Alcoa Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Figures are in millions of dollars unless stated otherwise. Alcoa became a standalone public company on November 1, 2016, so 2016 comparisons include pre-separation historical results and are not fully like-for-like. Interim statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Sales | $2,964 | $2,329 | $8,478 | $6,781 |
| Income (loss) before tax | $288 | $102 | $943 | $(39) |
| Net income (loss) attributable to Alcoa | $113 | $(10) | $413 | $(275) |
| Diluted EPS | $0.60 | $(0.06) | $2.21 | $(1.51) |
| Segment Adjusted EBITDA | $619 | $358 | $1,778 | $1,008 |
- Sales increased 27% in Q3 and 25% over nine months, driven mainly by higher realized aluminum and alumina prices and higher overall volumes. Q3 alumina shipments declined, while aluminum product shipments rose.
- Net income attributable to Alcoa improved by $123 in Q3 and $688 over nine months. Management cited stronger prices, lower restructuring charges, and the absence of pre-separation allocated interest and separation costs; offsets included higher input and maintenance costs, foreign exchange effects, taxes, and greater noncontrolling-interest earnings.
- Cost of goods sold was 79.7% of sales in Q3 and 79.2% over nine months, versus 84.5% and 85.2%, respectively, in 2016. These are cost-of-goods-sold ratios, not gross-margin disclosures.
- Segment Adjusted EBITDA rose across all three segments year over year. Nine-month 2017 amounts: Bauxite $321, Alumina $727, and Aluminum $730. Adjusted EBITDA is a non-GAAP segment measure and may not be comparable with similarly named measures at other companies.
- Cash provided by operations was $769 for the first nine months, versus cash used of $550 a year earlier. Capital expenditures were $255; cash and cash equivalents were $1,119 at September 30, up from $853 at year-end 2016.
- At September 30, current assets were $3,804 and current liabilities $2,766 (current ratio about 1.38). Debt was $1,401, including $17 due within one year; cash exceeded reported debt by about $282. Total liabilities were $9,136 and equity $8,118.
Material changes, outlook, and notable items
- Alcoa sold the Yadkin hydroelectric project for $246 cash and recorded a $120 gain in the first nine months. Under the separation agreement, $243 of sale proceeds was remitted to Arconic.
- Alcoa announced restart of three Warrick smelter potlines, 161,400 metric tons of capacity, expected to be completed in Q2 2018. The filing says the assets written down to zero during the earlier closure will remain at zero carrying value when returned to service; only new assets will be depreciated.
- For Q4 comparisons with Q4 2016, management anticipated higher bauxite production and total shipments, higher alumina costs for caustic soda and bauxite, and higher Aluminum-segment costs for alumina and carbon materials.
- On October 10, 2017, after quarter-end, Alcoa agreed to terminate the long-term Rockdale power, fuel, and lease arrangements, paid $238, and transferred related land and other items. It expects to record an approximately $250 pre- and after-tax Q4 charge, and expected a decision on remaining Rockdale facilities by year-end 2017.
- Q3 restructuring and other charges were a net credit of $10, including a $29 reversal of liabilities after the Warrick restart decision. Nine-month charges were $12. Approximately 70 of 120 employees associated with 2017 restructuring programs had been separated by quarter-end; remaining separations were expected by year-end.
- The estimated 2017 annual effective tax rate was 34.2%. A Brazilian tax holiday reduced the Juruti mine tax rate from 34% to 15.25% for ten years, effective retroactively from January 1, 2017; remeasurement of deferred tax assets produced a $10 noncash charge.
- Risks and contingencies include commodity and energy price volatility, foreign exchange, pension assumptions, operational disruptions, and environmental and legal matters. Notable exposures include a Spanish tax assessment of $152 for 2006–2009 (outcome not reasonably predictable), Brazilian tax disputes, the Sherwin refinery environmental and contractual matters, and a $306 environmental remediation reserve. Alcoa also has project-financing guarantees for its Saudi joint venture.
Most important facts for investors to verify
- Whether improved realized aluminum and alumina prices and shipment volumes persist, and how higher energy, maintenance, caustic soda, and carbon costs affect margins.
- Warrick restart timing, spending, ramp-up, and realized operating benefits; and the Q4 Rockdale charge and strategic review outcome.
- Cash conversion and working-capital trends, capital spending, debt, and future contributions or guarantee exposure related to the Saudi joint venture.
- Developments in the Spanish and Brazilian tax matters, Sherwin disputes, and environmental remediation obligations.
- The impact of segment reorganization and the switch to Adjusted EBITDA on comparisons; also note that pre-separation 2016 costs and EPS were allocated or pro forma.