Alcoa Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unless noted otherwise, amounts are in millions of U.S. dollars. The interim financial statements are unaudited.
Financial performance and liquidity
- Sales: $2,719, down 12% from $3,090 in Q1 2018. Management cited lower metal prices and shipments, including lower flat-rolled sales following the end of the Arconic tolling arrangement.
- Earnings: Consolidated net loss was $58, compared with net income of $340. Net loss attributable to Alcoa was $199, or $1.07 per diluted share, versus attributable net income of $195, or $1.04 per diluted share. The $141 of income attributable to noncontrolling interests contributed to the difference between consolidated and Alcoa-attributable results.
- Costs and margins: Cost of goods sold was $2,180, or 80.2% of sales, versus 74.5% a year earlier; the implied gross margin was 19.8%, compared with 25.5%. Income before tax was $92; income tax expense was $150, reflecting a 162.4% quarterly effective tax rate.
- Segment Adjusted EBITDA: $402, down from $689. Bauxite increased to $126 from $110; Alumina declined to $372 from $392; Aluminum fell to a loss of $96 from income of $187. Aluminum results were pressured by lower LME prices, higher input and energy costs, U.S. Section 232 tariffs on Canadian metal, and a $20 bad-debt reserve.
- Cash flow: Cash from operations was $168, versus $55. Capital expenditures were $69, implying operating cash flow less capital expenditures of $99. Cash used in financing was $199, including $214 of distributions to noncontrolling interests; cash used in investing was $59.
- Liquidity and debt: Cash and cash equivalents were $1,017 at quarter-end, down from $1,113 at year-end. Current assets were $4,114 and current liabilities $2,803. Debt was approximately $1,803, largely long-term, versus cash of $1,017. The filing reports no clear committed-credit-facility availability value in the text provided.
Material changes versus Q1 2018
- Alcoa-attributable results swung from $195 of income to a $199 loss; sales fell $371 and Segment Adjusted EBITDA decreased $287.
- Primary aluminum’s average realized price fell to $2,219 per metric ton from $2,483; alumina’s average realized price held at $385 per metric ton. Aluminum shipments declined to 709 kmt from 794 kmt, and alumina shipments declined to 2,329 kmt from 2,376 kmt.
- The Spanish Avilés and La Coruña smelters, with combined remaining capacity of 124 kmt, were curtailed in February. Aluminum segment idle capacity was 1,040 kmt at quarter-end.
- Comparisons reflect the retrospective change in certain inventory accounting from LIFO to average cost. The change increased Q1 2018 Alcoa-attributable income by $45 to $195 and increased Q1 2018 Segment Adjusted EBITDA by $34. For Q1 2019, average-cost accounting increased Alcoa-attributable results by $21 versus LIFO.
Outlook, commentary, and risks
- Alcoa expected Q2 2019 Alumina production to increase, with lower caustic-soda unit costs but higher usage, bauxite costs, and planned-outage maintenance expense. Management also anticipated lower alumina costs to Aluminum and improved Aluminum results related to the Spanish curtailments.
- Additional charges related to the Spanish facilities’ social plan or a potential third-party acquisition were expected in Q2, estimated at $70–$125; approximately 75% was expected to be paid in cash during 2019.
- Management expected a final AofA tax true-up payment of approximately $310 in Q2 2019 related to the 2018 tax year.
- Key exposures include volatile aluminum and alumina prices, energy and input costs, foreign exchange, operational interruptions, trade measures, labor matters, environmental remediation, and legal and tax contingencies. The company also reported Level 3 derivative liabilities of $615 and assets of $137 at March 31, 2019; derivative valuations and market movements may affect reported results and accumulated other comprehensive income.
- Recorded environmental remediation reserves were $276 at quarter-end. The filing discusses, among other matters, Spanish tax litigation, a Brazilian tax-credit dispute, and environmental obligations; outcomes and potential costs may change.
Important facts for investors to verify
- Whether lower aluminum prices, tariffs, energy costs, and shipments continue to weigh on Aluminum segment profitability.
- The final cost, cash timing, and outcome of the Spanish smelter curtailments, including any sale or restart.
- The Q2 cash impact of the approximately $310 tax payment and the company’s ability to sustain cash generation after distributions and capital spending.
- How the high quarterly tax provision, tax-loss jurisdictions, and pending tax disputes affect full-year taxes and cash flows.
- The assumptions and potential volatility in derivative valuations, environmental reserves, and other legal or contingent liabilities.