Alcoa Corp quarterly report, Q2 FY2019

Alcoa Corporation — Q2 2019 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2019. Amounts are in millions of U.S. dollars except per-share data and operating volumes. Alcoa reports bauxite, alumina, and aluminum operations.

Financial performance and position

Metric	Q2 2019	Q2 2018	Six months 2019	Six months 2018
Sales	$2,711	$3,579	$5,430	$6,669
Net income (loss) attributable to Alcoa	$(402)	$10	$(601)	$205
Diluted EPS	$(2.17)	$0.05	$(3.24)	$1.09
Segment Adjusted EBITDA	$484	$968	$886	$1,657

Q2 sales declined 24%; first-half sales declined 19%. Management attributed the declines principally to lower alumina and aluminum prices and lower metal trading volume. Flat-rolled sales also fell following the end of the Arconic tolling arrangement.
Cost of goods sold was 80.7% of sales in Q2 and 80.5% for the first half, compared with 76.9% and 75.8% in 2018. The filing cites lower product prices, unfavorable energy costs, and maintenance expenses.
Q2 restructuring and other charges were $370; first-half charges were $483. These included $319 related to the Ma’aden Rolling Company (MRC) divestiture, $38 for pension-benefit curtailment, and Spanish smelter exit costs of $5 in Q2 and $108 for the first half.
First-half operating cash flow was $250, versus cash use of $375 in 2018. Capital expenditures were $158; investing cash use was $258. Financing cash use was $270, including $286 of net distributions to noncontrolling interest.
At June 30, cash and cash equivalents were $834, down from $1,113 at year-end 2018. Current assets were $3,818 and current liabilities $2,531. Total debt was approximately $1,805, compared with $1,802 at year-end; the filing reports no material debt repayments or additions in the first half.
Total assets were $15,349 and total equity $6,859. The environmental remediation reserve was $271, including $34 current.

Material changes and segment trends

Alumina segment Adjusted EBITDA fell to $369 in Q2 from $638 and to $741 for the first half from $1,030. Lower realized alumina prices and higher maintenance and bauxite costs were principal factors; higher production and favorable currency effects partly offset them.
Aluminum segment Adjusted EBITDA fell to $3 in Q2 from $230 and was a loss of $93 for the first half, versus $417 of EBITDA in 2018. Lower metal prices, reduced shipments, higher energy and raw-material costs, and the Canadian customer bad-debt reserve weighed on results.
Bauxite segment Adjusted EBITDA increased to $112 in Q2 from $100 and to $238 for the first half from $210, aided by currency and realized-price effects.
Average realized alumina price was $376 per metric ton in Q2, down from $467; primary aluminum was $2,167 per metric ton, down from $2,623. Aluminum third-party shipments fell to 724 kmt from 853 kmt.
The company changed certain inventory accounting from LIFO to average cost effective January 1, 2019 and retrospectively adjusted comparative periods. Under average cost, Q2 2019 Alcoa-attributable loss was $24 greater than it would have been under LIFO; first-half loss was $3 greater.

Outlook, commentary, risks, and unusual items

Management expected higher bauxite production and intersegment realized prices in Q3 versus Q3 2018. For alumina, it expected higher production and improved unit costs and maintenance, partly offset by higher bauxite costs. For aluminum, it cited expected benefits from lower alumina costs, Canadian import tariff exemptions, and improved results related to Spanish smelter curtailments; lower Brazil hydro prices were expected to be partly offset by better rolling performance.
The Bécancour smelter labor agreement was approved in July 2019; restart began July 26 and was expected to complete in Q2 2020. Alcoa expected restart charges of approximately $40–$50 in each of the second half of 2019 and first half of 2020.
The Spanish Avilés and La Coruña facilities were curtailed in February. The filing reports that the conditional sale to PARTER closed July 31, 2019 after financial conditions were met. Alcoa expected to record about $135 of restructuring charges in Q3, including a $95 cash contribution and approximately $40 for working capital and asset write-offs.
The MRC transaction involved a $100 Alcoa cash contribution, forgiveness of MRC payables, transfer of Alcoa’s 25.1% interest to Ma’aden, and release from future MRC obligations, including sponsor support for $296 of MRC debt. Alcoa retained a 25.1% interest in the MBAC and MAC businesses.
The estimated 2019 annual effective tax rate was 137.1%, reflecting foreign income in higher-tax jurisdictions and losses for which no tax benefit was recognized. The filing says Q3 tax expense could be further affected by changing alumina and aluminum prices and jurisdictional income mix.
Key risks include commodity prices and premiums, energy costs and supply, foreign exchange and tax changes, operational performance, labor matters, environmental remediation, legal proceedings, and market and financing conditions. Management stated environmental reserves reflect its best estimates but may change as remediation plans and facts develop.
Other notable exposures include a Spanish tax dispute for which Alcoa recorded a liability for its 49% share, with a revised total assessment estimate of $25–$61 before allocation; and a Brazilian VAT-credit dispute with a reasonably possible loss range of $0–$57. Management said outcomes could not be predicted for the Brazilian matter.

Important facts for investors to verify

Whether commodity prices, premiums, energy costs, and lower alumina and aluminum segment earnings stabilize or continue to pressure margins and cash generation.
Actual costs, timing, and operating impact of the Bécancour restart and completed Spanish facility sale, including the anticipated charges.
Cash needs and returns from the remaining Ma’aden interests, and the practical value of the release from MRC obligations.
Changes in the effective tax rate, tax payments, and outcomes of the Spanish and Brazilian tax matters.
Future environmental remediation spending and any changes to reserves or other legal and contingency exposures.
Cash balance, working-capital movements, and distributions to noncontrolling interests; first-half operating cash flow benefited from working-capital movements and lower pension contributions versus 2018.