Item 1. Financial Statements.
Alcoa Corporation and subsidiaries
Statement of
Consolidated Operations (unaudited)
(in millions, except
per-share
amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second quarter ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Sales (C & E)
|
|
$
|
3,579
|
|
|
$
|
2,859
|
|
|
$
|
6,669
|
|
|
$
|
5,514
|
|
Cost of goods sold (exclusive of expenses below)
|
|
|
2,632
|
|
|
|
2,289
|
|
|
|
5,013
|
|
|
|
4,312
|
|
Selling, general administrative, and other expenses
|
|
|
64
|
|
|
|
70
|
|
|
|
131
|
|
|
|
141
|
|
Research and development expenses
|
|
|
9
|
|
|
|
8
|
|
|
|
17
|
|
|
|
15
|
|
Provision for depreciation, depletion, and amortization
|
|
|
192
|
|
|
|
190
|
|
|
|
386
|
|
|
|
369
|
|
Restructuring and other charges (D)
|
|
|
231
|
|
|
|
12
|
|
|
|
212
|
|
|
|
22
|
|
Interest expense
|
|
|
32
|
|
|
|
25
|
|
|
|
58
|
|
|
|
51
|
|
Other expenses (income), net (O)
|
|
|
9
|
|
|
|
28
|
|
|
|
30
|
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
3,169
|
|
|
|
2,622
|
|
|
|
5,847
|
|
|
|
4,859
|
|
Income before income taxes
|
|
|
410
|
|
|
|
237
|
|
|
|
822
|
|
|
|
655
|
|
Provision for income taxes
|
|
|
180
|
|
|
|
99
|
|
|
|
318
|
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
230
|
|
|
|
138
|
|
|
|
504
|
|
|
|
446
|
|
Less: Net income attributable to noncontrolling interest
|
|
|
155
|
|
|
|
63
|
|
|
|
279
|
|
|
|
146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME ATTRIBUTABLE TO ALCOA CORPORATION
|
|
$
|
75
|
|
|
$
|
75
|
|
|
$
|
225
|
|
|
$
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE ATTRIBUTABLE TO ALCOA CORPORATION COMMON SHAREHOLDERS (F):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.40
|
|
|
$
|
0.41
|
|
|
$
|
1.21
|
|
|
$
|
1.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.39
|
|
|
$
|
0.40
|
|
|
$
|
1.19
|
|
|
$
|
1.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
1
Alcoa Corporation and subsidiaries
Statement of Consolidated Comprehensive (Loss) Income (unaudited)
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alcoa Corporation
|
|
|
Noncontrolling
interest
|
|
|
Total
|
|
|
|
Second quarter ended
June 30,
|
|
|
Second quarter ended
June 30,
|
|
|
Second quarter ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net income
|
|
$
|
75
|
|
|
$
|
75
|
|
|
$
|
155
|
|
|
$
|
63
|
|
|
$
|
230
|
|
|
$
|
138
|
|
Other comprehensive loss, net of tax (G):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrecognized net actuarial loss and prior service cost/benefit related to pension and
other postretirement benefits
|
|
|
183
|
|
|
|
102
|
|
|
|
2
|
|
|
|
20
|
|
|
|
185
|
|
|
|
122
|
|
Foreign currency translation adjustments
|
|
|
(445
|
)
|
|
|
(99
|
)
|
|
|
(151
|
)
|
|
|
(37
|
)
|
|
|
(596
|
)
|
|
|
(136
|
)
|
Net change in unrecognized gains/losses on cash flow hedges
|
|
|
(175
|
)
|
|
|
(6
|
)
|
|
|
(10
|
)
|
|
|
(21
|
)
|
|
|
(185
|
)
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other comprehensive loss, net of tax
|
|
|
(437
|
)
|
|
|
(3
|
)
|
|
|
(159
|
)
|
|
|
(38
|
)
|
|
|
(596
|
)
|
|
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
$
|
(362
|
)
|
|
$
|
72
|
|
|
$
|
(4
|
)
|
|
$
|
25
|
|
|
$
|
(366
|
)
|
|
$
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net income
|
|
$
|
225
|
|
|
$
|
300
|
|
|
$
|
279
|
|
|
$
|
146
|
|
|
$
|
504
|
|
|
$
|
446
|
|
Other comprehensive income (loss), net of tax (G):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrecognized net actuarial loss and prior service cost/benefit related to pension and
other postretirement benefits
|
|
|
284
|
|
|
|
146
|
|
|
|
3
|
|
|
|
19
|
|
|
|
287
|
|
|
|
165
|
|
Foreign currency translation adjustments
|
|
|
(444
|
)
|
|
|
140
|
|
|
|
(165
|
)
|
|
|
77
|
|
|
|
(609
|
)
|
|
|
217
|
|
Net change in unrecognized gains/losses on cash flow hedges
|
|
|
375
|
|
|
|
(314
|
)
|
|
|
(30
|
)
|
|
|
62
|
|
|
|
345
|
|
|
|
(252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other comprehensive income (loss), net of tax
|
|
|
215
|
|
|
|
(28
|
)
|
|
|
(192
|
)
|
|
|
158
|
|
|
|
23
|
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
440
|
|
|
$
|
272
|
|
|
$
|
87
|
|
|
$
|
304
|
|
|
$
|
527
|
|
|
$
|
576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
2
Alcoa Corporation and subsidiaries
Consolidated Balance Sheet (unaudited)
(in millions)
|
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (L)
|
|
$
|
1,089
|
|
|
$
|
1,358
|
|
Receivables from customers
|
|
|
1,025
|
|
|
|
811
|
|
Other receivables
|
|
|
170
|
|
|
|
232
|
|
Inventories (I)
|
|
|
1,668
|
|
|
|
1,453
|
|
Fair value of derivative instruments (L)
|
|
|
46
|
|
|
|
113
|
|
Prepaid expenses and other current assets
|
|
|
283
|
|
|
|
271
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
4,281
|
|
|
|
4,238
|
|
|
|
|
|
|
|
|
|
|
Properties, plants, and equipment
|
|
|
22,079
|
|
|
|
23,046
|
|
Less: accumulated depreciation, depletion, and amortization
|
|
|
13,523
|
|
|
|
13,908
|
|
|
|
|
|
|
|
|
|
|
Properties, plants, and equipment, net
|
|
|
8,556
|
|
|
|
9,138
|
|
|
|
|
|
|
|
|
|
|
Investments (H & N)
|
|
|
1,390
|
|
|
|
1,410
|
|
Deferred income taxes
|
|
|
612
|
|
|
|
814
|
|
Fair value of derivative instruments (L)
|
|
|
44
|
|
|
|
128
|
|
Other noncurrent assets
|
|
|
1,635
|
|
|
|
1,719
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
16,518
|
|
|
$
|
17,447
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable, trade
|
|
$
|
1,752
|
|
|
$
|
1,898
|
|
Accrued compensation and retirement costs
|
|
|
421
|
|
|
|
459
|
|
Taxes, including income taxes
|
|
|
323
|
|
|
|
282
|
|
Fair value of derivative instruments (L)
|
|
|
151
|
|
|
|
185
|
|
Other current liabilities
|
|
|
353
|
|
|
|
412
|
|
Long-term debt due within one year (L)
|
|
|
13
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
3,013
|
|
|
|
3,252
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, less amount due within one year (J & L)
|
|
|
1,916
|
|
|
|
1,388
|
|
Accrued pension benefits (K)
|
|
|
1,580
|
|
|
|
2,341
|
|
Accrued other postretirement benefits (K)
|
|
|
1,025
|
|
|
|
1,100
|
|
Asset retirement obligations
|
|
|
560
|
|
|
|
617
|
|
Environmental remediation (N)
|
|
|
237
|
|
|
|
258
|
|
Fair value of derivative instruments (L)
|
|
|
580
|
|
|
|
1,105
|
|
Noncurrent income taxes
|
|
|
256
|
|
|
|
309
|
|
Other noncurrent liabilities and deferred credits
|
|
|
243
|
|
|
|
279
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
9,410
|
|
|
|
10,649
|
|
|
|
|
|
|
|
|
|
|
CONTINGENCIES AND COMMITMENTS (N)
|
|
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
|
|
|
|
Alcoa Corporation shareholders equity:
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
2
|
|
|
|
2
|
|
Additional capital
|
|
|
9,650
|
|
|
|
9,590
|
|
Retained earnings
|
|
|
339
|
|
|
|
113
|
|
Accumulated other comprehensive loss (G)
|
|
|
(4,967
|
)
|
|
|
(5,182
|
)
|
|
|
|
|
|
|
|
|
|
Total Alcoa Corporation shareholders equity
|
|
|
5,024
|
|
|
|
4,523
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
|
2,084
|
|
|
|
2,275
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
7,108
|
|
|
|
6,798
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
16,518
|
|
|
$
|
17,447
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
3
Alcoa Corporation and subsidiaries
Statement of Consolidated Cash Flows (unaudited)
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
Six months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
CASH FROM OPERATIONS
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
504
|
|
|
$
|
446
|
|
Adjustments to reconcile net income to cash from operations:
|
|
|
|
|
|
|
|
|
Depreciation, depletion, and amortization
|
|
|
387
|
|
|
|
369
|
|
Deferred income taxes
|
|
|
(31
|
)
|
|
|
50
|
|
Equity earnings, net of dividends
|
|
|
(11
|
)
|
|
|
14
|
|
Restructuring and other charges (D)
|
|
|
212
|
|
|
|
22
|
|
Net gain from investing activities asset sales (O)
|
|
|
(3
|
)
|
|
|
(116
|
)
|
Net periodic pension benefit cost (K)
|
|
|
81
|
|
|
|
55
|
|
Stock-based compensation
|
|
|
20
|
|
|
|
14
|
|
Other
|
|
|
(32
|
)
|
|
|
(3
|
)
|
Changes in assets and liabilities, excluding effects of acquisitions, divestitures, and foreign
currency translation adjustments:
|
|
|
|
|
|
|
|
|
(Increase) in receivables
|
|
|
(209
|
)
|
|
|
(75
|
)
|
(Increase) in inventories
|
|
|
(267
|
)
|
|
|
(86
|
)
|
(Increase) Decrease in prepaid expenses and other current assets
|
|
|
(8
|
)
|
|
|
52
|
|
(Decrease) Increase in accounts payable, trade
|
|
|
(105
|
)
|
|
|
19
|
|
(Decrease) in accrued expenses
|
|
|
(243
|
)
|
|
|
(238
|
)
|
Increase (Decrease) in taxes, including income taxes
|
|
|
101
|
|
|
|
(44
|
)
|
Pension contributions (K)
|
|
|
(692
|
)
|
|
|
(47
|
)
|
(Increase) in noncurrent assets
|
|
|
(49
|
)
|
|
|
(46
|
)
|
(Decrease) in noncurrent liabilities
|
|
|
(30
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
CASH (USED FOR) PROVIDED FROM OPERATIONS
|
|
|
(375
|
)
|
|
|
385
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Cash paid to former parent company related to separation
|
|
|
|
|
|
|
(247
|
)
|
Net change in short-term borrowings (original maturities of three months or less)
|
|
|
|
|
|
|
3
|
|
Additions to debt (original maturities greater than three months) (J)
|
|
|
553
|
|
|
|
3
|
|
Payments on debt (original maturities greater than three months)
|
|
|
(7
|
)
|
|
|
(10
|
)
|
Proceeds from the exercise of employee stock options
|
|
|
22
|
|
|
|
18
|
|
Contributions from noncontrolling interest
|
|
|
109
|
|
|
|
56
|
|
Distributions to noncontrolling interest
|
|
|
(385
|
)
|
|
|
(155
|
)
|
Other
|
|
|
(6
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
CASH PROVIDED FROM (USED FOR) FINANCING ACTIVITIES
|
|
|
286
|
|
|
|
(338
|
)
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(169
|
)
|
|
|
(159
|
)
|
Proceeds from the sale of assets and businesses
|
|
|
|
|
|
|
243
|
|
Additions to investments (H)
|
|
|
(5
|
)
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
CASH (USED FOR) PROVIDED FROM INVESTING ACTIVITIES
|
|
|
(174
|
)
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
(7
|
)
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents and restricted cash
|
|
|
(270
|
)
|
|
|
106
|
|
Cash and cash equivalents and restricted cash at beginning of year (B)
|
|
|
1,365
|
|
|
|
859
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD (B)
|
|
$
|
1,095
|
|
|
$
|
965
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
4
Alcoa Corporation and subsidiaries
Statement of Changes in Consolidated Equity (unaudited)
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alcoa Corporation shareholders
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
Additional
capital
|
|
|
Retained
earnings
(deficit)
|
|
|
Accumulated
other
comprehensive
loss
|
|
|
Non-
controlling
interest
|
|
|
Total
equity
|
|
Balance at March 31, 2017
|
|
$
|
2
|
|
|
$
|
9,553
|
|
|
$
|
121
|
|
|
$
|
(3,800
|
)
|
|
$
|
2,287
|
|
|
$
|
8,163
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
75
|
|
|
|
|
|
|
|
63
|
|
|
|
138
|
|
Other comprehensive loss (G)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
(38
|
)
|
|
|
(41
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Common stock issued: compensation plans
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Contributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
32
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(98
|
)
|
|
|
(98
|
)
|
Other
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2017
|
|
$
|
2
|
|
|
$
|
9,559
|
|
|
$
|
196
|
|
|
$
|
(3,803
|
)
|
|
$
|
2,245
|
|
|
$
|
8,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2018
|
|
$
|
2
|
|
|
$
|
9,633
|
|
|
$
|
263
|
|
|
$
|
(4,530
|
)
|
|
$
|
2,149
|
|
|
$
|
7,517
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
75
|
|
|
|
|
|
|
|
155
|
|
|
|
230
|
|
Other comprehensive loss (G)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(437
|
)
|
|
|
(159
|
)
|
|
|
(596
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Common stock issued: compensation plans
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Contributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
|
|
|
|
56
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(118
|
)
|
|
|
(118
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2018
|
|
$
|
2
|
|
|
$
|
9,650
|
|
|
$
|
339
|
|
|
$
|
(4,967
|
)
|
|
$
|
2,084
|
|
|
$
|
7,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
2
|
|
|
$
|
9,531
|
|
|
$
|
(104
|
)
|
|
$
|
(3,775
|
)
|
|
$
|
2,043
|
|
|
$
|
7,697
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
300
|
|
|
|
|
|
|
|
146
|
|
|
|
446
|
|
Other comprehensive (loss) income (G)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28
|
)
|
|
|
158
|
|
|
|
130
|
|
Stock-based compensation
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
Common stock issued: compensation plans
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
Contributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
|
|
|
|
56
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(155
|
)
|
|
|
(155
|
)
|
Other
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2017
|
|
$
|
2
|
|
|
$
|
9,559
|
|
|
$
|
196
|
|
|
$
|
(3,803
|
)
|
|
$
|
2,245
|
|
|
$
|
8,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
$
|
2
|
|
|
$
|
9,590
|
|
|
$
|
113
|
|
|
$
|
(5,182
|
)
|
|
$
|
2,275
|
|
|
$
|
6,798
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
225
|
|
|
|
|
|
|
|
279
|
|
|
|
504
|
|
Other comprehensive income (loss) (G)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
215
|
|
|
|
(192
|
)
|
|
|
23
|
|
Stock-based compensation
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
Common stock issued: compensation plans
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
Contributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109
|
|
|
|
109
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(385
|
)
|
|
|
(385
|
)
|
Other
|
|
|
|
|
|
|
18
|
|
|
|
1
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2018
|
|
$
|
2
|
|
|
$
|
9,650
|
|
|
$
|
339
|
|
|
$
|
(4,967
|
)
|
|
$
|
2,084
|
|
|
$
|
7,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
5
Alcoa Corporation and subsidiaries
Notes to the Consolidated Financial Statements (unaudited)
(dollars in millions, except
per-share
amounts; metric tons in thousands (kmt))
A.
