6 Feb

How Alcoa Plans to Address Its Legacy Issues

WRITTEN BY Mark O'Hara FEATURED IN Company News, Insights, & Analysis

Legacy issues

In this article, we’ll see how Alcoa plans to address some of its legacy issues. Alcoa (AA) generated free cash flows (or FCF) of $305 million in 4Q17, taking its fiscal 2017 FCF to $819 million. Higher metal prices (CENX) have boosted the FCF generation capacity of mining companies like South32 (S32), Rio Tinto (RIO), and Alumina Limited (AWC).

How Alcoa Plans to Address Its Legacy Issues

Pension funding

Alcoa had a cash pile of $1.4 billion as of December 31, 2017. After accounting for this cash, Alcoa had a net debt of only $54 million. Alcoa plans to have $1 billion in cash on its balance sheet and intends to split its excess cash flows between deleveraging and returning cash to shareholders. This year, Alcoa plans on additional discretionary funding of $300 million to its pension plan. Higher metal prices should help Alcoa lower its pension as well as debt liabilities this year.

Furthermore, Alcoa has announced that effective January 1, 2021, its “Salaried employees in the United States and Canada, where the Company’s largest portion of liabilities for pension plans and OPEB reside, will cease accruing retirement benefits for future service under defined benefit pension plans.”

Other legacy issues

Along with pension funding, Alcoa has been taking steps to address some of the other legacy issues. For instance, the company terminated its Rockdale power contract last year. Alcoa “expects an annual improvement to net income and adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of $60 million to $70 million as a result of the contract termination, beginning in the fourth quarter of 2017.”

Along with these company-specific factors, the macro environment also looks decent for Alcoa, which we’ll explore in the next article.

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