Alcoa Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Amounts are in U.S. dollars, millions, except per-share and operating data. Alcoa operates across bauxite, alumina, and aluminum; its AWAC joint venture is consolidated, with Alumina Limited’s 40% interest presented as noncontrolling interest.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Sales | $2,365 | $2,567 | $6,894 | $7,997 |
| Income (loss) before tax | $22 | $(52) | $136 | $(137) |
| Net loss attributable to Alcoa | $(49) | $(221) | $(166) | $(822) |
| Diluted loss per share | $(0.26) | $(1.19) | $(0.89) | $(4.43) |
| Segment Adjusted EBITDA | $359 | $400 | $919 | $1,286 |
- Q3 sales fell 8% year over year; nine-month sales fell 14%. Lower alumina and aluminum prices, reduced premiums, the Intalco curtailment, and the 2019 Spanish-facility divestiture were principal factors.
- Cost of goods sold was 86% of sales in Q3 and 87% for the nine months, versus 83% and 81% in the comparable 2019 periods. Lower prices and premiums weighed on the ratio, partly offset by lower raw-material costs.
- Q3 net loss attributable to Alcoa improved by $172 year over year, and the nine-month loss improved by $656. Lower restructuring charges, taxes, and noncontrolling-interest income, lower raw-material costs, and the Bécancour restart helped; lower realized prices and product premiums partly offset the improvement.
- Segment results diverged: Q3 Adjusted EBITDA was $124 for Bauxite, $119 for Alumina, and $116 for Aluminum, versus $134, $223, and $43, respectively, in Q3 2019. Nine-month Aluminum EBITDA improved to $144 from a loss of $50; Alumina declined to $400 from $964.
- Cash provided from operations for the nine months was $356, versus $424 in 2019. Capital expenditures were $242; investing cash outflow was $50, including $198 of proceeds from asset sales, primarily the Gum Springs facility.
Financial position and liquidity
- At September 30, 2020, cash and cash equivalents were $1,736, current assets $4,053, and current liabilities $2,303. Total assets were $14,250 and total equity $5,019.
- Debt was $2,540, including $2,538 long-term debt. Debt increased from $1,800 at year-end 2019, principally following the July issuance of $750 of 5.500% senior notes due 2027; net proceeds were approximately $736. Cash was $879 at year-end 2019.
- The $1,500 revolving credit facility had no borrowings outstanding; the company reported approximately $1,230 of additional borrowing capacity within its covenant limits and was in compliance with covenants. The leverage-ratio covenant was temporarily relaxed, with certain restrictions on payments and incremental secured borrowing.
- Management said cash, expected operating cash flow, liquidity options, and preservation measures were adequate for near-term operating and investing needs. The company targeted approximately $900 of 2020 cash improvements and said it was on track as of September 30.
Material changes, outlook, and risks
- Alcoa completed the full curtailment of Intalco’s 279 kmt of annual smelting capacity in Q3. Bécancour’s restart was also completed in Q3. The company reported approximately 830 kmt, or 30% of global smelting capacity, curtailed at that point.
- After quarter-end, Alcoa decided to curtail San Ciprián’s 228 kmt of annual smelting capacity, expected to be completed in Q1 2021. It anticipated $35–$40 of cash-based restructuring charges, primarily paid in the first half of 2021. Workers’ representatives filed suit seeking an injunction; the outcome could affect timing and charges. A strike at the site, begun October 4, reduced refinery and smelter production and shipments. Management estimated a Q4 net-income impact of no more than $5–$10, while warning of possible working-capital and cash-flow effects from shipment delays.
- Q4 comparisons with Q4 2019: Bauxite expected a lower average realized intersegment price. Alumina expected lower bauxite and caustic-soda costs partly offset by higher energy costs; the San Ciprián strike could adversely affect results. Aluminum expected lower alumina costs and benefits from the Bécancour restart and Intalco curtailment, partly offset by unfavorable energy prices; the San Ciprián strike could also weigh on results.
- COVID-19 reduced demand for value-add aluminum and pressured product margins as sales shifted toward commodity-grade products. Value-add sales volume rose 11% from Q2, mainly on stronger automotive demand. Operations remained open, with no significant supply interruptions reported; management cautioned that a renewed or prolonged pandemic could impair demand, operations, cash flow, asset values, tax-asset realization, and access to financing.
- Cash-preservation actions included reducing planned non-critical 2020 capital expenditures by $100, deferring approximately $200 of pension contributions to January 1, 2021, deferring certain environmental and asset-retirement payments, and other cost and payment measures. Estimated 2021 minimum pension contributions were approximately $490; management expected about $380 of available prefunding balance, subject to year-end valuation.
- Tax and legal contingencies include the Australian Taxation Office dispute: assessments asserted approximately $152 of tax, $502 of compounded interest, and proposed penalties of approximately $91. Alcoa paid approximately $74 during Q3, recorded it as a prepaid tax asset, and said it believes its tax position will be sustained; it recorded no tax expense for the matter. The possible ultimate loss could materially affect results or financial condition, but the filing does not provide a clear loss range. The company also disclosed Spanish and Brazilian tax disputes and environmental remediation reserves of $321.
- Other notable items: the Gum Springs divestiture generated a $181 gain in the nine-month period; Q3 restructuring charges were $5 versus $185 in Q3 2019. U.S. tariffs on certain Canadian aluminum imports were reinstated temporarily, but the exemption was restored retroactively on October 27; related tariffs accrued or collected were expected to be reversed or reimbursed in Q4.
- Debt ratings were Ba1/stable at Moody’s and BB+/stable at Fitch; S&P affirmed BB+ but revised the outlook to negative.
Key facts for investors to verify
- Whether aluminum, alumina prices and premiums, and value-add demand recover sufficiently to support margins and cash generation.
- Progress and economic impact of the San Ciprián curtailment, strike, and related litigation, including the expected restructuring charges.
- Resolution and potential cash, tax, and financial-statement effects of the Australian tax dispute and other tax contingencies.
- Whether the company achieves its approximately $900 cash-improvement target and how much liquidity remains available under credit covenants.
- 2021 pension funding needs, deferred contributions, environmental remediation costs, and any resulting effect on liquidity.
- Whether COVID-19, commodity markets, currency movements, energy costs, or derivative valuations lead to impairments, deferred-tax valuation allowances, or other material charges.