 realized loss related to power contracts was expected to be recognized over the next 12 months.
- Subsequent events: Alcoa expected to record a $63 pension settlement loss in Q4 after transferring $55 of obligations and assets for approximately 800 Suriname plan participants to an insurer.
Important facts for investors to verify
- Whether Alcoa’s improved earnings and segment margins persist if aluminum and alumina prices, premiums or energy costs change.
- The duration and full financial, shipment and cash-flow effects of the San Ciprián strike, including the consequences of the Spanish Supreme Court ruling.
- Alumar restart spending, schedule, output ramp and the performance of its energy arrangements.
- Working-capital conversion and operating cash generation, given the year-to-date build in receivables and inventories and the pension contribution.
- Outcomes of the Australian tax dispute, Spanish employee claims and other contingencies, as well as changes in environmental reserves.
- Debt, liquidity and power-contract exposures, including the expected recognition of derivative losses and the company’s planned dividend and repurchases.