Alcoa Corporation — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter filing; the filing also provides unaudited quarterly results. Amounts are in U.S. dollars unless noted.
Business context and key financial results
Alcoa is a vertically integrated producer operating in bauxite mining, alumina refining, aluminum production, and energy. Its three reportable segments are Bauxite, Alumina, and Aluminum. The filing consolidates AWAC, in which Alcoa owns 60%; Alumina Limited’s 40% share is reflected as noncontrolling interest.
- Revenue: $13.403 billion, up 15% from $11.652 billion in 2017, primarily from higher realized alumina and aluminum prices.
- Profit: Consolidated net income was $871 million; net income attributable to Alcoa Corporation was $227 million, or $1.22 basic and $1.20 diluted per share. The difference principally reflects $644 million attributable to noncontrolling interests.
- Operating costs and margin indicator: Cost of goods sold was $10.081 billion. COGS was 75.2% of sales versus 77.2% in 2017. Higher selling prices and a favorable LIFO adjustment helped, partly offset by higher input, maintenance, transportation, and tariff costs.
- Segment Adjusted EBITDA: Total was $3.203 billion versus $2.725 billion. Alumina contributed $2.373 billion (up from $1.289 billion), Bauxite $426 million (little changed), and Aluminum $404 million (down from $1.012 billion). This is a non-GAAP segment measure and is not directly comparable across companies.
- Cash flow and investment: Operating cash flow was $448 million, down from $1.224 billion. Capital expenditures were $399 million, including $307 million sustaining and $92 million return-seeking; environmental-control capital spending was approximately $145 million.
- Liquidity and debt: Year-end cash and cash equivalents were $1.113 billion; current assets were $4.134 billion and current liabilities $2.919 billion. Debt was $1.802 billion on the balance sheet. The $1.5 billion secured revolving facility was undrawn at year-end, and the company reported compliance with its covenants.
- Balance sheet: Total assets were $15.938 billion, down from $17.447 billion; total equity was $7.394 billion. Cash dividends were not declared in 2018.
Fourth-quarter results and comparison
Fourth-quarter 2018 sales were $3.344 billion and net income attributable to Alcoa Corporation was $43 million, or $0.23 per diluted share. In fourth-quarter 2017, sales were $3.174 billion and the company reported a $196 million attributable loss, or $1.06 per diluted share. Fourth-quarter 2018 included $138 million of restructuring and other charges, primarily the allowance on certain Brazilian value-added tax credits.
Material changes, outlook, risks, and unusual items
- Earnings mix and cash conversion: Alumina’s strong results from higher prices drove segment EBITDA growth, while Aluminum EBITDA fell substantially as higher alumina, energy, and carbon costs, U.S. import tariffs, lower shipments, and derivative losses offset improved selling prices. Operating cash flow declined notably, including $992 million of pension contributions and a $596 million unfavorable working-capital change.
- Significant charges and actions: Restructuring and other charges totaled $527 million, including $331 million for pension and retiree-benefit settlements/curtailments, a $107 million allowance on Brazilian state VAT credits, and a $62 million Wenatchee power-contract payment. The company also recorded a $30 million tax charge for its estimated share of a Spanish tax dispute and paid a $29 million arbitration award related to Suriname mining services.
- Operations and labor: Bécancour capacity was curtailed amid a labor lockout; Wenatchee’s three remaining potlines remained curtailed and one potline was permanently closed. After year-end, Alcoa curtailed the remaining 124 kmt of combined operating capacity at Spain’s Avilés and La Coruña smelters. The company estimated possible first-half 2019 restructuring charges of $215–$250 million, with about 40% noncash, while pursuing a potential sale of the plants.
- Management outlook: 2019 capital expenditures were expected to be approximately $450 million ($300 million sustaining; $150 million return-seeking). Management anticipated a 2019 effective tax rate of 65%–70%, higher bauxite and energy costs in Alumina (with lower caustic soda costs), and lower Aluminum-segment production at Avilés, La Coruña, and Bécancour, partly offset by higher Warrick output. The filing notes expected Section 232 tariff costs in the first half of 2019.
- Key risks: Aluminum and alumina price volatility, energy and raw-material costs, tariffs and trade actions, foreign exchange, labor disputes, environmental remediation, pension funding, joint-venture exposure, and changes in global demand and supply. The company participates in environmental assessments and cleanups at about 60 locations; remediation reserves were $280 million at year-end. Certain legal and tax matters remain uncertain, including the Brazilian VAT-credit dispute and Spanish tax assessment.
Most important facts for investors to verify
- Whether higher alumina prices and the sharp improvement in Alumina segment EBITDA can persist, and how falling aluminum prices or input costs could affect integrated earnings.
- Drivers of the decline in operating cash flow, the sustainability of working-capital needs, and future pension contributions; 2019 minimum required pension funding was estimated at $310 million.
- Outcome and cash cost of the Avilés/La Coruña sale process and related restructuring, including the estimated $215–$250 million charge.
- Whether Brazilian state VAT credits can ultimately be monetized; management recorded a $107 million allowance and stated that restarting the São Luís smelter is the only identified route to monetize state credits.
- Exposure to the Spanish tax dispute, environmental obligations, energy commitments, and debt covenants; review the full contingencies and contractual-obligations disclosures for timing and potential variability.