Basis of Presentation
The interim Consolidated Financial Statements of Alcoa Corporation and its subsidiaries (Alcoa
Corporation or the Company) are unaudited. These Consolidated Financial Statements include all adjustments, consisting only of normal recurring adjustments, considered necessary by management to fairly state the Companys
results of operations, financial position, and cash flows. The results reported in these Consolidated Financial Statements are not necessarily indicative of the results that may be expected for the entire year. The 2017
year-end
balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP). This Form
10-Q
report should be read in conjunction with the Companys Annual Report on Form
10-K
for the year ended December 31, 2017, which includes all disclosures required
by GAAP. Certain amounts in previously issued financial statements were reclassified to conform to the current period presentation (see Note B).
References in these Notes to ParentCo refer to Alcoa Inc., a Pennsylvania corporation, and its consolidated subsidiaries (through
October 31, 2016, at which time was renamed Arconic Inc. (Arconic)). On November 1, 2016 (the Separation Date), ParentCo separated into two standalone, publicly-traded companies, Alcoa Corporation and Arconic (the
Separation Transaction). In connection with the Separation Transaction, as of October 31, 2016, the Company and Arconic entered into several agreements to effect the Separation Transaction, including a Separation and Distribution
Agreement and a Tax Matters Agreement. See Note A to the Consolidated Financial Statements in Part II Item 8 of Alcoa Corporations Annual Report on Form
10-K
for the year ended December 31, 2017 for
additional information.
Principles of Consolidation.
The Consolidated Financial Statements of Alcoa Corporation include the
accounts of Alcoa Corporation and companies in which Alcoa Corporation has a controlling interest, including those that comprise the Alcoa World Alumina & Chemicals (AWAC) joint venture (see below). Intercompany transactions have been
eliminated. The equity method of accounting is used for investments in affiliates and other joint ventures over which Alcoa Corporation has significant influence but does not have effective control. Investments in affiliates in which Alcoa
Corporation cannot exercise significant influence are accounted for on the cost method.
AWAC is an unincorporated global joint venture
between Alcoa Corporation and Alumina Limited and consists of several affiliated operating entities, which own, or have an interest in, or operate the bauxite mines and alumina refineries within Alcoa Corporations Bauxite and Alumina segments
(except for the Poços de Caldas mine and refinery and a portion of the São Luís refinery, all in Brazil) and the Portland smelter in Australia. Alcoa Corporation owns 60% and Alumina Limited owns 40% of these individual
entities, which are consolidated by the Company for financial reporting purposes and include Alcoa of Australia Limited, Alcoa World Alumina LLC (AWA), and Alcoa World Alumina Brasil Ltda. (AWAB). Alumina Limiteds interest in the equity of
such entities is reflected as Noncontrolling interest on the accompanying Consolidated Balance Sheet.
B. Recently Adopted and Recently Issued
Accounting Guidance
Adopted
On
January 1, 2018, Alcoa Corporation adopted guidance issued by the Financial Accounting Standards Board (FASB) to the recognition of revenue from contracts with customers. This guidance created a comprehensive framework for all entities in all
industries to apply in the determination of when to recognize revenue, and, therefore, supersedes virtually all existing revenue recognition requirements and guidance. This framework is expected to result in less complex guidance in application
while providing a consistent and comparable methodology for revenue recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this principle, an entity should apply the following steps: (i) identify the contract(s) with a customer,
(ii) identify the performance obligations in the contract(s), (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract(s), and (v) recognize revenue when, or as,
the entity satisfies a performance obligation. Managements assessment of this guidance was applied only to those customer contracts that were open on the date of adoption under the modified retrospective method. Through a previously
established project team, the Company completed a detailed review of the terms and provisions of its
6
customer contracts, as well as evaluated these contracts under the new guidance, throughout 2017 and concluded that Alcoa Corporations revenue recognition practices were in compliance with
this framework. That said, the Company did make some minor modifications to its internal accounting policies and internal control structure to ensure that any future customer contracts that may have different terms and conditions of those that the
Company has today are properly evaluated under the new guidance. Other than providing additional disclosure (see Note C), the adoption of this guidance had no impact on the Consolidated Financial Statements.
On January 1, 2018, Alcoa Corporation adopted guidance issued by the FASB to the accounting and reporting of certain equity investments.
This guidance requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income.
However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical
or similar investment of the same issuer. Additionally, the impairment assessment of equity investments without readily determinable fair values has been simplified by requiring a qualitative assessment to identify impairment. The adoption of this
guidance had no impact on the Consolidated Financial Statements, as all of Alcoa Corporations equity investments are accounted for under the equity method of accounting.
On January 1, 2018, Alcoa Corporation adopted guidance issued by the FASB to the presentation of several items in the statement of cash
flows. Specifically, the guidance identifies nine cash flow items and the sections where they must be presented within the statement of cash flows, including distributions received from equity method investees, proceeds from the settlement of
insurance claims, and restricted cash. Other than as it relates to restricted cash, the adoption of this guidance had no impact on the Consolidated Financial Statements. This guidance requires that restricted cash be aggregated with cash and cash
equivalents in both the
beginning-of-period
and
end-of-period
line items at the bottom of
the statement of cash flows. Previously, the change in restricted cash between the
beginning-of-period
and
end-of
period was
reflected as either an investing, financing, operating, or
non-cash
activity based on the underlying nature of the transaction. Accordingly, for the accompanying Statement of Consolidated Cash Flows for the
six months ended June 30, 2018, the Cash and cash equivalents and restricted cash at beginning of year and Cash and cash equivalents and restricted cash at end of period line items include restricted cash of $7 and $6, respectively.
Additionally, the Companys Statement of Consolidated Cash Flows for the six months ended June 30, 2017 was recast to reflect this change in presentation. As a result, the Cash and cash equivalents and restricted cash at beginning of year
and Cash and cash equivalents and restricted cash at end of period line items include restricted cash of $6 and $11 respectively. Of the $5 increase in restricted cash for the six months ended June 30, 2017, $4 was previously presented as a
cash outflow in the investing activities section of the Companys Statement of Consolidated Cash Flows for the six months ended June 30, 2017. The remaining change of $1 is now reflected in the Effect of exchange rate changes on cash and
cash equivalents and restricted cash line item. The following table provides a reconciliation of Cash and cash equivalents and Restricted cash reported in the accompanying Consolidated Balance Sheet that sum to the Cash and cash equivalents and
restricted cash at both the beginning of year and end of period presented on the accompanying Statement of Consolidated Cash Flows for the six months ended June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
Cash and cash equivalents
|
|
$
|
1,089
|
|
|
$
|
1,358
|
|
Restricted cash*
|
|
|
6
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,095
|
|
|
$
|
1,365
|
|
|
|
|
|
|
|
|
|
|
*
|
These amounts are reported in Prepaid expenses and other current assets on the accompanying Consolidated
Balance Sheet.
|
On January 1, 2018, Alcoa Corporation adopted guidance issued by the FASB to the accounting for
intra-entity transactions, other than inventory. The guidance requires the current and deferred income tax consequences of an intra-entity transfer to be recorded immediately when the transaction occurs; the exception to defer the tax
consequences of inventory transactions is maintained. Prior to this guidance, no immediate tax impact was permitted to be recognized in an entitys financial statements as a result of intra-entity transfers of assets. An entity was precluded
from reflecting a tax benefit or expense from an intra-entity asset transfer between entities that file separate tax returns, whether or not such entities are in different tax jurisdictions, until the asset had been sold to a third party or
otherwise recovered. The buyer of such asset was prohibited from recognizing a deferred tax asset for the temporary difference arising from the excess of the buyers tax basis over the cost to the seller. The adoption of this guidance had
an immaterial impact on the Consolidated Financial Statements.
7
On January 1, 2018, Alcoa Corporation adopted guidance issued by the FASB to accounting for
business combinations. This guidance clarifies the definition of a business for the purposes of evaluating whether a particular transaction should be accounted for as an acquisition or disposal of a business or an asset. Generally, a business is an
integrated set of assets and activities that contain inputs, processes, and outputs, although outputs are not required. This guidance provides a screen to determine whether an integrated set of assets and activities qualifies as a
business. If substantially all of the fair value of the gross assets is concentrated in a single identifiable asset or a group of similar identifiable assets, the definition of a business has not been met and the transaction should be accounted for
as an acquisition or disposal of an asset. Otherwise, an entity is required to evaluate whether the integrated set of assets and activities include, at a minimum, an input and a substantive process that together significantly contribute to the
ability to create output and are no longer to consider whether a market participant could replace any missing elements. This guidance also narrows the definition of an output. Previously, an output was defined as the ability to provide a return in
the form of dividends, lower costs, or other economic benefits directly to investors, owners, members, or participants. An output is now defined as the ability to provide goods or services to customers, investment income, or other revenues. The
adoption of this guidance had no immediate impact on the Consolidated Financial Statements; however, this guidance will need to be considered in the event Alcoa Corporation acquires or disposes of an integrated set of assets and activities.
On January 1, 2018, Alcoa Corporation early adopted guidance issued by the FASB to the assessment of goodwill for impairment as it
relates to the quantitative test. Prior to this guidance, there were two steps when performing a quantitative impairment test. The first step required an entity to compare the current fair value of a reporting unit to its carrying value. In the
event the reporting units estimated fair value was less than its carrying value, an entity performed the second step, which was to compare the carrying amount of the reporting units goodwill with the implied fair value of that goodwill.
The implied fair value of goodwill is the excess of the fair value of the reporting unit over the fair value amounts assigned to all of the assets and liabilities of that unit as if the reporting unit was acquired in a business combination and the
fair value of the reporting unit represented the purchase price. If the carrying value of goodwill exceeded its implied fair value, an impairment loss equal to such excess was recognized. This guidance eliminates the second step of the quantitative
impairment test. Accordingly, an entity would recognize an impairment of goodwill for a reporting unit, if under what was previously referred to as the first step, the estimated fair value of the reporting unit is less than the carrying value. The
impairment would be equal to the excess of the reporting units carrying value over its fair value not to exceed the total amount of goodwill applicable to that reporting unit. The adoption of this guidance had no immediate impact on the
Consolidated Financial Statements; however, this guidance will need to be considered each time the Company performs an assessment of goodwill for impairment under the quantitative test.
On January 1, 2018, Alcoa Corporation adopted guidance issued by the FASB to the presentation of net periodic benefit cost related to
pension and other postretirement benefit plans. This guidance requires that an entity report the service cost component of net periodic benefit cost in the same line item(s) on its income statement as other compensation costs arising from services
rendered by the pertinent employees during a reporting period. The other components of net periodic benefit cost (see Note K) are required to be reported separately from the service cost component. In other words, these other components may be
aggregated and presented as a separate line item or they may be reported in existing line items on the income statement other than such line items that include the service cost component. Previously, Alcoa Corporation reported all components of net
periodic benefit cost, except for certain settlements, curtailments, and special termination benefits, in Cost of goods sold (business employees) and Selling, general administrative, and other expenses (corporate employees) consistent with the
location of other compensation costs related to the respective employees. The
non-service
cost components noted as exceptions are reported in Restructuring and other charges, as applicable. Additionally, this
guidance only permits the service cost component to be capitalized as applicable (e.g., as a cost of internally manufactured inventory). Upon adoption of this guidance, management began reporting the
non-service
cost components of net periodic benefit cost, except for certain settlements, curtailments, and special termination benefits that will continue to be reported in Restructuring and other charges, in
Other expenses (income), net on the accompanying Statement of Consolidated Operations (see Note K). For the second quarter and six months ended June 30, 2018, the
non-service
cost components reported in
Other expenses, net was $39 and $77, respectively. Additionally, the Statement of Consolidated Operations for the second quarter and six months ended June 30, 2017 was recast to reflect the reclassification of the
non-service
cost components of net periodic benefit cost to Other expense (income), net from both Cost of goods sold and Selling, general administrative, and other expenses. As a result, for the second quarter
and six months ended June 30, 2017, Cost of goods sold decreased by $20 and $40, respectively, Selling, general administrative, and other expenses decreased by $2 and $3, respectively, and Other expenses (income), net changed by $22 and $43,
respectively,
8
from previously reported amounts. Under the practical expedient option provided for in the guidance, the Company used previously disclosed amounts for
non-service
cost components to recast these line items for the second quarter and six months ended June 30, 2017. Furthermore, Alcoa Corporation no longer capitalizes any
non-service
cost components as part of the cost of inventory prospectively beginning January 1, 2018.
On January 1, 2018, Alcoa Corporation adopted guidance issued by the FASB to the accounting for stock-based compensation when there has
been a modification to the terms or conditions of a share-based payment award. This guidance requires an entity to account for the modification only when there has been a substantive change to the terms or conditions of a share-based payment award.
