Business context and reporting period
Alcoa Corporation’s Form 10-K covers the fiscal year ended December 31, 2017; quarterly figures include the fourth quarter of 2017. Alcoa is a global, vertically integrated producer of bauxite, alumina and aluminum, with operations in 10 countries. Following a 2017 realignment, it reported three segments: Bauxite, Alumina and Aluminum. Most Bauxite and Alumina operations are within AWAC, which Alcoa owns 60% of and consolidates; Alumina Limited owns the remaining 40%.
Key financial metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Sales | $11.652 billion | $9.318 billion |
| Net income (loss) attributable to Alcoa | $217 million | $(400) million |
| Diluted EPS | $1.16 | $(2.19) |
| Segment Adjusted EBITDA | $2.680 billion | $1.433 billion |
| Cash provided by (used for) operations | $1.224 billion | $(311) million |
| Capital expenditures | $405 million | $404 million |
- Sales rose 25%, primarily on higher realized aluminum and alumina prices and increased shipments. Cost of goods sold was 77.9% of sales versus 84.8% in 2016, equivalent to a gross margin of 22.1% versus 15.2%.
- 2017 segment Adjusted EBITDA: Alumina $1.289 billion (up from $378 million); Aluminum $964 million (up from $680 million); Bauxite $427 million (up from $375 million). The Alumina improvement was principally price-driven.
- At year-end, cash and cash equivalents were $1.358 billion, current assets $4.238 billion and current liabilities $3.252 billion. Balance-sheet debt carrying value was $1.404 billion; the $1.5 billion revolving facility was undrawn. The company reported compliance with its debt covenants.
- Alcoa reported a $600 million income tax provision and a 51.8% effective tax rate. The year-end balance sheet showed $6.798 billion in total equity, including $4.523 billion attributable to Alcoa shareholders.
Material changes versus the prior comparable period
- Alcoa returned to attributable profitability from a $400 million loss in 2016. Higher realized prices and shipments, lower allocated interest expense and the absence of prior-year separation costs were important contributors; higher taxes, raw-material, maintenance and transportation costs, foreign exchange and noncontrolling-interest earnings partly offset the improvement.
- Operating cash flow improved by $1.535 billion, from cash use of $311 million to cash generation of $1.224 billion. The filing attributes the change to stronger operating results and working capital, among other factors.
- Interest expense fell to $104 million from $243 million, mainly because 2016 included interest expense allocated from former parent Arconic. Restructuring and other charges remained material at $309 million, compared with $318 million.
- Fourth-quarter sales were $3.174 billion; Alcoa-attributable net loss was $196 million, compared with a $125 million loss in fourth-quarter 2016. The 2017 quarter included $297 million of pretax restructuring and other charges, mainly related to Rockdale, and $98 million of discrete tax charges.
- Other comprehensive loss attributable to Alcoa was $1.407 billion in 2017, including a $1.139 billion loss related to cash-flow hedges and a $456 million pension and postretirement-benefit loss. These items contributed to the decline in Alcoa shareholders’ equity from $5.654 billion to $4.523 billion.
Outlook, commentary, risks and unusual items
- Management expected 2018 capital expenditures of approximately $450 million, including $300 million for sustaining projects and $150 million for return-seeking projects. It anticipated higher bauxite production at Huntly and Juruti and increased shipments, as well as higher Alumina-segment caustic soda and bauxite costs and higher Aluminum-segment alumina and carbon-material costs.
- Alcoa planned to restart three Warrick smelter potlines, about 161,000 metric tons of annual capacity, by the second quarter of 2018. The restart followed the 2017 decision to permanently close Rockdale and is intended to supply the Warrick rolling mill. A lockout at the Bécancour smelter began in January 2018; only one of its three potlines was operating at the filing date.
- Management anticipated a 2018 effective tax rate of 35%–40%, subject to changes in business mix, tax law, currencies and results by jurisdiction. The $22 million 2017 charge for the U.S. Tax Cuts and Jobs Act was provisional; management expected to complete its analysis in 2018. Alcoa also recorded a $60 million tax charge for a valuation allowance on Iceland deferred tax assets and a $26 million charge to remeasure certain Brazilian deferred tax assets.
- The $309 million of 2017 restructuring and other charges included $244 million related to early termination of the Rockdale power contract. Alcoa paid $238 million and transferred related assets and liabilities; it also recorded closure costs and impairments. A separate $122 million gain was recorded on the sale of the Yadkin hydroelectric project, of which $243 million of proceeds was remitted to Arconic under the separation agreement.
- Commodity prices are a key earnings risk: aluminum is priced against the LME and alumina against the Alumina Price Index. Other disclosed risks include energy availability and cost, raw materials, foreign exchange, China-driven supply and demand, weather and operational disruptions, labor disputes, joint-venture exposure and environmental obligations. Environmental remediation reserves were $294 million at year-end; certain potential retirement obligations were not recorded because timing or method of settlement could not yet be estimated.
- Material unresolved matters include a Spanish tax assessment of $155 million, including interest, for 2006–2009, which Alcoa is contesting; Sherwin refinery-related environmental and contract disputes with outcomes the company said it could not reasonably predict; and other environmental and legal contingencies. The Italian energy matter was settled for $18 million, paid in January 2018.
- Management said operating cash flow and access to capital markets were expected to cover operating and investing needs over the next 12 months, while noting that future financing access depends on credit ratings, markets and economic conditions. Alcoa expected mandatory pension contributions of $290 million and approximately $300 million in additional discretionary contributions in 2018.
Most important facts for investors to verify
- Whether aluminum and alumina prices, premiums and shipment levels sustain the 2017 earnings recovery, and how higher input costs affect segment margins.
- Whether the Warrick restart meets its timing, cost and production objectives, and the operating and financial effects of the Bécancour lockout.
- How 2018 cash flow, working capital, capital spending and pension contributions compare with management’s expectations; confirm the extent and availability of cash held outside the United States.
- Final accounting and cash-tax effects of the Tax Cuts and Jobs Act, and the recoverability of deferred tax assets, particularly in Iceland and Brazil.
- Progress and potential financial exposure from the Spanish tax assessment, Sherwin-related matters, environmental remediation and other contingencies.
- The effect of energy-contract and aluminum-price derivatives: at year-end, Level 3 derivatives included a net embedded-aluminum-derivative liability of $1.146 billion, alongside a $197 million financial-contract asset; these fair values are sensitive to market assumptions.