Alcoa Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Alcoa produces bauxite, alumina, and aluminum through its Bauxite, Alumina, and Aluminum segments. Unless noted otherwise, dollar amounts are in millions.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Sales | $3,644 | $2,833 | $6,937 | $5,703 |
| Income before taxes | $908 | $461 | $1,671 | $773 |
| Net income attributable to Alcoa | $549 | $309 | $1,018 | $484 |
| Diluted EPS | $2.95 | $1.63 | $5.44 | $2.56 |
| Segment Adjusted EBITDA | $944 | $625 | $1,957 | $1,194 |
Q2 sales rose 29% year over year and Alcoa-attributable net income rose 78%. For the first half, sales increased 22% and attributable net income more than doubled. Q2 segment Adjusted EBITDA was $343 for Alumina, $596 for Aluminum, and $5 for Bauxite. Adjusted EBITDA is a non-GAAP segment measure and may not be comparable with similarly titled measures of other companies.
- Pricing and shipments: Q2 realized prices were $442 per metric ton for alumina and $3,864 per metric ton for primary aluminum. Alumina shipments were 2,438 kmt and aluminum shipments 674 kmt. First-half realized prices were $410 and $3,863 per metric ton, respectively.
- Costs and margin: Cost of goods sold was $2,767 in Q2 versus $2,156 a year earlier. Gross profit, calculated as sales less cost of goods sold, was $877, or approximately 24.1% of sales, versus $677, or 23.9%, in Q2 2021. Management cited inflation in raw materials, higher energy costs—especially in Europe—maintenance, transportation, and operational inefficiencies. Sequentially, cost of goods sold as a share of sales increased, despite higher sales.
- Cash flow: First-half cash from operations was $570, compared with cash used of $80 in the prior-year period. Capital expenditures were $181; operating cash flow less capital expenditures was $389. Inventory growth used $657 of cash, among other working-capital effects.
- Liquidity and debt: June 30 cash and cash equivalents were $1,638; restricted cash was another $110. Current assets were $5,863 and current liabilities $3,236. Long-term debt was $1,725, plus $1 due within one year; Note L also reports $75 of short-term borrowings. The $1,250 revolving credit facility was undrawn, and Alcoa reported compliance with covenants. The facility maturity was extended to June 2027.
- Capital returns: Alcoa repurchased 4.532 million shares for $275 in Q2 and paid $19 in common dividends during the first half. The quarterly dividend was $0.10 per share. Following quarter-end, the board authorized an additional $500 repurchase program; $150 remained under the prior authorization.
Material changes and unusual items
- Higher aluminum and alumina prices, favorable derivative mark-to-market results, and increased value-added product sales supported year-over-year earnings growth. Higher costs, taxes, and energy expenses partly offset those benefits.
- Q2 included an $83 benefit from reversing a Brazil state VAT valuation allowance, following the Alumar smelter restart and the resulting ability to monetize credits. A separate $46 reversal was recorded in cost of goods sold.
- First-half restructuring and other charges were a net $50, including a $79 charge for the Avilés and La Coruña worker settlement and a $58 impairment tied to the MRN investment sale, partly offset by the VAT-related benefit. Q2 alone recorded a net restructuring benefit of $75.
- Other income included favorable derivative mark-to-market results; the first-half cash-flow statement reports a $123 gain on mark-to-market derivative financial contracts. Derivative values can be volatile: at June 30, derivative liabilities totaled $1,099, including $1,058 for power contracts, with the filing expecting $202 of realized power-contract losses to be recognized in sales over the next 12 months, assuming market rates remain unchanged.
- Alcoa sold its MRN investment in Brazil for $10; up to $30 of additional proceeds may be received if specified post-closing conditions are met. The $58 impairment was recorded before the sale.
Outlook, management commentary, and risks
- For 2022, Alcoa reduced its bauxite shipment outlook by 2 million dry metric tons to 44.0–45.0 million, and reduced alumina shipment guidance by 0.6 million metric tons to 13.6–13.8 million, primarily reflecting weaker first-half shipments and market disruptions.
- Management expected higher bauxite volume in Q3 versus Q2, with higher production costs partly offset by higher intersegment prices. Alumina expected higher energy and raw-material costs partly offset by higher shipments; additional Poços de Caldas impoundment-related ARO revisions were anticipated in the second half.
- Alumar’s restart began producing saleable metal in Q2; full capacity was expected in Q1 2023. Portland restart production was expected to begin in Q3 2022. San Ciprián’s 228 kmt annual smelter capacity remained curtailed for two years because of high energy prices; from July, refinery production was reduced approximately 15% to mitigate natural-gas costs.
- After quarter-end, Alcoa curtailed a 54 kmt potline at Warrick due to regional labor shortages and anticipated an approximately $20 negative impact on Q3 net income. The company also cited persistent supply-chain, logistics, inflation, and energy-cost pressures, and said it had stopped buying from and selling to Russian businesses.
- Significant risks and contingencies include the Australian tax dispute: the ATO disallowed Alcoa of Australia’s objections to an income-tax assessment of approximately $147, with assessed interest of approximately $488 and proposed penalties of approximately $88. Alcoa is contesting the matter; it paid approximately $74 toward tax and records a $171 noncurrent tax liability associated with interest deductions. The company says it cannot predict the potential loss or range of loss.
- Other matters include Brazilian VAT-credit disputes, environmental remediation reserves of $302, a new EPA Notice of Violation concerning the curtailed Intalco smelter, and ongoing environmental, employment, tax, and other legal proceedings. Alcoa states that the ultimate outcome of certain matters is uncertain and that one or more could materially affect liquidity or results in a particular period.
- Management believes cash, operating cash flows, and available liquidity are adequate for near- and long-term needs, but warns that commodity markets, macroeconomic conditions, credit ratings, financing access, and covenant compliance could affect liquidity. The filing’s forward-looking statements are subject to risks including the Russia-Ukraine conflict, COVID-19, commodity prices, energy and raw-material supply, labor disruptions, foreign exchange, and legal, tax, and environmental outcomes.
Important facts for investors to verify
- Whether alumina and aluminum prices, shipments, and margins can withstand inflation, softer demand, and high European energy costs.
- Execution and cost of the Alumar and Portland restarts, the San Ciprián curtailment and refinery reduction, and the Warrick labor-related curtailment.
- Cash conversion and inventory levels, given the $657 first-half cash use from inventory growth.
- Potential outcomes and cash exposure from the Australian tax dispute, Brazilian VAT claims, environmental obligations, and Intalco EPA matter.
- Derivative valuation and expected realization, particularly the power-contract liabilities and expected losses.
- Share repurchase and dividend pace relative to operating cash flow, capital spending, and available liquidity.