A substantive change occurs when the fair value, vesting conditions or balance sheet classification (liability or equity) of a share-based payment award is/are different immediately before and after the modification. Previously, an entity was
required to account for any modification in the terms or conditions of a share-based payment award. The adoption of this guidance had no immediate impact on the Consolidated Financial Statements; however, this guidance will need to be considered if
the Company initiates a modification that is determined to be a substantive change to an outstanding share-based award. Additionally, the Company will no longer account for any future
non-substantive
change to
the terms or conditions of a share-based payment awards as a modification.
On April 1, 2018, Alcoa Corporation early adopted
guidance issued by the FASB to the accounting for hedging activities retroactive to January 1, 2018. This guidance permits hedge accounting for risk components in hedging relationships involving nonfinancial risk and interest rate risk; reduces
current limitations on the designation and measurement of a hedged item in a fair value hedge of interest rate risk; removes the requirement to separately measure and report hedge ineffectiveness; provides an election to systematically and
rationally recognize in earnings the initial value of any amount excluded from the assessment of hedge effectiveness for all types of hedges; and eases the requirements of effectiveness testing. Additionally, modifications to existing disclosures,
as well as additional disclosures, are required, as applicable, to reflect these changes regarding the measurement and recognition of hedging activities. This guidance is to be initially applied only to hedging instruments that exist as of the
adoption date using the modified retrospective method. In other words, any financial statement impact from application of these changes to open hedging instruments as of the adoption date related to periods prior to the adoption year is to be
recognized through a cumulative effect adjustment in beginning retained earnings of the adoption year. Accordingly, upon adoption of this guidance, Alcoa Corporation recognized an immaterial cumulative effect adjustment within equity effective
January 1, 2018 related to open Level 1 hedging instruments as of the adoption date. The Company had no open Level 2 hedging instruments as of the adoption date and there was no financial statement impact from Alcoa Corporations
open Level 3 hedging instruments as of the adoption date. This guidance will also be applied prospectively upon the Company entering into any new hedging instruments. See the Derivatives section of Note L for additional information.
Issued
In January 2018, the FASB issued
guidance regarding the assessment of land easements (or rights of way) under the pending lease accounting requirements to be adopted on January 1, 2019 (see Recently Issued Accounting Guidance in Note B to the Consolidated Financial Statements
in Part II Item 8 of Alcoa Corporations Annual Report on Form
10-K
for the year ended December 31, 2017). This guidance provides an entity an option to not evaluate existing or expired land
easements as leases in preparation for the adoption of the new lease accounting requirements, as long as such land easements were recorded as something other than leases under current accounting requirements. That said, any new land easement
acquired or existing land easement modified on January 1, 2019 or later must be assessed for lease accounting under the new requirements. This guidance becomes effective for Alcoa Corporation on January 1, 2019. Management plans to elect
the option to not evaluate existing or expired land easements that are currently accounted for as something other than leases under the new lease accounting requirements. The Companys land easements are currently accounted for as fixed assets
and are immaterial to Alcoa Corporations Consolidated Financial Statements. Accordingly, management has determined that the adoption of this guidance will not have an immediate impact on the Companys Consolidated Financial Statements.
The new lease accounting requirements will need to be considered if the Company acquires a new land easement or modifies an existing land easement on January 1, 2019 or later.
In February 2018, the FASB issued guidance regarding the reclassification of certain income tax effects reported in accumulated comprehensive
income (loss) in response to U.S. tax legislation enacted on December 22, 2017 known as the U.S. Tax Cuts and Jobs Act of 2017 (the TCJA). For corporations, one of the main provisions of the TCJA was the reduction in the corporate
income tax rate to 21% from 35%. Under current income tax accounting requirements, an entity was required to remeasure applicable
9
U.S. deferred tax assets and deferred tax liabilities at the 21% tax rate effective on the TCJA enactment date. This remeasurement was required to be recognized in an entitys income tax
provision in its income statement. However, certain of these deferred tax assets and deferred tax liabilities relate to income tax effects initially recognized at the 35% tax rate through other comprehensive income (loss) on items reported within
accumulated other comprehensive income (loss) on an entitys balance sheet. Consequently, an entitys financial statements will reflect an inconsistency between the deferred tax assets and deferred tax liabilities measured at 21% and the
related income tax effects in accumulated other comprehensive income (loss) recorded at 35%. Accordingly, this guidance provides a
one-time
option to remeasure the income tax effects within accumulated other
comprehensive income (loss) at the 21% income tax rate. The impact from this remeasurement is to be recorded directly in retained earnings on an entitys balance sheet. This guidance becomes effective for Alcoa Corporation on January 1,
2019, with early adoption permitted. Management is currently evaluating whether to elect this option, as well as whether to early adopt the guidance. If management elects to apply this guidance, the impact on the Companys Consolidated Balance
Sheet is estimated to be an increase of approximately $350 to both Retained earnings and Accumulated other comprehensive loss.
In June
2018, the FASB issued guidance regarding the accounting for nonemployee share-based payment transactions. This guidance effectively changes the accounting for such transactions to be consistent with the accounting for employee share-based payment
transactions. The nonemployee share-based payment transactions subject to this guidance are those in which a grantor acquires goods or services to be used or consumed in a grantors own operations by issuing share-based payment awards. This
guidance is not to be applied to other nonemployee share-based payment transactions, such as those used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as
part of a contract accounted for under revenue recognition principles. This guidance becomes effective for Alcoa Corporation on January 1, 2019, with early adoption permitted. The only nonemployees to receive share-based payments from Alcoa
Corporation are the members of the Companys Board of Directors. Accordingly, management does not expect the adoption of this guidance to have a material impact on the Consolidated Financial Statements.
C. Revenue
The Company recognizes revenue when it satisfies a performance obligation(s) in accordance with the provisions of a customer order or
contract. This is achieved when control of the product has been transferred to the customer, which is generally determined when title, ownership, and risk of loss pass to the customer, all of which occurs upon shipment or delivery of the product.
The shipping terms vary across all businesses and depend on the product, the country of origin, and the type of transportation (commercial delivery truck, train, or vessel). Accordingly, except for the sale of electricity, the sale of Alcoa
Corporations products to its customers represent single performance obligations for which revenue is recognized at a point in time. Based on the foregoing, no significant judgment is required to determine when control of a product has been
transferred to a customer.
The Company measures revenue based on the consideration it expects to be entitled to receive in exchange for
its products. The standard terms and conditions of customer orders and contracts include general rights of return and product warranty provisions related to nonconforming or
out-of-spec
product. Depending on the circumstances, the product is either replaced or a quality adjustment is issued. Historically, such returns and
adjustments have not been material to Alcoa Corporations Consolidated Financial Statements.
The Company considers shipping and
handling activities as costs to fulfill the promise to transfer the related products. As a result, customer payments of shipping and handling costs are recorded as a component of revenue. Also, Alcoa Corporation may collect various taxes (e.g.,
sales, use, value-added, excise) from its customers related to the sale of its products and remit such amounts to governmental authorities. As such, amounts paid to the Company for these types of taxes are excluded from the transaction price used to
determine the proper measurement of revenue.
Alcoa Corporation has five product divisions as follows:
Bauxite
Bauxite is a reddish clay rock that is mined from the surface of the earths terrain. This ore is the basic raw
material used to produce alumina and is the primary source of aluminum.
Alumina
Alumina is an oxide that is extracted from
bauxite and is the basic raw material used to produce primary aluminum. This product can also be consumed for
non-metallurgical
purposes, such as industrial chemical products.
Primary aluminum
Primary aluminum is metal in the form of a common alloy ingot (e.g.,
t-bar,
sow, standard ingot) or a
value-add
ingot (e.g., billet, rod, and slab). These products are sold primarily to customers that produce products for the
transportation, building and construction, packaging, wire, and other industrial markets.
10
Flat-rolled aluminum
Flat-rolled aluminum is metal in the form of sheet, which is
sold primarily to customers that produce beverage and food cans, including body, tab, and end stock.
Energy
Energy is the
generation of electricity, which is sold in the wholesale market to traders, large industrial consumers, distribution companies, and other generation companies.
The following table represents the general commercial profile of the Companys Bauxite, Alumina, Primary aluminum, and Flat-rolled
aluminum product divisions (see text below table for Energy):
|
|
|
|
|
|
|
Product division
|
|
Pricing components
|
|
Shipping
terms
(4)
|
|
Payment
terms
(5)
|
Bauxite
|
|
Negotiated
|
|
FOB/CIF
|
|
LC Sight
|
Alumina:
|
|
|
|
|
|
|
Smelter-grade
|
|
API
(1)
/spot
|
|
FOB
|
|
LC Sight/CAD/Net 30 days
|
Non-metallurgical
|
|
Negotiated
|
|
FOB/CIF
|
|
Net 30 days
|
Primary aluminum:
|
|
|
|
|
|
|
Common alloy ingot
|
|
LME + Regional premium
(2)
|
|
DAP/CIF
|
|
Net 30 to 45 days
|
Value-add
ingot
|
|
LME + Regional premium + Product premium
(2)
|
|
DAP/CIF
|
|
Net 30 to 45 days
|
Flat-rolled aluminum
|
|
Metal + Conversion
(3)
|
|
DAP
|
|
Negotiated
|
(1)
|
API (Alumina Price Index) is a pricing mechanism that is calculated by the Company based on the weighted
average of a prior months daily spot prices published by the following three indices: CRU Metallurgical Grade Alumina Price; Platts Metals Daily Alumina PAX Price; and Metal Bulletin
Non-Ferrous
Metals
Alumina Index.
|
(2)
|
LME (London Metal Exchange) is a globally recognized exchange for commodity trading, including aluminum. The
LME pricing component represents the underlying base metal component, based on quoted prices for aluminum on the exchange. The regional premium represents the incremental price over the base LME component that is associated with the physical
delivery of metal to a particular region (e.g., the Midwest premium for metal sold in the United States). The product premium represents the incremental price for receiving physical metal in a particular shape (e.g., billet, rod, slab, etc.) or
alloy.
|
(3)
|
Metal represents the underlying base metal component plus a regional premium (see footnote 2). Conversion
represents the incremental price over the metal price component that is associated with converting primary or scrap aluminum into sheet.
|
(4)
|
CIF (cost, insurance, and freight) means that the Company pays for these items until the product reaches the
buyers designated destination point related to transportation by vessel. DAP (delivered at place) means the same as CIF related to all methods of transportation. FOB (free on board) means that the Company pays for costs, insurance, and freight
until the product reaches the sellers designated shipping point.
|
(5)
|
The net number of days means that the customer is required to remit payment to the Company for the invoice
amount within the designated number of days. LC Sight is a letter of credit that is payable immediately (usually within five to ten business days) after a seller meets the requirements of the letter of credit (i.e. shipping documents that evidence
the seller performed its obligations as agreed to with a buyer). CAD (cash against documents) is a payment arrangement in which a seller instructs a bank to provide shipping and title documents to the buyer at the time the buyer pays in full the
accompanying bill of exchange.
|
For the Companys Energy product division, sales of electricity are based on
current market prices. Electricity is provided to customers on demand through a national or regional power grid; the customer simultaneously receives and consumes the electricity. Payment terms are generally within 10 days related to the previous 30
days of electricity consumption.
The following table details Alcoa Corporations revenue by product division:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second quarter ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Primary aluminum
|
|
$
|
1,871
|
|
|
$
|
1,498
|
|
|
$
|
3,518
|
|
|
$
|
2,850
|
|
Alumina
|
|
|
1,068
|
|
|
|
746
|
|
|
|
1,981
|
|
|
|
1,477
|
|
Flat-rolled aluminum
|
|
|
516
|
|
|
|
453
|
|
|
|
945
|
|
|
|
876
|
|
Energy
|
|
|
73
|
|
|
|
93
|
|
|
|
146
|
|
|
|
183
|
|
Bauxite
|
|
|
71
|
|
|
|
80
|
|
|
|
116
|
|
|
|
150
|
|
Other*
|
|
|
(20
|
)
|
|
|
(11
|
)
|
|
|
(37
|
)
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,579
|
|
|
$
|
2,859
|
|
|
$
|
6,669
|
|
|
$
|
5,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Other includes realized gains and losses related to embedded derivative instruments designated as cash flow
hedges of forward sales of aluminum (see Note L).
|
11
D. Restructuring and Other Charges
In the second quarter and
six-month
period of 2018, Alcoa Corporation recorded Restructuring and other charges of $231 and $212, respectively, which were comprised of the following components: $167 and $144 (net), respectively, related
to settlements and/or curtailments of certain pension and other postretirement employee benefits (see Note K); $80 and $84, respectively, for additional costs related to the curtailed Wenatchee (Washington) smelter, including $73 in both periods
associated with recent management decisions (see below); a $15 net benefit in both periods related to the Portovesme (Italy) smelter (see Italy 148 in the Litigation section of Note N); and a $1 net benefit in both periods for
miscellaneous items.
In June 2018, management decided not to restart the fully curtailed Wenatchee smelter within the term provided in
the related electricity supply agreement. Alcoa Corporation was therefore required to make a $62 payment to the energy supplier under the provisions of the agreement. Additionally, management decided to permanently close one (38 kmt) of the four
potlines at this smelter. This potline has not operated since 2001 and the investments needed to restart this line are cost prohibitive. The remaining three curtailed potlines have a capacity of 146 kmt. In connection with these decisions, the
Company recognized a charge of $73, composed of the $62 payment, $10 for asset impairments, and $1 for asset retirement obligations triggered by the decision to decommission the potline.
In the second quarter and
six-month
period of 2017, Alcoa Corporation recorded Restructuring and other
charges of $12 and $22, respectively, which were comprised of the following components: $5 and $18, respectively, for additional contract costs related to the curtailed Wenatchee smelter; $11 and $13, respectively, for layoff costs related to cost
reduction initiatives, including the separation of approximately 110 employees in the Aluminum segment; and a reversal of $4 and $9, respectively, associated with several reserves related to prior periods.
Alcoa Corporation does not include Restructuring and other charges in the results of its reportable segments. The impact of allocating such
charges to segment results would have been as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second quarter ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Bauxite
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Alumina
|
|
|
3
|
|
|
|
(1
|
)
|
|
|
2
|
|
|
|
(1
|
)
|
Aluminum
|
|
|
79
|
|
|
|
15
|
|
|
|
84
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment total
|
|
|
82
|
|
|
|
14
|
|
|
|
86
|
|
|
|
26
|
|
Corporate
|
|
|
149
|
|
|
|
(2
|
)
|
|
|
126
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring and other charges
|
|
$
|
231
|
|
|
$
|
12
|
|
|
$
|
212
|
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2018, approximately 125 of the 140 employees associated with 2017 restructuring programs
were separated. The remaining separations for the 2017 restructuring programs are expected to be completed by the end of 2018.
