Alcoa Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unless noted otherwise, amounts are in millions of U.S. dollars. The filing is unaudited.
Business context and reporting period
Alcoa operates through Bauxite, Alumina, and Aluminum segments. Its mines, refineries, and manufacturing facilities remained operational during the COVID-19 pandemic, with health and business-continuity measures in place. Management reported pandemic-related weaker demand for value-added aluminum products and pressure from low metal prices.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Sales | $2,148 | $2,711 | $4,529 | $5,430 |
| Net loss attributable to Alcoa | $(197) | $(402) | $(117) | $(601) |
| Diluted loss per share | $(1.06) | $(2.17) | $(0.63) | $(3.24) |
| Segment Adjusted EBITDA | $185 | $484 | $560 | $886 |
- Cost of goods sold was 89.9% of sales in Q2 and 87.4% for the first half, compared with 80.7% and 80.5%, respectively, in 2019.
- Q2 segment Adjusted EBITDA: Bauxite $131, Alumina $88, and Aluminum loss of $34. Alumina fell sharply from $369 in Q2 2019; Aluminum also declined from $3.
- For the six months, cash from operations was $198, versus $250 in 2019. Investing activities provided $28, primarily reflecting $199 of asset-sale proceeds, while capital expenditures were $168. Financing activities used $115. Ending cash and cash equivalents were $965; including restricted cash, the cash-flow statement reports $968.
- At June 30, cash was $965 and long-term debt was $1,801, with $1 due within one year. Total current assets were $3,179 and current liabilities $2,241. The $1,500 revolving credit facility remained available subject to its terms; Alcoa reported compliance with its covenants.
- In July, after quarter-end, Alcoa issued $750 of 5.500% senior notes due 2027 and received approximately $736 net proceeds, intended for general corporate purposes, including adding cash to the balance sheet.
Material changes versus the prior comparable period
- Sales declined 21% in Q2 and 17% in the first half. Management attributed the declines primarily to lower alumina and aluminum prices, reduced premiums as demand shifted away from value-added products, and the prior-year divestiture of Spanish facilities; higher Bécancour shipments partly offset the declines.
- Attributable net losses narrowed year over year, principally because restructuring charges and tax provisions were lower, noncontrolling-interest income declined, and raw-material and energy costs and currency effects were favorable. Lower commodity prices and product premiums partly offset these improvements.
- Q2 restructuring charges were $37, versus $370 in Q2 2019; first-half charges were $39, versus $483. The 2019 amounts included charges related to the Ma’aden Rolling Company divestiture and Spanish smelter curtailments.
- Alumina segment Adjusted EBITDA fell to $88 in Q2 from $369, mainly because of lower realized alumina prices. Bauxite EBITDA increased to $131 from $112. Aluminum EBITDA was a loss of $34 versus income of $3 in Q2 2019, but first-half Aluminum EBITDA improved to $28 from a loss of $93.
Outlook, management commentary, risks, and unusual items
- Management targeted approximately $900 of cash improvements during 2020 through pandemic-response actions, strategic measures, and working-capital and productivity programs; as of June 30, it said the company was on track. Actions included reducing planned non-critical capital expenditures by $100 and deferring approximately $220 of pension contributions to January 1, 2021 under the CARES Act.
- The Bécancour smelter restart was approximately 90% of nameplate capacity at June 30 and was expected to be completed in Q3, later than initially planned. Intalco’s remaining capacity was being curtailed, with the full 279 kmt curtailment expected in Q3; the smelter had a $71 net loss in the first half.
- Alcoa began a formal consultation process concerning a potential restructuring at its San Ciprián aluminum plant in Spain, potentially affecting up to 534 employees. No final decision had been made; the alumina refinery was not part of the consultation.
- For Q3, management cited possible continued low metal prices and lower value-added product margins. It expected lower bauxite and caustic-soda costs in Alumina, partly offset by higher energy costs, and expected Aluminum benefits from the Bécancour restart, Intalco curtailment, and lower raw-material costs, partly offset by weaker value-added margins.
- COVID-19 risks include further demand and price weakness, customer or supplier liquidity issues, financing and covenant pressure, deferred-tax-asset and asset-impairment risks, and pension-funding effects. Management reported no impairment or additional valuation allowance in Q2, but noted that future impacts remain uncertain.
- Australian tax dispute: The Australian Taxation Office issued assessments in July for approximately $147 of tax plus approximately $488 of compounded interest, with potential penalties not yet quantified. Alcoa disputes the position, expects to pay approximately $74 in Q3 under the dispute process, and has not recorded tax expense because it believes its position is more likely than not to be sustained. The company says the potential loss or range of loss cannot currently be predicted and could materially affect results or financial condition.
- The company recorded a $181 first-half gain related to the sale of its Gum Springs waste-processing facility; $50 of the $250 transaction value remained in escrow subject to post-closing conditions. Alcoa also reported $323 of environmental remediation reserves at June 30.
Most important facts for investors to verify
- Whether lower alumina and aluminum prices, premiums, and value-added demand continue to pressure sales and segment profitability.
- Whether the Bécancour restart and Intalco curtailment meet expected timing, and the outcome of the San Ciprián consultation.
- Whether Alcoa achieves its 2020 cash-improvement target and maintains liquidity and compliance with revised credit-facility covenants.
- The Australian tax dispute’s eventual assessment, penalties, interest, cash payments, and resolution; also monitor environmental and other tax contingencies.
- How the July 2027 notes affect cash, interest expense, debt levels, and revolving-credit availability.