Alcoa Corporation — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a Q4-only filing; quarterly figures are unaudited supplementary data. Amounts are in U.S. dollars unless noted.
Business context
Alcoa is a vertically integrated producer of bauxite, alumina, and aluminum, with three reportable segments: Bauxite, Alumina, and Aluminum. Its operations span 30 locations in nine countries. The business is significantly exposed to volatile LME aluminum and alumina index prices, energy costs, and foreign exchange rates.
Key financial metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Sales | $10.433 billion | $13.403 billion |
| Net income (loss) attributable to Alcoa | $(1.125) billion | $250 million |
| EPS, diluted | $(6.07) | $1.33 |
| Cash from operations | $686 million | $448 million |
| Capital expenditures | $379 million | $399 million |
| Total debt | $1.800 billion | $1.802 billion |
| Cash and cash equivalents at year-end | $879 million | $1.113 billion |
| Current assets / current liabilities | $3.530 billion / $2.563 billion | $4.328 billion / $2.919 billion |
Cost of goods sold was 82% of sales, versus 75% in 2018, implying gross margin of about 18% versus 25%. Segment Adjusted EBITDA fell to $1.626 billion from $3.250 billion. By segment, Bauxite EBITDA rose to $504 million from $426 million; Alumina fell to $1.097 billion from $2.373 billion; and Aluminum declined to $25 million from $451 million. These segment measures are non-GAAP and may not be comparable with similarly titled measures at other companies.
Fourth-quarter sales were $2.436 billion, versus $3.344 billion in Q4 2018. Q4 net loss attributable to Alcoa was $303 million, compared with income of $51 million; diluted EPS was $(1.63), versus $0.27.
Changes versus the prior comparable period
- Annual sales declined 22%, primarily reflecting lower realized alumina and aluminum prices, the end of the Tennessee tolling arrangement, and lower sales following the divestiture of two Spanish aluminum facilities.
- The $1.375 billion year-over-year swing in attributable earnings to a loss primarily reflected weaker alumina and aluminum margins and higher restructuring charges. Favorable currency effects, higher volume, lower taxes, and lower noncontrolling-interest income partly offset the decline.
- Operating cash flow increased by $238 million. The filing cites improved working capital and lower pension contributions, including the absence of $725 million of unscheduled discretionary contributions made in 2018; higher tax-related cash outflows partly offset these benefits.
- Cash declined by $234 million, while total debt was broadly unchanged. Year-end total equity fell to $5.886 billion from $7.588 billion.
Outlook, management commentary, risks, and unusual items
- Portfolio actions: Alcoa began a multi-year review of 1.5 million metric tons of smelting capacity and 4 million metric tons of alumina refining capacity, including possible curtailments, closures, or divestitures. It targeted $500 million to $1 billion of net proceeds from non-core asset sales over the following 12–18 months.
- Cost and closure plans: The new operating model is expected to save about $60 million annually beginning in Q2 2020. The Point Comfort refinery closure is expected to improve annual net income by about $15 million and cash by about $10 million, Alcoa’s share, compared with continued curtailment spending and excluding closure costs.
- Other transactions: Transfer of the Afobaka dam to Suriname at year-end is expected to reduce annual net income by about $20 million. A January 2020 sale of the Gum Springs waste-processing business closed for $250 million in stated value ($200 million received and $50 million in escrow); Alcoa expected a first-quarter 2020 gain of about $175 million and approximately $10 million of annual net income improvement.
- 2020 expectations: Management forecast capital expenditures of about $400 million for sustaining projects and $75 million for growth. It expected an operational tax rate of 70%–80%, while noting that portfolio actions, economic conditions, tax changes, currency, deferred-tax-asset realization, and jurisdictional results could move the actual rate outside that range. The Bécancour smelter restart was expected to be completed in Q2 2020; segment commentary also pointed to lower bauxite prices and increased mining-move capital spending, and to energy-price volatility.
- Liquidity and debt: Alcoa reported $879 million of cash, including $755 million held outside the U.S., and $1.8 billion of debt. The $1.5 billion secured revolving facility had no borrowings; covenant-based additional borrowing capacity was $1.2 billion at year-end, with the difference reflecting covenant calculations and letters of credit. The company said it expected cash, operating flows, and borrowing capacity to cover operating and investing needs over the next 12 months. Debt covenants and collateral provisions may limit flexibility.
- Large and unusual charges: Restructuring and other charges were $1.031 billion, versus $527 million in 2018. Major 2019 items included the $319 million Ma’aden Rolling Company divestiture charge, $274 million for Point Comfort closure costs, $235 million related to the Spanish facilities, and $119 million related to pension and other postretirement benefit actions.
- Contingencies and risks: The Australian Taxation Office proposed approximately $144 million of additional tax, excluding interest and penalties, related to historic alumina sales pricing. Management disagreed, recorded no liability, and said the outcome could materially affect results. Environmental remediation reserves were $335 million at year-end; the Baie-Comeau class action had no reasonably estimable loss range. Other principal risks include commodity and energy price volatility, global demand and Chinese supply, foreign exchange, labor, pension funding, environmental compliance, tax matters, and execution of portfolio changes.
- Reporting matters: Alcoa changed certain U.S. and Canadian inventory accounting from LIFO to average cost, retrospectively applying the change to comparative periods. The change reduced 2019 attributable results by $50 million compared with LIFO. The company adopted lease accounting guidance in 2019 and recorded $201 million each in operating lease right-of-use assets and liabilities at adoption. The auditor issued unqualified opinions on the financial statements and internal control; realization of Canadian deferred tax assets was identified as a critical audit matter.
Most important facts for investors to verify
- How much of the 2019 loss and lower segment EBITDA reflects recurring commodity-price and operating pressures versus restructuring, divestiture, pension, and closure charges.
- Whether the expected $500 million–$1 billion of asset-sale proceeds, $60 million of operating-model savings, and Point Comfort savings are achieved on schedule and net of related costs.
- The resolution and potential cash impact of the Australian tax dispute, environmental remediation obligations, and other disclosed contingencies.
- Whether cash generation, pension funding needs, debt covenants, and the $1.2 billion covenant-based borrowing capacity remain adequate as commodity markets and capital requirements change.
- Whether the Bécancour restart and the broader capacity review improve profitability without significant further impairment, closure, or restart costs.