In the
2018
six-month
period, cash payments of $2 were made against layoff reserves related to 2017 restructuring programs.
Activity and reserve balances for restructuring charges were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Layoff
costs
|
|
|
Other
costs
|
|
|
Total
|
|
Reserve balances at December 31, 2016
|
|
$
|
38
|
|
|
$
|
28
|
|
|
$
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments
|
|
|
(30
|
)
|
|
|
(43
|
)
|
|
|
(73
|
)
|
Restructuring charges
|
|
|
23
|
|
|
|
67
|
|
|
|
90
|
|
Other*
|
|
|
(20
|
)
|
|
|
(18
|
)
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve balances at December 31, 2017
|
|
|
11
|
|
|
|
34
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments
|
|
|
(5
|
)
|
|
|
(88
|
)
|
|
|
(93
|
)
|
Restructuring charges
|
|
|
1
|
|
|
|
100
|
|
|
|
101
|
|
Other*
|
|
|
(1
|
)
|
|
|
(7
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve balances at June 30, 2018
|
|
$
|
6
|
|
|
$
|
39
|
|
|
$
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
*
|
Other includes reversals of previously recorded restructuring charges and the effects of foreign currency
translation. In the 2018
six-month
period, Other for Other costs also included a reclassification of the following restructuring charges: $1 in asset retirement and $2 in environmental obligations, as these
liabilities were included in Alcoa Corporations separate reserves for asset retirement obligations and environmental remediation. In 2017, Other for Layoff costs also included a reclassification of $8 in pension benefits costs, as these
obligations were included in Alcoa Corporations separate liability for pension benefits obligations. Additionally in 2017, Other for Other costs also included a reclassification of the following restructuring charges: $10 in asset retirement
and $8 in environmental obligations, as these liabilities were included in Alcoa Corporations separate reserves for asset retirement obligations and environmental remediation.
|
The remaining reserves are expected to be paid in cash during the remainder of 2018, with the exception of $19, of which $15 relates to the
Portovesme smelter (see Italy 148 in the Litigation section of Note N) and $4 relates to the termination of an office lease contract. Half of these amounts are scheduled to be paid in each of 2019 and 2020.
E. Segment Information
The operating results of Alcoa Corporations reportable segments were as follows (differences between segment totals
and consolidated amounts are in Corporate):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bauxite
|
|
|
Alumina
|
|
|
Aluminum
|
|
|
Total
|
|
Second quarter ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party sales
|
|
$
|
77
|
|
|
$
|
1,068
|
|
|
$
|
2,413
|
|
|
$
|
3,558
|
|
Intersegment sales
|
|
|
226
|
|
|
|
536
|
|
|
|
4
|
|
|
|
766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
303
|
|
|
$
|
1,604
|
|
|
$
|
2,417
|
|
|
$
|
4,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
100
|
|
|
$
|
638
|
|
|
$
|
231
|
|
|
$
|
969
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion, and amortization
|
|
$
|
27
|
|
|
$
|
49
|
|
|
$
|
108
|
|
|
$
|
184
|
|
Equity income (loss)
|
|
|
|
|
|
|
14
|
|
|
|
(8
|
)
|
|
|
6
|
|
Second quarter ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party sales
|
|
$
|
80
|
|
|
$
|
749
|
|
|
$
|
1,988
|
|
|
$
|
2,817
|
|
Intersegment sales
|
|
|
208
|
|
|
|
384
|
|
|
|
3
|
|
|
|
595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
288
|
|
|
$
|
1,133
|
|
|
$
|
1,991
|
|
|
$
|
3,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
97
|
|
|
$
|
227
|
|
|
$
|
234
|
|
|
$
|
558
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion, and amortization
|
|
$
|
19
|
|
|
$
|
53
|
|
|
$
|
108
|
|
|
$
|
180
|
|
Equity (loss) income
|
|
|
|
|
|
|
(6
|
)
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
Bauxite
|
|
|
Alumina
|
|
|
Aluminum
|
|
|
Total
|
|
Six months ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party sales
|
|
$
|
124
|
|
|
$
|
1,982
|
|
|
$
|
4,524
|
|
|
$
|
6,630
|
|
Intersegment sales
|
|
|
475
|
|
|
|
990
|
|
|
|
8
|
|
|
|
1,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
599
|
|
|
$
|
2,972
|
|
|
$
|
4,532
|
|
|
$
|
8,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
210
|
|
|
$
|
1,030
|
|
|
$
|
384
|
|
|
$
|
1,624
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion, and amortization
|
|
$
|
56
|
|
|
$
|
102
|
|
|
$
|
214
|
|
|
$
|
372
|
|
Equity income (loss)
|
|
|
|
|
|
|
13
|
|
|
|
(8
|
)
|
|
|
5
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party sales
|
|
$
|
150
|
|
|
$
|
1,483
|
|
|
$
|
3,794
|
|
|
$
|
5,427
|
|
Intersegment sales
|
|
|
427
|
|
|
|
745
|
|
|
|
7
|
|
|
|
1,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
577
|
|
|
$
|
2,228
|
|
|
$
|
3,801
|
|
|
$
|
6,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
207
|
|
|
$
|
524
|
|
|
$
|
451
|
|
|
$
|
1,182
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion, and amortization
|
|
$
|
37
|
|
|
$
|
102
|
|
|
$
|
209
|
|
|
$
|
348
|
|
Equity loss
|
|
|
|
|
|
|
(5
|
)
|
|
|
(4
|
)
|
|
|
(9
|
)
|
The following table reconciles total segment Adjusted EBITDA to consolidated net income attributable to Alcoa
Corporation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second quarter ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Total segment Adjusted EBITDA
|
|
$
|
969
|
|
|
$
|
558
|
|
|
$
|
1,624
|
|
|
$
|
1,182
|
|
Unallocated amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transformation
(1),(2)
|
|
|
(1
|
)
|
|
|
(28
|
)
|
|
|
(3
|
)
|
|
|
(48
|
)
|
Corporate inventory
accounting
(1),(3)
|
|
|
(32
|
)
|
|
|
14
|
|
|
|
(1
|
)
|
|
|
(3
|
)
|
Corporate expenses
(4)
|
|
|
(26
|
)
|
|
|
(34
|
)
|
|
|
(53
|
)
|
|
|
(67
|
)
|
Provision for depreciation, depletion, and amortization
|
|
|
(192
|
)
|
|
|
(190
|
)
|
|
|
(386
|
)
|
|
|
(369
|
)
|
Restructuring and other charges (D)
|
|
|
(231
|
)
|
|
|
(12
|
)
|
|
|
(212
|
)
|
|
|
(22
|
)
|
Interest expense
|
|
|
(32
|
)
|
|
|
(25
|
)
|
|
|
(58
|
)
|
|
|
(51
|
)
|
Other (expenses) income, net (O)
|
|
|
(9
|
)
|
|
|
(28
|
)
|
|
|
(30
|
)
|
|
|
51
|
|
Other
(1),(5)
|
|
|
(36
|
)
|
|
|
(18
|
)
|
|
|
(59
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income before income taxes
|
|
|
410
|
|
|
|
237
|
|
|
|
822
|
|
|
|
655
|
|
Provision for income taxes
|
|
|
(180
|
)
|
|
|
(99
|
)
|
|
|
(318
|
)
|
|
|
(209
|
)
|
Net income attributable to noncontrolling interest
|
|
|
(155
|
)
|
|
|
(63
|
)
|
|
|
(279
|
)
|
|
|
(146
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income attributable to Alcoa Corporation
|
|
$
|
75
|
|
|
$
|
75
|
|
|
$
|
225
|
|
|
$
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Effective in the first quarter of 2018, management elected to change the presentation of certain line items in
the reconciliation of total segment Adjusted EBITDA to consolidated net income attributable to Alcoa Corporation to provide additional transparency to the nature of these reconciling items. Accordingly, Transformation (see footnote 2), which was
previously reported within Other, is presented as a separate line item. Additionally, Impact of LIFO (last in, first out) and Metal price lag, which were previously reported as separate line items, are now combined and reported in a new line item
labeled Corporate inventory accounting (see footnote 3). Also, the impact of intersegment profit eliminations, which was previously reported within Other, is reported in the new Corporate inventory accounting line item. The applicable information
for all prior periods presented was recast to reflect these changes.
|
(2)
|
Transformation includes, among other items, the Adjusted EBITDA of previously closed operations.
|
(3)
|
Corporate inventory accounting is composed of the impacts of LIFO inventory accounting, metal price lag, and
intersegment profit eliminations. Metal price lag describes the timing difference created when the average price of metal sold differs from the average cost of the metal when purchased by Alcoa Corporations rolled aluminum operations. In
general, when the price of metal increases, metal price lag is favorable, and when the price of metal decreases, metal price lag is unfavorable.
|
(4)
|
Corporate expenses are composed of general administrative and other expenses of operating the corporate
headquarters and other global administrative facilities, as well as research and development expenses of the corporate technical center.
|
(5)
|
Other includes certain items that impact Cost of goods sold and Selling, general administrative, and other
expenses on Alcoa Corporations Statement of Consolidated Operations that are not included in the Adjusted EBITDA of the reportable segments.
|
F. Earnings Per Share
Basic earnings per share (EPS) amounts are computed by dividing earnings by the average number of common shares
outstanding. Diluted EPS amounts assume the issuance of common stock for all potentially dilutive share equivalents outstanding.
The
information used to compute basic and diluted EPS attributable to Alcoa Corporation common shareholders was as follows (shares in millions):
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second quarter ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net income attributable to Alcoa Corporation
|
|
$
|
75
|
|
|
$
|
75
|
|
|
$
|
225
|
|
|
$
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding basic
|
|
|
186
|
|
|
|
184
|
|
|
|
186
|
|
|
|
184
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
Stock and performance awards
|
|
|
2
|
|
|
|
1
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding diluted
|
|
|
189
|
|
|
|
186
|
|
|
|
189
|
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase 1 million shares of common stock at a weighted average exercise price of $36.28 were
outstanding as of June 30, 2017, but were not included in the computation of diluted EPS because they were anti-dilutive, as the exercise prices of the options were greater than the average market price of Alcoa Corporations common stock.
G. Accumulated Other Comprehensive Loss
The following table details the activity of the three components that comprise Accumulated other comprehensive loss for both Alcoa
Corporations shareholders and Noncontrolling interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alcoa Corporation
|
|
|
Noncontrolling
interest
|
|
|
|
Second quarter ended
June 30,
|
|
|
Second quarter ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Pension and other postretirement benefits (K)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(2,685
|
)
|
|
$
|
(2,286
|
)
|
|
$
|
(46
|
)
|
|
$
|
(57
|
)
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized net actuarial loss and prior service cost/benefit
|
|
|
1
|
|
|
|
53
|
|
|
|
2
|
|
|
|
19
|
|
Tax benefit
|
|
|
6
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other comprehensive income before reclassifications, net of tax
|
|
|
7
|
|
|
|
55
|
|
|
|
2
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss and prior service cost/benefit
(1)
|
|
|
224
|
|
|
|
49
|
|
|
|
|
|
|
|
1
|
|
Tax expense
(2)
|
|
|
(48
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amount reclassified from Accumulated other comprehensive loss, net of tax
(6)
|
|
|
176
|
|
|
|
47
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other comprehensive income
|
|
|
183
|
|
|
|
102
|
|
|
|
2
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
(2,502
|
)
|
|
$
|
(2,184
|
)
|
|
$
|
(44
|
)
|
|
$
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(1,466
|
)
|
|
$
|
(1,416
|
)
|
|
$
|
(595
|
)
|
|
$
|
(563
|
)
|
Other comprehensive (loss)
(3)
|
|
|
(445
|
)
|
|
|
(99
|
)
|
|
|
(151
|
)
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
(1,911
|
)
|
|
$
|
(1,515
|
)
|
|
$
|
(746
|
)
|
|
$
|
(600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges (L)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(379
|
)
|
|
$
|
(98
|
)
|
|
$
|
31
|
|
|
$
|
84
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change from periodic revaluations
|
|
|
(231
|
)
|
|
|
(50
|
)
|
|
|
(10
|
)
|
|
|
(30
|
)
|
Tax benefit
|
|
|
31
|
|
|
|
19
|
|
|
|
3
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other comprehensive loss before reclassifications, net of tax
|
|
|
(200
|
)
|
|
|
(31
|
)
|
|
|
(7
|
)
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount reclassified to earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aluminum contracts
(4)
|
|
|
34
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
Financial contracts
(5)
|
|
|
(7
|
)
|
|
|
(2
|
)
|
|
|
(4
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
27
|
|
|
|
29
|
|
|
|
(4
|
)
|
|
|
(1
|
)
|
Tax (expense) benefit
(2)
|
|
|
(2
|
)
|
|
|
(4
|
)
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amount reclassified from Accumulated other comprehensive (loss) income, net of tax
(6)
|
|
|
25
|
|
|
|
25
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other comprehensive loss
|
|
|
(175
|
)
|
|
|
(6
|
)
|
|
|
(10
|
)
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
(554
|
)
|
|
$
|
(104
|
)
|
|
$
|
21
|
|
|
$
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alcoa Corporation
|
|
|
Noncontrolling interest
|
|
|
|
Six months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Pension and other postretirement benefits (K)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(2,786
|
)
|
|
$
|
(2,330
|
)
|
|
$
|
(47
|
)
|
|
$
|
(56
|
)
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized net actuarial loss and prior service cost/benefit
|
|
|
76
|
|
|
|
48
|
|
|
|
3
|
|
|
|
18
|
|
Tax (expense) benefit
|
|
|
(2
|
)
|
|
|
3
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other comprehensive income before reclassifications, net of tax
|
|
|
74
|
|
|
|
51
|
|
|
|
2
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss and prior service cost/benefit
(1)
|
|
|
260
|
|
|
|
99
|
|
|
|
1
|
|
|
|
1
|
|
Tax expense
(2)
|
|
|
(50
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amount reclassified from Accumulated other comprehensive loss, net of tax
(6)
|
|
|
210
|
|
|
|
95
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other comprehensive income
|
|
|
284
|
|
|
|
146
|
|
|
|
3
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
(2,502
|
)
|
|
$
|
(2,184
|
)
|
|
$
|
(44
|
)
|
|
$
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(1,467
|
)
|
|
$
|
(1,655
|
)
|
|
$
|
(581
|
)
|
|
$
|
(677
|
)
|
Other comprehensive (loss) income
(3)
|
|
|
(444
|
)
|
|
|
140
|
|
|
|
(165
|
)
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
(1,911
|
)
|
|
$
|
(1,515
|
)
|
|
$
|
(746
|
)
|
|
$
|
(600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges (L)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(929
|
)
|
|
$
|
210
|
|
|
$
|
51
|
|
|
$
|
1
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change from periodic revaluations
|
|
|
404
|
|
|
|
(430
|
)
|
|
|
(30
|
)
|
|
|
90
|
|
Tax (expense) benefit
|
|
|
(68
|
)
|
|
|
77
|
|
|
|
9
|
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other comprehensive income (loss) before reclassifications, net of tax
|
|
|
336
|
|
|
|
(353
|
)
|
|
|
(21
|
)
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount reclassified to earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aluminum contracts
(4)
|
|
|
61
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
Financial contracts
(5)
|
|
|
(20
|
)
|
|
|
(3
|
)
|
|
|
(13
|
)
|
|
|
(2
|
)
|
Foreign exchange contracts
(4)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
40
|
|
|
|
46
|
|
|
|
(13
|
)
|
|
|
(2
|
)
|
Tax (expense) benefit
(2)
|
|
|
(1
|
)
|
|
|
(7
|
)
|
|
|
4
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amount reclassified from Accumulated other comprehensive (loss) income, net of tax
(6)
|
|
|
39
|
|
|
|
39
|
|
|
|
(9
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other comprehensive income (loss)
|
|
|
375
|
|
|
|
(314
|
)
|
|
|
(30
|
)
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
(554
|
)
|
|
$
|
(104
|
)
|
|
$
|
21
|
|
|
$
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
These amounts were included in the computation of net periodic benefit cost for pension and other postretirement benefits (see Note K). For the second quarter ended and six months ended June 30, 2018, these amounts
include $167 and $144 (net), respectively, related to settlements and/or curtailments of certain pension and other postretirement employee benefits (see Note K).
