Alcoa(US:AA)2024-08-02 21:05PART I Financial Statements Alcoa reported a net income of $20 million in Q2 2024, a significant turnaround from a prior-year loss, with improved cash flow from operations Note C: Acquisitions and Divestitures Alcoa completed the $2.8 billion acquisition of Alumina Limited, simplifying its structure and assuming $385 million in debt, while managing prior divestiture commitments - Alcoa completed the acquisition of Alumina Limited on August 1, 2024, to gain full ownership of the AWAC joint venture, simplifying its corporate structure and enhancing operational flexibility24 - The acquisition involved exchanging Alcoa stock/CDIs for Alumina Shares, with an aggregate purchase consideration of approximately $2.8 billion. Alcoa also assumed ~$385 million of Alumina Limited's debt2627 - The company recorded charges of $4 million in Q2 2024 and $15 million in H1 2024 related to site separation commitments from the 2021 Warrick Rolling Mill divestiture, with a remaining balance of $14 million expected to be spent in 20243031 Note D: Restructuring and Other Charges, Net Alcoa recorded $220 million in H1 2024 restructuring charges, primarily from the Kwinana refinery curtailment, with additional costs from closed smelter contracts Restructuring and Other Charges, Net (in millions) | Period | Alumina Segment | Aluminum Segment | Corporate | Total | | :--- | :--- | :--- | :--- | :--- | | Q2 2024 | $8 | $0 | $10 | $18 | | H1 2024 | $205 | $0 | $15 | $220 | | Q2 2023 | $1 | $19 | $4 | $24 | | H1 2023 | $2 | $165 | $6 | $173 | - The full curtailment of the Kwinana refinery was completed in June 2024. Charges for the first half of 2024 totaled $205 million, covering water management, severance for ~580 employees, asset retirement, and other costs. Cash outlays of ~$225 million are expected through 202533 Note K: Debt Alcoa issued a $750 million green bond in March 2024, maintained undrawn credit facilities, and assumed $385 million of Alumina Limited's debt post-acquisition - In March 2024, a subsidiary issued $750 million of 7.125% Senior Notes due 2031, designated as a green bond, with net proceeds of $737 million to finance qualifying environmental projects and support cash needs61 - The company's main $1.25 billion Revolving Credit Facility and its $250 million Japanese Yen Revolving Credit Facility had no outstanding borrowings as of June 30, 20246668 - Upon acquiring Alumina Limited on August 1, 2024, Alcoa assumed approximately $385 million of its outstanding debt under a $500 million revolving credit facility. Lenders have indicated they will delay any repayment demand until at least December 1, 2024707172 Note N: Income Taxes Alcoa's 2024 effective tax rate is 105.1% due to valuation allowances on losses, offset by $20 million in tax credits and an expected $100 million deferred tax asset from the Alumina Limited acquisition - The estimated annualized effective tax rate for 2024 is 105.1%, deviating from the 21% U.S. statutory rate primarily due to losses in jurisdictions with full valuation allowances, resulting in no tax benefit9192 - The company recorded benefits of $10 million in Q2 and $20 million in H1 2024 under the Inflation Reduction Act's Advanced Manufacturing Tax Credit for its Massena West and Warrick smelters93 - Post-acquisition of Alumina Limited, Alcoa will recognize a deferred tax asset of approximately $100 million related to Alumina Limited's Australian net operating loss carryforwards92 Note O: Contingencies Alcoa faces $252 million in environmental remediation reserves, a significant tax dispute with the ATO for $143 million in tax and $474 million in interest, and ongoing 'Red Dust' legal proceedings - The environmental remediation reserve was $252 million at June 30, 2024, with significant sites including Suriname, Massena (NY), and Point Comfort (TX)9598 - AofA is in a dispute with the Australian Taxation Office (ATO) over assessments claiming ~$143 million in tax and ~$474 million in interest. AofA has paid 50% of the tax amount and believes its position will be sustained. The case hearing was completed in June 2024, awaiting a decision109114116 - In the St. Croix 'Red Dust' legal proceedings, trials for the first group of cases are scheduled to begin in November 2024. The company recorded a reserve for its estimate of probable loss in Q2 2024120 Note R: Subsequent Events Post-quarter, Alcoa completed the Alumina Limited acquisition, declared a $0.10 per share dividend, and settled a $5 million Clean Air Act violation fine for its Intalco smelter - On August 1, 2024, the Company completed the acquisition of Alumina Limited127 - On July 31, 2024, the Board declared a quarterly cash dividend of $0.10 per share on common and preferred stock, payable on August 29, 2024128 - The company agreed to a stipulated settlement with the U.S. Department of Justice to pay a $5 million civil fine for alleged Clean Air Act violations at the Intalco smelter129 Consolidated Statement of Operations Highlights (unaudited, in millions) | Metric | Q2 2024 | Q2 2023 | Six Months 2024 | Six Months 2023 | | :--- | :--- | :--- | :--- | :--- | | Sales | $2,906 | $2,684 | $5,505 | $5,354 | | Income (Loss) Before Taxes | $92 | $(99) | $(233) | $(279) | | Net Income (Loss) Attributable to Alcoa | $20 | $(102) | $(232) | $(333) | | Diluted EPS | $0.11 | $(0.57) | $(1.29) | $(1.87) | Consolidated Balance Sheet Highlights (unaudited, in millions) | Metric | June 30, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | $1,396 | $944 | | Total Current Assets | $4,903 | $4,405 | | Total Assets | $14,307 | $14,155 | | Long-term debt, less current portion | $2,469 | $1,732 | | Total Liabilities | $8,891 | $8,310 | | Total Equity | $5,416 | $5,845 | Consolidated Cash Flow Highlights (unaudited, in millions) | Metric | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--- | :--- | :--- | | Cash Provided From (Used For) Operations | $64 | $(176) | | Cash Provided From Financing Activities | $679 | $16 | | Cash Used For Investing Activities | $(281) | $(222) | | Net Change in Cash | $446 | $(377) | Management's Discussion and Analysis of Financial Condition and Results of Operations Management reported improved Q2 2024 net income driven by higher prices and lower restructuring, with the Alumina Limited acquisition completed and liquidity enhanced by a green bond issuance Business Update Alcoa completed the Alumina Limited acquisition, fully curtailed the Kwinana refinery, progressed the Alumar smelter restart, and faces funding exhaustion at the San Ciprián complex - The acquisition of Alumina Limited was completed on August 1, 2024, simplifying governance and enhancing Alcoa's vertical integration131133135 - The full curtailment of the Kwinana refinery was completed in June 2024, based on factors including its age, costs, and bauxite grades138 - The San Ciprián complex remains unviable due to high energy costs and is projected to run out of funding by the end of 2024, at which point Alcoa will not provide additional funding143144 - In March 2024, Alcoa issued its first green bond, raising $750 million to fund decarbonization, water management, and other sustainability-focused projects146 Results of Operations Q2 2024 net income of $20 million reflects a $272 million sequential improvement driven by higher prices and lower restructuring, narrowing the year-to-date net loss Selected Financial Metrics | Metric | Q2 2024 | Q1 2024 | H1 2024 | H1 2023 | | :--- | :--- | :--- | :--- | :--- | | Sales | $2,906M | $2,599M | $5,505M | $5,354M | | Net Income (Loss) Attributable to Alcoa | $20M | $(252)M | $(232)M | $(333)M | | Diluted EPS | $0.11 | $(1.41) | $(1.29) | $(1.87) | | Avg. Realized Alumina Price ($/mt) | $399 | $372 | $385 | $367 | | Avg. Realized Aluminum Price ($/mt) | $2,858 | $2,620 | $2,743 | $3,000 | - The sequential improvement from Q1 to Q2 2024 was primarily due to higher aluminum and alumina prices, lower restructuring charges (Q2 charge of $18 million vs Q1 charge of $202 million), and favorable derivative results151160 - The year-over-year improvement for the first six months was mainly due to favorable raw material and energy costs and lower equity losses, which partially offset the negative impact of a lower average realized price for aluminum152 Segment Information Alumina and Aluminum segments showed significant Q2 2024 Adjusted EBITDA improvements driven by higher prices, with shipment guidance maintained for 2024 Alumina Segment Performance (Q2 2024 vs Q1 2024) | Metric | Q2 2024 | Q1 2024 | | :--- | :--- | :--- | | Segment Adjusted EBITDA | $186M | $139M | | Avg. Realized Price/mt | $399 | $372 | | Alumina Production (kmt) | 2,539 | 2,670 | | Total Shipments (kmt) | 3,292 | 3,340 | Aluminum Segment Performance (Q2 2024 vs Q1 2024) | Metric | Q2 2024 | Q1 2024 | | :--- | :--- | :--- | | Segment Adjusted EBITDA | $233M | $50M | | Avg. Realized Price/mt | $2,858 | $2,620 | | Production (kmt) | 543 | 542 | | Total Shipments (kmt) | 677 | 634 | - The Alumina segment's sequential EBITDA increase was driven by higher prices, partially offset by higher production costs from the Kwinana curtailment. Production decreased 5% due to the curtailment176178 - The Aluminum segment's sequential EBITDA increase was primarily due to higher average realized prices. This was partially offset by unfavorable raw material costs from higher alumina input prices191 Liquidity and Capital Resources Alcoa's liquidity is adequate with improved H1 2024 cash from operations and a $737 million bond issuance, despite recent credit rating downgrades and assumed acquisition debt - Cash provided from operations was $64 million in H1 2024, a $240 million positive swing from the $176 million used in H1 2023, driven by better underlying earnings and lower tax payments202 - Financing activities provided $679 million in cash in H1 2024, primarily from the $737 million net proceeds of the March 2024 senior notes issuance205208 - In March 2024, Moody's, Fitch, and S&P all downgraded Alcoa's long-term debt ratings, citing market conditions and operational challenges219220 Quantitative and Qualitative Disclosures About Market Risk Alcoa's market risk exposure remains materially unchanged since fiscal year-end 2023, with further details available in the 2023 Form 10-K and Note M - Alcoa's exposure to market risk has not changed materially since December 31, 2023224 Controls and Procedures Alcoa's disclosure controls and procedures were effective as of June 30, 2024, with no material changes to internal control over financial reporting during Q2 2024 - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of June 30, 2024225 - No changes in internal control over financial reporting occurred during Q2 2024 that have materially affected, or are reasonably likely to materially affect, the company's internal controls226 PART II – OTHER INFORMATION Legal Proceedings Alcoa faces ongoing 'Red Dust' legal proceedings with trials starting November 2024 and settled a $5 million Clean Air Act violation fine for its Intalco smelter - In the St. Croix 'Red Dust' proceedings, trials for the first group of lead cases are scheduled to begin in November 2024 and continue through July 2025, with court-ordered mediation to occur by August 31, 2024230 - The company settled a Notice of Violation from the EPA regarding the Intalco smelter, agreeing to pay a civil fine of $5 million for alleged Clean Air Act violations232 Risk Factors New risks from the Alumina Limited acquisition include shareholder dilution, potential stock price pressure, dual listing complexities, increased currency exposure, and assumed liabilities - The issuance of new shares for the Alumina Limited acquisition has diluted existing Alcoa stockholders, who now own a smaller proportion of the company, and may depress the market price of Alcoa's stock235236 - The secondary listing of Alcoa's stock as CDIs on the Australian Stock Exchange (ASX) could lead to price variations between the NYSE and ASX due to currency differences and other factors237238 - The integration of Alumina Limited subjects Alcoa to all of Alumina's existing and potential liabilities, including those related to its revolving credit facility and potential tax issues240 Unregistered Sales of Equity Securities and Use of Proceeds Alcoa did not repurchase common stock in Q2 2024, with the full $500 million share repurchase authorization remaining available Issuer Purchases of Equity Securities (Q2 2024) | Period | Total Shares Purchased | Weighted Avg. Price Paid | Approx. Dollar Value Remaining in Program | | :--- | :--- | :--- | :--- | | April 2024 | 0 | N/A | $500,000,000 | | May 2024 | 0 | N/A | $500,000,000 | | June 2024 | 0 | N/A | $500,000,000 | Other Information No directors or officers adopted, modified, or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during Q2 2024 - No directors or officers adopted, modified, or terminated a Rule 10b5-1 trading arrangement during the quarter ended June 30, 2024244 Exhibits This section lists exhibits filed with the Form 10-Q, including documents related to the Alumina Limited acquisition, new stock, bylaws, and officer certifications - Exhibits filed include documents related to the Alumina Limited acquisition, new preferred stock designation, amended bylaws, and required officer certifications (31.1, 31.2, 32.1, 32.2)248