|
(2)
|
These amounts were reported in Provision for income taxes on the accompanying Statement of Consolidated Operations.
|
(3)
|
In all periods presented, there were no tax impacts related to rate changes and no amounts were reclassified to earnings.
|
(4)
|
These amounts were reported in Sales on the accompanying Statement of Consolidated Operations.
|
(5)
|
These amounts were reported in Cost of goods sold on the accompanying Statement of Consolidated Operations.
|
(6)
|
A positive amount indicates a corresponding charge to earnings and a negative amount indicates a corresponding benefit to earnings. These amounts were reflected on the accompanying Statement of Consolidated Operations
in the line items indicated in footnotes 1 through 5.
|
16
H. Investments
A summary of unaudited financial information for Alcoa Corporations equity
investments is as follows (amounts represent 100% of investee financial information):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second quarter ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Sales
|
|
$
|
1,367
|
|
|
$
|
958
|
|
|
$
|
2,620
|
|
|
$
|
1,874
|
|
Cost of goods sold
|
|
|
1,078
|
|
|
|
716
|
|
|
|
2,038
|
|
|
|
1,394
|
|
Net income
|
|
|
32
|
|
|
|
19
|
|
|
|
97
|
|
|
|
42
|
|
In June 2018, Alcoa Corporation, Rio Tinto plc, and the provincial government of Quebec, Canada launched a new
joint venture, Elysis Limited Partnership (Elysis). The purpose of this partnership is to advance larger scale development and commercialization of the Companys patent-protected technology that produces oxygen and eliminates all direct
greenhouse gas emissions from the traditional aluminum smelting process. Alcoa Corporation and Rio Tinto plc, as general partners, each own a 48.235% stake in Elysis and the Quebec provincial government, as a limited partner, owns a 3.53% stake. The
federal government of Canada and Apple Inc., as well as the Quebec provincial government, will provide initial financing to the partnership. The total combined investment (equity and debt) of the five participants in the joint venture is $145
(C$188). Alcoa Corporation and Rio Tinto plc will invest a combined $44 (C$55) over the next three years, as well as contribute and license certain intellectual property and patents to Elysis. Alcoa Corporations investment in Elysis is
accounted for under the equity method. In the second quarter of 2018, the Company made an initial investment of $5 (C$6).
I. Inventories
|
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
Finished goods
|
|
$
|
325
|
|
|
$
|
296
|
|
Work-in-process
|
|
|
286
|
|
|
|
258
|
|
Bauxite and alumina
|
|
|
651
|
|
|
|
585
|
|
Purchased raw materials
|
|
|
578
|
|
|
|
473
|
|
Operating supplies
|
|
|
143
|
|
|
|
147
|
|
LIFO reserve
|
|
|
(315
|
)
|
|
|
(306
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,668
|
|
|
$
|
1,453
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2018 and December 31, 2017, the total amount of inventories valued on a LIFO basis was
$607, or 31%, and $516, or 29%, respectively, of total inventories before LIFO adjustments. The inventory values, prior to the application of LIFO, are generally determined under the average cost method, which approximates current cost.
J. Debt
In May 2018, Alcoa Nederland Holding B.V. (ANHBV), a wholly-owned subsidiary of Alcoa Corporation, completed a Rule 144A (U.S.
Securities Act of 1933, as amended) debt offering for $500 of 6.125% Senior Notes due 2028 (the 2028 Notes). ANHBV received $492 in net proceeds from the debt offering reflecting a discount to the initial purchasers of the 2028 Notes.
The net proceeds, along with available cash on hand, were used to make discretionary contributions to certain U.S. defined benefit pension plans (see Note K). The discount to the initial purchasers, as well as costs to complete the financing, was
deferred and is being amortized to interest expense over the term of the 2028 Notes. Interest on the 2028 Notes will be paid semi-annually in November and May, commencing on November 15, 2018.
ANHBV has the option to redeem the 2028 Notes on at least 30 days, but not more than 60 days, prior notice to the holders of the 2028 Notes
under multiple scenarios, including, in whole or in part, at any time or from time to time after May 2023 at a redemption price specified in the indenture (up to 103.063% of the principal amount plus any accrued and unpaid interest in each case).
Also, the 2028 Notes are subject to repurchase upon the occurrence of a change in control repurchase event (as defined in the indenture) at a repurchase price in cash equal to 101% of the aggregate principal amount of the 2028 Notes repurchased,
plus any accrued and unpaid interest on the 2028 Notes repurchased.
The 2028 Notes are senior unsecured obligations of ANHBV and do not
entitle the holders to any registration rights pursuant to a registration rights agreement. ANHBV does not intend to file a
17
registration statement with respect to resales of or an exchange offer for the 2028 Notes. The 2028 Notes are guaranteed on a senior unsecured basis by Alcoa Corporation and its subsidiaries that
are guarantors under the Companys Amended Revolving Credit Agreement (the subsidiary guarantors and, together with Alcoa Corporation, the guarantors) (see Note L to the Consolidated Financial Statements included in Part
II Item 8 of the Companys Annual Report on Form
10-K
for the year ended December 31, 2017). Each of the subsidiary guarantors will be released from their 2028 Notes guarantees upon the occurrence of
certain events, including the release of such guarantor from its obligations as a guarantor under the Revolving Credit Agreement.
The
2028 Notes indenture includes several customary affirmative covenants. Additionally, the 2028 Notes indenture contains several negative covenants, that, subject to certain exceptions, include limitations on liens, limitations on sale and leaseback
transactions, and a prohibition on a reduction in the ownership of AWAC entities below an agreed level. The negative covenants in the 2028 Notes indenture are less extensive than those in the 2024 Notes and 2026 Notes (see Note L to the Consolidated
Financial Statements included in Part II Item 8 of the Companys Annual Report on Form
10-K
for the year ended December 31, 2017) indenture and the Amended Revolving Credit Agreement. For example,
the 2028 Notes indenture does not include a limitation on restricted payments, such as repurchases of common stock and shareholder dividends.
The 2028 Notes rank equally in right of payment with all of ANHBVs existing and future senior indebtedness, including the 2024 Notes and
2026 Notes; rank senior in right of payment to any future subordinated obligations of ANHBV; and are effectively subordinated to ANHBVs existing and future secured indebtedness, including under the Amended Revolving Credit Agreement, to the
extent of the value of property and assets securing such indebtedness.
K. Pension and Other Postretirement Benefits
The components of net
periodic benefit cost were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second quarter ended
June 30,
|
|
|
Six months ended
June 30,
|
|
Pension benefits
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Service cost
|
|
$
|
14
|
|
|
$
|
17
|
|
|
$
|
28
|
|
|
$
|
35
|
|
Interest cost
(1)
|
|
|
55
|
|
|
|
60
|
|
|
|
114
|
|
|
|
121
|
|
Expected return on plan assets
(1)
|
|
|
(82
|
)
|
|
|
(98
|
)
|
|
|
(172
|
)
|
|
|
(197
|
)
|
Recognized net actuarial loss
(1)
|
|
|
52
|
|
|
|
46
|
|
|
|
107
|
|
|
|
92
|
|
Amortization of prior service
cost
(1)
|
|
|
2
|
|
|
|
2
|
|
|
|
4
|
|
|
|
4
|
|
Settlements
(2)
|
|
|
167
|
|
|
|
|
|
|
|
167
|
|
|
|
|
|
Curtailments
(2)
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
Special termination benefits
(2)
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
208
|
|
|
$
|
30
|
|
|
$
|
253
|
|
|
$
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
These amounts were reported in Other expenses (income), net on the accompanying Statement of Consolidated
Operations (see Notes B and O).
|
(2)
|
These amounts were reported in Restructuring and other charges on the accompanying Statement of Consolidated
Operations (see Note D).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second quarter ended
June 30,
|
|
|
Six months ended
June 30,
|
|
Other postretirement benefits
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Service cost
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Interest cost
(1)
|
|
|
9
|
|
|
|
10
|
|
|
|
18
|
|
|
|
19
|
|
Recognized net actuarial loss
(1)
|
|
|
4
|
|
|
|
4
|
|
|
|
7
|
|
|
|
7
|
|
Amortization of prior service
benefit
(1)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(3
|
)
|
Curtailments
(2)
|
|
|
|
|
|
|
|
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
13
|
|
|
$
|
13
|
|
|
$
|
(2
|
)
|
|
$
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
These amounts were reported in Other expenses (income), net on the accompanying Statement of Consolidated
Operations (see Notes B and O).
|
(2)
|
These amounts were reported in Restructuring and other charges on the accompanying Statement of Consolidated
Operations (see Note D).
|
Alcoa Corporation sponsors several defined benefit pension and other postretirement employee
benefit plans, primarily in the United States and Canada. As of January 1, 2018, the pension benefit plans and the other postretirement benefit plans cover an aggregate of approximately 54,000 and approximately 48,000 participants,
respectively.
18
In January 2018, the Company communicated retirement benefit changes to certain U.S. and Canadian
plan participants.
Effective January 1, 2021, all U.S. and Canadian salaried employees that are participants in three of the
Companys defined benefit pension plans will cease accruing retirement benefits for future service. This change will affect approximately 800 employees, who will be transitioned to country-specific defined contribution plans, in which the
Company will contribute 3% of these participants eligible earnings on an annual basis. Such contributions will be incremental to any employer savings match the employees may receive under existing defined contribution plans. Participants
already collecting benefits under these defined benefit pension plans are not affected by these changes.
This change resulted in the
adoption of a significant plan amendment by the three defined benefit pension plans in January 2018. Accordingly, these plans were required to be remeasured, and through this process, the discount rate (weighted-average for these three plans) was
updated from 3.65% at December 31, 2017 to 3.80% at January 31, 2018. The remeasurement of these plans resulted in a decrease of $57 to both Alcoas pension benefits liability and Accumulated other comprehensive loss. The
remeasurement of these plans also resulted in a curtailment charge of $5 in the first quarter of 2018, representing accelerated amortization of a portion of the existing prior service cost associated with these plans. This amount was reclassified to
earnings through Restructuring and other charges from Accumulated other comprehensive loss.
Also, effective January 1, 2021, Alcoa
Corporation will no longer contribute to
pre-Medicare
retiree medical coverage for U.S. salaried employees and retirees, affecting approximately 700 participants in one plan. This change resulted in the
adoption of a significant plan amendment by this other postretirement benefits plan in January 2018. Accordingly, this plan was required to be remeasured, and through this process, the discount rate was updated from 3.29% at December 31, 2017
to 3.43% at January 31, 2018. The remeasurement of this plan resulted in a decrease of $7 to both Alcoas other postretirement benefits liability and Accumulated other comprehensive loss. The remeasurement of this plan also resulted in a
curtailment gain of $28 in the first quarter of 2018, representing accelerated amortization of a portion of the existing prior service benefit associated with this plan. This amount was reclassified to earnings through Restructuring and other
charges from Accumulated other comprehensive loss.
In April 2018, Alcoa Corporation signed group annuity contracts to transfer the
obligation to pay the remaining retirement benefits of approximately 2,100 retirees from two Canadian defined benefit pension plans to three insurance companies. The transfer of $560 in both plan obligations and plan assets, as well as a transaction
fee of $23, was completed on April 13, 2018. The Company contributed $89 between the two plans to facilitate the transaction and maintain the funding level of the remaining plan obligations. Prior to this transaction, these two Canadian pension
plans combined had approximately 3,500 participants.
Accordingly, these plans were required to be remeasured, and through this process,
the discount rate (weighted-average for these two plans) was updated from 3.43% at December 31, 2017 to 3.60% at March 31, 2018. The remeasurement of these plans resulted in an increase of $24 to both Alcoas pension benefits
liability and Accumulated other comprehensive loss. The remeasurement of these plans also resulted in a settlement charge of $167 in the second quarter of 2018, representing accelerated amortization of a portion of the existing net actuarial loss
associated with these plans. This amount was reclassified to earnings through Restructuring and other charges from Accumulated other comprehensive loss.
The five plans affected by the curtailment and settlement actions described above represented 36% of the combined net unfunded status of Alcoa
Corporations pension and other postretirement benefit plans as of December 31, 2017.
In the second quarter of 2018, Alcoa
Corporation made a combined $605 in unscheduled contributions to several defined benefit pension plans, including a combined $500 to three of the Companys U.S. defined benefit pension plans and a combined $105 to two of the Companys
Canadian defined benefit pension plans (inclusive of $89 above). The additional payments to the U.S. plans were discretionary in nature and were funded with $492 in net proceeds from a May 2018 debt issuance (see Note J) plus available cash on hand.
The primary purpose of the U.S. discretionary funding was to reduce near-term pension funding risk with a fixed-rate,
10-year
maturity instrument.
L. Derivatives and Other Financial Instruments
Fair Value
Fair value is defined
as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (i) market participant
assumptions developed based on market data obtained from independent sources (observable inputs) and (ii) an entitys own assumptions about market participant assumptions developed based on the best information available in the
circumstances (unobservable
19
inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and
the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
|
|
|
Level 1Unadjusted quoted prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities.
|
|
|
|
Level 2Inputs other than quoted prices included within Level 1 that are observable for the asset or
liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that
are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
|
|
Level 3Inputs that are both significant to the fair value measurement and unobservable.
|
Derivatives
Alcoa Corporation is exposed to certain risks relating to its ongoing business operations, including financial, market, political, and economic
risks. The following discussion provides information regarding Alcoa Corporations exposure to the risks of changing commodity prices and foreign currency exchange rates.
Alcoa Corporations commodity and derivative activities are subject to the management, direction, and control of the Strategic Risk
Management Committee (SRMC), which consists of at least three members, including the chief executive officer and the chief financial officer. The remaining member(s) are other officers and/or employees of the Company as the chief executive officer
may designate from time to time. Currently, the only other member of the SRMC is Alcoa Corporations treasurer. The SRMC meets on a periodic basis to review derivative positions and strategy and reports to the Audit Committee of Alcoa
Corporations Board of Directors on the scope of its activities.
Alcoa Corporations aluminum, energy, and foreign exchange
contracts are held for purposes other than trading. They are used primarily to mitigate uncertainty and volatility, and to cover underlying exposures. Alcoa Corporation is not involved in trading activities for energy, weather derivatives, or other
nonexchange commodity trading activities.
Several of Alcoa Corporations aluminum, energy, and foreign exchange contracts are
classified as Level 1 or Level 2 under the fair value hierarchy. The total fair value of these derivative contracts recorded as assets and liabilities was $7 and $67, respectively, at June 30, 2018 and $44 and $117, respectively, at
December 31, 2017. In the 2017 second quarter and
six-month
period, Alcoa Corporation recognized a loss of $2 and $24, respectively, in Other expenses (income), net on the accompanying Statement of
Consolidated Operations related to these contracts. Certain of these contracts are designated as either fair value or cash flow hedging instruments. For the contracts designated as cash flow hedges, Alcoa Corporation recognized an unrealized loss of
$55 and an unrealized gain of $13 in the 2018 second quarter and
six-month
period, respectively, and an unrealized gain of $25 and an unrealized loss of $25 in the 2017 second quarter and
six-month
period, respectively, in Other comprehensive (loss) income. Additionally, Alcoa Corporation reclassified a realized loss of $6 and $7 in the 2018 second quarter and
six-month
period, respectively, and $4 and $5 in the 2017 second quarter and
six-month
period, respectively, from Accumulated other comprehensive loss to Sales.
In addition to the Level 1 and 2 derivative instruments described above, Alcoa Corporation has several derivative instruments classified
as Level 3 under the fair value hierarchy. These instruments are composed of (i) embedded aluminum derivatives and an embedded credit derivative related to energy supply contracts and (ii) freestanding financial contracts related to
energy purchases on the spot market, all of which are associated with nine smelters and three refineries. Certain of the embedded aluminum derivatives and financial contracts are designated as cash flow hedging instruments. All of these Level 3
derivative instruments are described below in detail and are enumerated as D1 through D11.
The following section describes the valuation
methodologies used by Alcoa Corporation to measure its Level 3 derivative instruments at fair value. Derivative instruments classified as Level 3 in the fair value hierarchy represent those in which management has used at least one
significant unobservable input in the valuation model. Alcoa Corporation uses a discounted cash flow model to fair value all Level 3 derivative instruments. Where appropriate, the description below includes the key inputs to those models and
any significant assumptions. These valuation models are reviewed and tested at least on an annual basis.
Inputs in the valuation models
for Level 3 derivative instruments are composed of the following: (i) quoted market prices (e.g., aluminum prices on the
10-year
London Metal Exchange (LME) forward curve and energy prices), (ii)
significant other observable inputs (e.g., information concerning time premiums and volatilities for certain option type embedded derivatives and regional
20
premiums for aluminum contracts), and (iii) unobservable inputs (e.g., aluminum and energy prices beyond those quoted in the market). For periods beyond the term of quoted market prices for
aluminum, Alcoa Corporation estimates the price of aluminum by extrapolating the
10-year
LME forward curve. Additionally, for periods beyond the term of quoted market prices for energy, management has
developed a forward curve based on independent consultant market research. Where appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads, and credit considerations. Such adjustments are generally based on
available market evidence (Level 2). In the absence of such evidence, managements best estimate is used (Level 3). If a significant input that is unobservable in one period becomes observable in a subsequent period, the related asset or
liability would be transferred to the appropriate classification (Level 1 or 2) in the period of such change (there were no such transfers in the periods presented).
D1 through D5.
Alcoa Corporation has two power contracts (D1 and D2), each of which contain an embedded derivative that indexes the
price of power to the LME price of aluminum. Additionally, Alcoa Corporation has three power contracts (D3 through D5), each of which contain an embedded derivative that indexes the price of power to the LME price of aluminum plus the Midwest
premium. The embedded derivatives in these five power contracts are primarily valued using observable market prices; however, due to the length of the contracts, the valuation models also require management to estimate the long-term price of
aluminum based upon an extrapolation of the
10-year
LME forward curve (one of the contracts no longer requires the use of prices beyond this curve). Additionally, for three of the contracts, management also
estimates the Midwest premium, generally, for the next twelve months based on recent transactions and then holds the premium estimated in that twelfth month constant for the remaining duration of the contract. Significant increases or decreases in
the actual LME price beyond 10 years would result in a higher or lower fair value measurement. An increase in actual LME price and/or the Midwest premium over the inputs used in the valuation models will result in a higher cost of power and a
corresponding decrease to the derivative asset or increase to the derivative liability. The embedded derivatives have been designated as cash flow hedges of forward sales of aluminum. Unrealized gains and losses were included in Other comprehensive
(loss) income on the accompanying Consolidated Balance Sheet while realized gains and losses were included in Sales on the accompanying Statement of Consolidated Operations.
D6.
[Reserved]
D7.
Alcoa Corporation has a natural gas supply contract, which has an
LME-linked
ceiling. This
embedded derivative is valued using probabilities of future LME aluminum prices and the price of Brent crude oil (priced on Platts), including the interrelationships between the two commodities subject to the ceiling. Any change in the
interrelationship would result in a higher or lower fair value measurement. An LME ceiling was embedded into the contract price to protect against an increase in the price of oil without a corresponding increase in the price of LME. An increase in
oil prices with no similar increase in the LME price would limit the increase of the price paid for natural gas. This embedded derivative did not qualify for hedge accounting treatment. Unrealized gains and losses from the embedded derivative were
included in Other expenses (income), net on the accompanying Statement of Consolidated Operations while realized gains and losses were included in Cost of goods sold on the accompanying Statement of Consolidated Operations as gas purchases were made
under the contract.
D8.
In 2016, Alcoa Corporation and the related counterparty elected to modify the pricing of an existing power
contract for a smelter in the United States. This amendment contains an embedded derivative that indexes the price of power to the LME price of aluminum plus the Midwest premium. The embedded derivative is valued using the interrelationship of
future metal prices (LME base plus Midwest premium) and the amount of megawatt hours of energy needed to produce the forecasted metric tons of aluminum at the smelter. Significant increases or decreases in the metal price would result in a higher or
lower fair value measurement. An increase in actual metal price over the inputs used in the valuation model will result in a higher cost of power and a corresponding increase to the derivative liability. Management elected not to qualify the
embedded derivative for hedge accounting treatment. Unrealized gains and losses from the embedded derivative were included in Other expenses (income), net on the accompanying Statement of Consolidated Operations while realized gains and losses were
included in Cost of goods sold on the accompanying Statement of Consolidated Operations as electricity purchases were made under the contract. At the time this derivative liability was recognized, an equivalent amount was recognized as a deferred
charge in Other noncurrent assets on the accompanying Consolidated Balance Sheet. The amortization of this deferred charge is recognized in Other expenses (income), net on the accompanying Statement of Consolidated Operations as power is received
over the life of the contract.
D9.
Alcoa Corporation has a power contract, which contains an embedded derivative that indexes the
spread between the Companys estimated
30-year
debt yield and the counterpartys
30-year
debt yield. As Alcoa Corporation does not have outstanding
30-year
debt, the Companys estimated
30-year
debt yield is represented by the sum of (i) the excess of the yield on Alcoas outstanding notes due 2026 over the
yield on only the
Ba/BB-rated
company debt included in Barclays High Yield Index for intermediate
21
(10-year)
credits and (ii) the yield on only the
Ba/BB-rated
company debt included in Barclays High Yield
Index for long
(30-year)
credits. In accordance with the terms of the power contract, this calculation may be changed in January of each calendar year. Management uses market prices, historical relationships,
and forecast services to determine fair value. Significant increases or decreases in any of these inputs would result in a lower or higher fair value measurement. A wider credit spread between Alcoa Corporation and the counterparty would result in a
higher cost of power and a corresponding increase in the derivative liability. This embedded derivative did not qualify for hedge accounting treatment. Unrealized gains and losses were included in Other expenses (income), net on the accompanying
Statement of Consolidated Operations while realized gains and losses were included in Cost of goods sold on the accompanying Statement of Consolidated Operations as electricity purchases were made under the contract.
D10 and D11.
Alcoa Corporation had a financial contract (D10) to hedge the anticipated power requirements at one of its smelters that
began in November 2016. At that time, the energy supply contract related to this smelter had expired and Alcoa Corporation began purchasing electricity directly from the spot market. Beyond the term where market information is available, management
developed a forward curve, for valuation purposes, based on independent consultant market research. Significant increases or decreases in the power market may result in a higher or lower fair value measurement of the financial contract. Lower prices
in the power market would cause a decrease in the derivative asset. The financial contract had been designated as a cash flow hedge of future purchases of electricity (this designation ceased in December 2016 see below). Through November
2016, unrealized gains and losses on this contract were recorded in Other comprehensive (loss) income on the Companys Consolidated Balance Sheet, while realized gains and losses were recorded in Cost of goods sold as electricity purchases were
made from the spot market. In August 2016, Alcoa Corporation gave the required notice to terminate this financial contract one year from the date of notification. As a result, Alcoa Corporation decreased both the related derivative asset recorded in
Other noncurrent assets and the unrealized gain recorded in Accumulated other comprehensive loss by $84, which related to the August 2017 through 2036 timeframe, resulting in no impact to Alcoa Corporations earnings. In December 2016, the
smelter experienced an unplanned outage, resulting in a portion of the financial contract no longer qualifying for hedge accounting, at which point management elected to discontinue hedge accounting for all of the remainder of the contract (through
August 2017). As a result, Alcoa Corporation reclassified an unrealized gain of $7 from Accumulated other comprehensive loss to Other income, net related to the portion of the contract that no longer qualified for hedge accounting. The remaining $6
unrealized gain in Accumulated other comprehensive loss related to the portion management elected to discontinue hedge accounting was reclassified to Cost of goods sold as electricity purchases were made from the spot market through the termination
date of the financial contract. Additionally, from December 2016 through August 2017, unrealized gains and losses on this contract were recorded in Other expenses (income), net, and realized gains and losses were recorded in Other expenses (income),
net as electricity purchases were made from the spot market.
In January 2017, Alcoa Corporation and the counterparty entered into a new
financial contract (D11) to hedge the anticipated power requirements at this smelter for the period from August 2017 through July 2021 and amended the existing financial contract to both reduce the hedged amount of anticipated power requirements and
to move up the effective termination date to July 31, 2017. The new financial contract has been designated as a cash flow hedge of future purchases of electricity. Unrealized gains and losses on the new financial contract were recorded in Other
comprehensive (loss) income on the accompanying Consolidated Balance Sheet while realized gains and losses were recorded (began in August 2017) in Cost of goods sold as electricity purchases were made from the spot market.
22
The following table presents quantitative information related to the significant unobservable
inputs described above for Level 3 derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
Fair value at
June 30, 2018
|
|
|
Unobservable
input
|
|
Range
($ in full amounts)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded aluminum derivative (D7)
|
|
$
|
|
|
|
Interrelationship of future aluminum and oil prices
|
|
Aluminum: $2,164 per metric ton in July 2018 to $2,135 per metric ton in October 2018
Oil: $79 per barrel in July 2018 to $79 per barrel in October 2018
|
|
|
|
|
Financial contract (D11)
|
|
|
83
|
|
|
Interrelationship of forward energy price and the Consumer Price Index and price of electricity
beyond forward curve
|
|
Electricity: $60.70 per megawatt hour in 2018 to $48.35 per megawatt hour in 2021
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded aluminum derivative (D1)
|
|
|
305
|
|
|
Interrelationship of LME price to the amount of megawatt hours of energy needed to produce the
forecasted metric tons of aluminum
|
|
Aluminum: $2,164 per metric ton in 2018 to $2,452 per metric ton in 2027
Electricity: rate of 4 million megawatt hours per year
|
|
|
|
|
Embedded aluminum derivatives (D3 through D5)
|
|
|
301
|
|
|
Price of aluminum beyond forward curve
|
|
Aluminum: $2,504 per metric ton in 2028 to $2,560 per metric ton in 2029 (two contracts) and $2,855
per metric ton in 2036 (one contract)
Midwest premium: $0.2100 per pound in 2018 to $0.2000 per pound in 2029 (two
contracts) and 2036 (one contract)
|
|
|
|
|
Embedded aluminum derivative (D8)
|
|
|
23
|
|
|
Interrelationship of LME price to the amount of megawatt hours of energy needed to produce the
forecasted metric tons of aluminum
|
|
Aluminum: $2,164 per metric ton in 2018 to $2,145 per metric ton in 2019
Midwest premium: $0.2100 per pound in 2018 to $0.2000 per pound in 2019
Electricity: rate of 2 million megawatt hours per year
|
|
|
|
|
Embedded aluminum derivative (D2)
|
|
|
15
|
|
|
Interrelationship of LME price to overall energy price
|
|
Aluminum: $2,174 per metric ton in 2018 to $2,157 per metric ton in 2019
|
|
|
|
|
Embedded credit derivative (D9)
|
|
|
20
|
|
|
Estimated spread between the respective
30-year
debt yield
of Alcoa Corporation and the counterparty
|
|
2.81%
(30-year
debt yields: Alcoa Corporation 6.93%
(estimated) and counterparty 4.12%)
|
23
The fair values of Level 3 derivative instruments recorded as assets and liabilities in the
accompanying Consolidated Balance Sheet were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
Asset Derivatives
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Fair value of derivative instruments current:
|
|
|
|
|
|
|
|
|
Financial contract
|
|
$
|
41
|
|
|
$
|
96
|
|
Fair value of derivative instruments noncurrent:
|
|
|
|
|
|
|
|
|
Financial contract
|
|
|
42
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated as hedging instruments
|
|
$
|
83
|
|
|
$
|
197
|
|
|
|
|
|
|
|
|
|
|
Total Asset Derivatives
|
|
$
|
83
|
|
|
$
|
197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Fair value of derivative instruments current:
|
|
|
|
|
|
|
|
|
Embedded aluminum derivatives
|
|
$
|
99
|
|
|
$
|
120
|
|
Fair value of derivative instruments noncurrent:
|
|
|
|
|
|
|
|
|
Embedded aluminum derivatives
|
|
|
522
|
|
|
|
992
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated as hedging instruments
|
|
$
|
621
|
|
|
$
|
1,112
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Fair value of derivative instruments current:
|
|
|
|
|
|
|
|
|
Embedded aluminum derivative
|
|
$
|
23
|
|
|
$
|
28
|
|
Embedded credit derivative
|
|
|
3
|
|
|
|
4
|
|
Fair value of derivative instruments noncurrent:
|
|
|
|
|
|
|
|
|
Embedded aluminum derivative
|
|
|
|
|
|
|
6
|
|
Embedded credit derivative
|
|
|
17
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedging instruments
|
|
$
|
43
|
|
|
$
|
61
|
|
|
|
|
|
|
|
|
|
|
Total Liability Derivatives
|
|
$
|
664
|
|
|
$
|
1,173
|
|
|
|
|
|
|
|
|
|
|
The following tables present a reconciliation of activity for Level 3 derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
Liabilities
|
|
Second quarter ended
June 30, 2018
|
|
Financial
contracts
|
|
|
Embedded
aluminum
derivatives
|
|
|
Embedded
credit
derivative
|
|
Opening balance April 1, 2018
|
|
$
|
124
|
|
|
$
|
515
|
|
|
$
|
16
|
|
Total gains or losses (realized and unrealized) included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
|
|
(29
|
)
|
|
|
|
|
Cost of goods sold
|
|
|
(12
|
)
|
|
|
|
|
|
|
(2
|
)
|
Other expenses, net
|
|
|
|
|
|
|
|
|
|
|
6
|
|
Other comprehensive loss
|
|
|
(24
|
)
|
|
|
162
|
|
|
|
|
|
Purchases, sales, issuances, and settlements*
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers into and/or out of Level 3*
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(5
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing balance June 30, 2018
|
|
$
|
83
|
|
|
$
|
644
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains or losses included in earnings for derivative instruments held at
June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses, net
|
|
|
|
|
|
|
|
|
|
|
6
|
|
*
|
In the 2018 second quarter, there were no purchases, sales, issuances or settlements of Level 3 derivative
instruments. Additionally, there were no transfers of derivative instruments into or out of Level 3.
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
Liabilities
|
|
Six months ended
June 30, 2018
|
|
Financial
contracts
|
|
|
Embedded
aluminum
derivatives
|
|
|
Embedded
credit
derivative
|
|
Opening balance January 1, 2018
|
|
$
|
197
|
|
|
$
|
1,146
|
|
|
$
|
27
|
|
Total gains or losses (realized and unrealized) included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
|
|
(54
|
)
|
|
|
|
|
Cost of goods sold
|
|
|
(34
|
)
|
|
|
|
|
|
|
(2
|
)
|
Other expenses, net
|
|
|
|
|
|
|
(6
|
)
|
|
|
(5
|
)
|
Other comprehensive income
|
|
|
(75
|
)
|
|
|
(435
|
)
|
|
|
|
|
Purchases, sales, issuances, and settlements*
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers into and/or out of Level 3*
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(5
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing balance June 30, 2018
|
|
$
|
83
|
|
|
$
|
644
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains or losses included in earnings for derivative instruments held at
June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses, net
|
|
|
|
|
|
|
(6
|
)
|
|
|
(5
|
)
|
*
|
In the 2018
six-month
period, there were no purchases, sales, issuances
or settlements of Level 3 derivative instruments. Additionally, there were no transfers of derivative instruments into or out of Level 3.
|
Derivatives Designated As Hedging Instruments Cash Flow Hedges
For derivative instruments that are designated and qualify as cash flow hedges, effective on January 1, 2018, the entire amount of
unrealized gains or losses on the derivative is reported as a component of other comprehensive income. Prior to January 1, 2018, only the effective portion of unrealized gains or losses on the derivative is reported as a component of other
comprehensive income while the ineffective portion of unrealized gains or losses is recognized directly in earnings immediately. On April 1, 2018, Alcoa Corporation adopted guidance issued by the FASB to the accounting for hedging activities
(see Note B), which included the elimination of the concept of ineffectiveness. Accordingly, there is no longer a requirement to separately measure and report ineffectiveness. In all periods presented, realized gains or losses on the derivative are
reclassified from other comprehensive income into earnings in the same period or periods during which the hedged transaction impacts earnings. Additionally, gains and losses on the derivative representing hedge components excluded from the
assessment of effectiveness are recognized directly in earnings immediately.
Alcoa Corporation has five Level 3 embedded aluminum
derivatives and one Level 3 financial contract (through November 2016 see D10 above) that have been designated as cash flow hedges as described below. Additionally, in January 2017, Alcoa Corporation entered into a new financial contract
(see D11 above), which was designated as a cash flow hedging instrument and was classified as Level 3 under the fair value hierarchy, that replaced the existing financial contract (see D10 above) in August 2017.
Embedded aluminum derivatives (D1 through D5).
Alcoa Corporation has entered into energy supply contracts that contain pricing
provisions related to the LME aluminum price. The
LME-linked
pricing features are considered embedded derivatives. Five of these embedded derivatives have been designated as cash flow hedges of forward sales
of aluminum. At June 30, 2018 and December 31, 2017, these embedded aluminum derivatives hedge forecasted aluminum sales of 2,693 kmt and 2,859 kmt, respectively.
Alcoa Corporation recognized a net unrealized loss of $162 and a net unrealized gain of $435 in the 2018 second quarter and
six-month
period, respectively, and a net unrealized loss of $43 and $541 in the 2017 second quarter and
six-month
period, respectively, in Other comprehensive (loss) income
related to these five derivative instruments. Additionally, Alcoa Corporation reclassified a realized loss of $29 and $54 in the 2018 second quarter and
six-month
period, respectively, and $27 and $45 in the
2017 second quarter and
six-month
period, respectively, from Accumulated other comprehensive loss to Sales. Assuming market rates remain constant with the rates at June 30, 2018, a realized loss of $99 is
expected to be recognized in Sales over the next 12 months.
There was no ineffectiveness related to these five derivative instruments in
the 2017 second quarter and
six-month
period.
Financial contracts (D10 and D11).
Alcoa
Corporation had a financial contract to hedge the anticipated power requirements at one of its smelters that became effective when the existing power contract expired in October 2016. In August 2016, Alcoa Corporation elected to terminate most of
the remaining term of this financial contract (see D10 above). Additionally, in December
25
2016, management elected to discontinue hedge accounting for this contract (see D10 above). This financial contract hedged forecasted electricity purchases of 1,969,544 megawatt hours prior to
December 2016. In the 2017 second quarter and
six-month
period, Alcoa Corporation reclassified a realized gain of $3 and $5, respectively, from Accumulated other comprehensive loss to Cost of goods sold.
In addition, in January 2017, Alcoa Corporation entered into a new financial contract that hedges the anticipated power requirements at this
smelter for the period from August 2017 through July 2021 (see D11 above). At June 30, 2018 and December 31, 2017, this financial contract hedges forecasted electricity purchases of 7,586,964 and 8,805,456, respectively, megawatt hours.
Alcoa Corporation recognized an unrealized loss of $24 and $75 in the 2018 second and
six-month
period, respectively, and an unrealized loss of $62 and an unrealized gain of $107 in the 2017 second quarter and
six-month
period, respectively, in Other comprehensive (loss) income. Additionally, Alcoa Corporation reclassified a realized gain of $12 and $34 in the 2018 second quarter and
six-month
period, respectively, from Accumulated other comprehensive loss to Cost of goods sold. Assuming market rates remain consistent with the rates at June 30, 2018, a realized gain of $41 is expected
to be recognized in Cost of goods sold over the next 12 months. The amount of hedge ineffectiveness related to this derivative instrument was not material in both the 2017 second quarter and
six-month
period.
Derivatives Not Designated As Hedging Instruments
Alcoa Corporation has two Level 3 embedded aluminum derivatives (D7 and D8) and one Level 3 embedded credit derivative (D9) that do
not qualify for hedge accounting treatment and one Level 3 financial contract for which management elected to discontinue hedge accounting treatment (see D10 above). As such, gains and losses related to the changes in fair value of these
instruments are recorded directly in earnings. In the 2018 second quarter and
six-month
period, Alcoa Corporation recognized a loss of $6 and a gain of $11, respectively, in Other expenses, net, of which a
gain of $6 (2018
six-month
period) related to the embedded aluminum derivatives and a loss of $6 and a gain of $5, respectively, related to the embedded credit derivative. In the 2017 second quarter and
six-month
period, Alcoa Corporation recognized a loss of $29 and $4, respectively, in Other expenses (income), net, of which a gain of $6 and a loss of $8, respectively, related to the embedded aluminum derivatives
a loss of $5 and $1, respectively, related to the embedded credit derivative, and a loss of $30 and a gain of $4, respectively, related to the financial contract.
Material Limitations
The disclosures
with respect to commodity prices and foreign currency exchange risk do not consider the underlying commitments or anticipated transactions. If the underlying items were included in the analysis, the gains or losses on the futures contracts may be
offset. Actual results will be determined by several factors that are not under Alcoa Corporations control and could vary significantly from those factors disclosed.
Alcoa Corporation is exposed to credit loss in the event of nonperformance by counterparties on the above instruments, as well as credit or
performance risk with respect to its hedged customers commitments. Although nonperformance is possible, Alcoa Corporation does not anticipate nonperformance by any of these parties. Contracts are with creditworthy counterparties and are
further supported by cash, treasury bills, or irrevocable letters of credit issued by carefully chosen banks. In addition, various master netting arrangements are in place with counterparties to facilitate settlement of gains and losses on these
contracts.
Other Financial Instruments
The carrying values and fair values of Alcoa Corporations other financial instruments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Carrying
value
|
|
|
Fair
value
|
|
|
Carrying
value
|
|
|
Fair
value
|
|
Cash and cash equivalents
|
|
$
|
1,089
|
|
|
$
|
1,089
|
|
|
$
|
1,358
|
|
|
$
|
1,358
|
|
Restricted cash
|
|
|
6
|
|
|
|
6
|
|
|
|
7
|
|
|
|
7
|
|
Long-term debt due within one year
|
|
|
13
|
|
|
|
13
|
|
|
|
16
|
|
|
|
16
|
|
Long-term debt, less amount due within one year
|
|
|
1,916
|
|
|
|
2,030
|
|
|
|
1,388
|
|
|
|
1,555
|
|
The following methods were used to estimate the fair values of other financial instruments:
Cash and cash equivalents and Restricted cash.
The carrying amounts approximate fair value because of the short maturity of the
instruments. The fair value amounts for Cash and cash equivalents and Restricted cash were classified in Level 1 of the fair value hierarchy.
26
Long-term debt due within one year and Long-term debt, less amount due within one year.
The fair value was based on quoted market prices for public debt and on interest rates that are currently available to Alcoa Corporation for issuance of debt with similar terms and maturities for
non-public
debt. The fair value amounts for all Long-term debt were classified in Level 2 of the fair value hierarchy.
M. Income Taxes
On
December 22, 2017, U.S. tax legislation known as the U.S. Tax Cuts and Jobs Act of 2017 (the TCJA) was enacted. For corporations, the TCJA amends the U.S. Internal Revenue Code by reducing the corporate income tax rate (to 21% from
35%) and modifying several business deduction and international tax provisions, including a tax on each of the following: (i) a mandatory
one-time
deemed repatriation of accumulated foreign earnings,
(ii) a new category of income, referred to as global intangible low tax income, related to earnings taxed at a low rate of foreign entities without a significant fixed asset base; and (iii) base erosion payments (deductible cross-border
payments to related parties) that exceed 3% of a companys deductible expenses.
Based on managements preliminary analysis of
the TCJA, the Company recorded a $22 discrete income tax charge in its Consolidated Financial Statements for the year ended December 31, 2017. This amount was provisional in nature in accordance with guidance issued by the U.S. Securities and
Exchange Commission under Staff Accounting Bulletin No. 118,
Income Tax Accounting Implications of the Tax Cuts and Jobs Act
. In the 2018
six-month
period, management continued to gather
information and perform additional analysis of the TCJA provisions. In the first quarter of 2018, the Company completed its analysis related to the reduced corporate income tax rate, resulting in no further impact to Alcoa Corporations
Consolidated Financial Statements. Managements assessment of the other provisions of the TCJA remain provisional as of June 30, 2018 (no additional impact was recorded in the 2018
six-month
period).
Several items are in the process of being completed by the Company, including the calculation of earnings and profits of relevant subsidiaries related to (i) above, the calculation of the interest expense allocation, which is subject to future
guidance to be issued by the U.S. Treasury Department, related to (ii) above, and an analysis of the characterization of amounts paid or accrued to determine if they qualify as base erosion payments, which is subject to future guidance to be
issued by the U.S. Treasury Department and U.S. Internal Revenue Service, related to (iii) above. The Company will finalize its analyses of the TCJA provisions later in 2018.
See Note P to the Consolidated Financial Statements in Part II Item 8 of Alcoa Corporations Annual Report on Form
10-K
for the year ended December 31, 2017 for additional information.
N. Contingencies and Commitments
Contingencies
Unless specifically
described to the contrary, all matters within Note N are the full responsibility of Alcoa Corporation pursuant to the Separation and Distribution Agreement. Additionally, the Separation and Distribution Agreement provides for cross-indemnities
between the Company and Arconic for claims subject to indemnification.
Litigation
Italy 148
Beginning in 2006, ParentCo and the Italian Energy Authority (Autorità di Regolazione per Energia Reti e Ambiente,
formerly lAutorità per lEnergia Elettrica, il Gas e il Sistema Idrico, the Energy Authority) had been in a dispute regarding the calculation of a drawback applied to a portion of the price of power under a special
tariff received by Alcoa Trasformazioni S.r.l. (Trasformazioni, previously a subsidiary of ParentCo; now a subsidiary of Alcoa Corporation). This dispute arose as a result of a resolution (148/2004) issued in 2004 by the Energy Authority
that changed the method for calculating the drawback. Through 2009, Trasformazioni continued to receive the power price drawback for its Portovesme and Fusina smelters in accordance with the original resolution (204/1999), at which time the European
Commission declared all such special tariffs to be impermissible state aid. Between 2006 and 2014, several judicial hearings occurred related to continuous appeals filed by both ParentCo and the Energy Authority regarding the dispute on
the calculation of the drawback; a hearing on the latest appeal was scheduled for May 2018 (see below). Additionally, between 2012 and 2013, Trasformazioni received multiple letters from the agency responsible for making and collecting payments on
behalf of the Energy Authority demanding payment for the difference in the drawback calculation between the two resolutions. The latest such demand was for $97 (76), including interest, and allegedly included consideration of a third
resolution (44/2012) issued in 2012 on the calculation of the drawback; Trasformazioni rejected this demand.
In the meantime, as a result
of the conclusion of the European Commission Matter in January 2016 (see Note R to the Consolidated Financial Statements in Part II Item 8 of Alcoa Corporations Annual Report on Form
10-K
for the year
ended December 31, 2017), ParentCos management modified its outlook with respect to a portion of the then-pending legal proceedings related to the drawback dispute. As such, a charge of $37 (34) was recorded in Restructuring and
other charges for the year ended December 31, 2015 to establish a partial reserve for this matter.
27
In December 2017, through an agreement with the Energy Authority, Alcoa Corporation settled this
matter for $18 (15) (paid in January 2018). Accordingly, the Company recorded a reduction of $22 (19) (the U.S. dollar amount reflects the effects of foreign currency movements since 2015) to its previously established reserve in
Restructuring and other charges on the Statement of Consolidated Operations for the year ended December 31, 2017. In January 2018, subsequent to making the previously referenced payment, Alcoa Corporation and the respective state attorney in
Italy filed a joint request with the Regional Administrative Court for Lombardy to have this matter formally dismissed. The parties have yet to receive notice of the courts formal recognition of the dismissal request.
Also in December 2017, as part of a separate but related agreement to the above, the Company agreed to transfer ownership of the Portovesme
smelter (permanently closed in 2014) to Invitalia, an Italian government agency responsible for managing economic development. Under the provisions of the agreement, the Company will retain the responsibility for environmental-related obligations
associated with decommissioning the Portovesme smelter. The agreement further provides that the Company may be relieved of such obligations upon Invitalia exercising an option to receive a cash payment of $23 (20) from the Company.
Additionally, this agreement included a framework for the future settlement of a groundwater remediation project related to the Portovesme site (see Fusina and Portovesme, Italy in Environmental Matters below). In February 2018, the Company
completed the transfer of ownership of the Portovesme smelter to Invitalia. The carrying value of the assets related to the Portovesme site were previously written down to zero as a direct result of ParentCos decision in 2014 to decommission
the facility.
In the second quarter of 2018, Invitalia sold the Portovesme smelter to SiderAlloys International S.A., a Switzerland
company, which intends to restart the facility. In June 2018, Invitalia gave notice to the Company that it was exercising its option under the December 2017 agreement to receive the cash payment thereby releasing the Company from responsibility of
all environmental-related obligations associated with a future decommissioning of the Portovesme smelter. The cash payment will be made in three installments, one in each of 2018 (paid $8 (7) on June 18), 2019, and 2020. Accordingly, Alcoa
Corporation recognized a $15 net benefit in Restructuring and other charges on the accompanying Statement of Consolidated Operations for the second quarter and
six-month
period of 2018 (see Note D), comprised
of (i) a $38 reversal of previously accrued asset retirement obligations ($36) and environmental reserves ($2) related to the Companys former decommissioning plan for the Portovesme smelter, and (ii) a $23 charge to establish a
liability for the planned cash payment to Invitalia.
Environmental Matters
Alcoa Corporation participates in environmental assessments and cleanups at several locations. These include owned or operating facilities and
adjoining properties, previously owned or operating facilities and adjoining properties, and waste sites, including Superfund (Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)) sites.
A liability is recorded for environmental remediation when a cleanup program becomes probable and the costs can be reasonably estimated. As
assessments and cleanups proceed, the liability is adjusted based on progress made in determining the extent of remedial actions and related costs. The liability can change substantially due to factors such as, among others, the nature and extent of
contamination, changes in remedial requirements, and technological changes.
Alcoa Corporations remediation reserve balance was $291
and $294 at June 30, 2018 and December 31, 2017 (of which $54 and $36 was classified as a current liability), respectively, and reflects the most probable costs to remediate identified environmental conditions for which costs can be
reasonably estimated.
In the 2018 second quarter and
six-month
period, the remediation reserve
was increased by $15. The changes to the remediation reserve in both periods were due to a charge of $9 related to the former Sherwin location (see below), a reversal of $2 related to the Portovesme location (unrelated to the matter below see
Italy 148 in Litigation above), and a net charge of $8 associated with several sites. Of the changes to the remediation reserve in the 2018 second quarter and
six-month
period, a net charge of $15 was recorded
in Cost of goods sold and both a charge of $2 and a reversal of $2 were recorded in Restructuring and other charges on the accompanying Statement of Consolidated Operations.
Payments related to remediation expenses applied against the reserve were $8 and $14 in the 2018 second quarter and
six-month
period, respectively. These amounts include expenditures currently mandated, as well as those not required by any regulatory authority or third party. In the 2018 second quarter and
six-month
period, the reserve also reflects both a decrease of $6 and $5, respectively, due to the effects of foreign currency translation and an increase of $6 and $1, respectively, for reclassifications made
between this reserve and the Companys liability for asset retirement obligations.
28
The Separation and Distribution Agreement includes provisions for the assignment or allocation of
environmental liabilities between Alcoa Corporation and Arconic, including certain remediation obligations associated with environmental matters. In general, the respective parties are responsible for the environmental matters associated with their
operations, and with the properties and other assets assigned to each. Additionally, the Separation and Distribution Agreement lists environmental matters with a shared responsibility between the two companies with an allocation of responsibility
and the lead party responsible for management of each matter. For matters assigned to Alcoa Corporation and Arconic under the Separation and Distribution Agreement, the companies have agreed to indemnify each other in whole or in part for
environmental liabilities arising from operations prior to the Separation Date.
The following description provides details regarding the
current status of certain significant reserves related to current or former Alcoa Corporation sites. With the exception of the Fusina, Italy matter, Alcoa Corporation assumed full responsibility of the matters described below.
General
The Company is in the process of decommissioning various plants in several countries. As a result, redeveloping these
sites for reuse or returning the land to a natural state requires the performance of certain remediation activities. In aggregate, the majority of these activities will be completed at various times in the future with the latest expected to be in
2026, after which ongoing monitoring and other activities will be required. At June 30, 2018 and December 31, 2017, the reserve balance associated with these activities was $133 and $150, respectively.
Sherwin, TX
In connection with ParentCos sale of the Sherwin alumina refinery, which was required to be divested as part of
ParentCos acquisition of Reynolds Metals Company in 2000, ParentCo agreed to retain responsibility for the remediation of the then-existing environmental conditions, as well as a pro rata share of the final closure of the active bauxite
residue waste disposal areas (known as the Copano facility). All ParentCo obligations regarding the Sherwin refinery and Copano facility were transferred from ParentCo to Alcoa Corporation as part of the Separation Transaction on November 1,
2016. Since October 2016, Reynolds Metals Company, a subsidiary of Alcoa Corporation, had been involved in a legal dispute with the owner of Sherwin related to the allocation of responsibility for the environmental obligations at this site. In April
2018, Reynolds Metals Company reached a settlement agreement with the owner of Sherwin, as well as a separate agreement with the Texas Commission on Environmental Quality, that revised the environmental responsibilities and obligations for each
related to the Sherwin refinery site and Copano facility. These agreements became effective on June 5, 2018. Accordingly, in the 2018 second quarter, the Company increased the reserve associated with this matter by $9 to reflect certain
incremental obligations under the agreements. At June 30, 2018 and December 31, 2017, the reserve balance associated with this matter was $38 and $29, respectively. In managements judgment, the Companys reserve as of
June 30, 2018 is sufficient to satisfy the provisions of the settlement agreements. Upon changes in facts or circumstances, a change to the reserve may be required. See Sherwin in the Other section below for a complete description
of this matter.
Baie Comeau, Quebec, Canada
Alcoa Corporation has a remediation project related to known polychlorinated
biphenyls (PCBs) and polycyclic aromatic hydrocarbons (PAHs) contained in sediments of the Anse du Moulin bay, which is near the Companys Baie Comeau smelter. The project, which was approved by the Quebec Ministry of Sustainable Development,
Environment, Wildlife and Parks through a final ministerial decree issued in July 2015, is aimed at dredging and capping of the contaminated sediments. The project work began in April 2017 and was virtually completed in December 2017. At the end of
2017, the Company decreased the reserve for Baie Comeau by $4 to reflect the final cost estimate of the remaining work and the subsequent monitoring program, which is expected to last through 2023. At June 30, 2018 and December 31, 2017,
the reserve balance associated with this matter was $4 and $5, respectively.
Fusina and Portovesme, Italy
The following
matters are in regards to an order issued in 2004 to Alcoa Trasformazioni S.r.l. (Trasformazioni) (Trasformazioni is now a subsidiary of Alcoa Corporation and owns the Fusina smelter and Portovesme smelter (until February 2017 see
Italy 148 in Litigation above) sites, and Fusina Rolling S.r.l., a new ParentCo subsidiary, now owns the Fusina rolling operations) by the Italian Ministry of Environment and Protection of Land and Sea (MOE) for the development of a
clean-up
plan related to soil and groundwater contamination in excess of allowable limits under legislative decree and, for only the Fusina site, to institute emergency actions and pay natural resource damages.
For the Fusina site, Trasformazioni has a soil and groundwater remediation project, which was approved by the MOE through a final ministerial
decree issued in August 2014. Additionally, under an administrative agreement reached in February 2014 with the MOE, Trasformazioni is required to make annual payments over a
10-year
period for groundwater
emergency containment and natural resource damages related to the Fusina site. Trasformazioni began work on the soil remediation project in October 2017 and expects to complete the project by the end of 2019. The MOE assumed the responsibility for
the execution of the groundwater remediation/emergency containment in accordance with the February 2014 settlement agreement, as part of a regional effort by the MOE, and project work is slated to begin in 2019. At June 30, 2018 and
December 31, 2017, the reserve balance associated with all of the foregoing Fusina-related matters (excluding a portion related to the rolling operations see below) was $6 and $8, respectively.
29
Effective with the Separation Transaction, Arconic retained the portion of Trasformazionis
obligation related to the Fusina rolling operations. Specifically, under the Separation and Distribution Agreement, Trasformazioni, and with it the Fusina properties, were assigned to Alcoa Corporation. Fusina Rolling S.r.l., entered into a lease
agreement for the portion of property that included the rolling operations. Pursuant to the Separation and Distribution Agreement, the liabilities at Fusina described above were allocated between Alcoa Corporation (Trasformazioni) and Arconic
(Fusina Rolling S.r.l.).
For the Portovesme site, Trasformazioni has a soil remediation project, which was approved by the MOE through a
final ministerial decree issued in October 2015. Project work on the soil remediation project commenced in
mid-2016
and is expected to be completed in 2019. Additionally, Trasformazioni, along with four other
entities that operated in the same industrial park, have submitted a groundwater remediation project, which was preliminarily approved in 2010 by the MOE. Since that time, the parties have performed additional studies and work to be incorporated
into the final remedial design. In December 2017, a framework for the future settlement of the groundwater remediation project was included within an agreement to transfer the ownership of the Portovesme smelter to an Italian government agency (see
Italy 148 in Litigation above). The MOE has confirmed its acceptance of the proposal set out in the framework; however, the total cost of the groundwater remediation project will not be determined until the final remedial design is completed in late
2018. The ultimate outcome of this matter may result in a change to the existing reserve for Portovesme. At June 30, 2018 and December 31, 2017, the reserve balance associated with all of the foregoing Portovesme-related matters was $13
and $16, respectively.
Mosjøen, Norway
Alcoa Corporation has a remediation project related to known PAHs in the
sediments located in the harbor and extending out into the fjord, which are near the Companys Mosjøen smelter. The project, which was approved by the Norwegian Environmental Agency through a final order issued in June 2015, is aimed at
dredging and capping of the contaminated sediments. In order to allow for the sediment dredging in the harbor, the project also includes stabilization of the wharf. Project work commenced in early 2016 and the main portion of such work was completed
in the 2017 third quarter. At that time, the Company reexamined its cost estimate for the remaining project work, resulting in a reduction of the reserve associated with this matter by $2. In the 2018 second quarter, the remaining project work was
completed. At June 30, 2018, there is an immaterial reserve balance for required ongoing reporting and monitoring activities. At December 31, 2017, the reserve balance associated with this matter was $2.
East St. Louis, IL
Alcoa Corporation has an ongoing remediation project related to an area used for the disposal of bauxite
residue from ParentCos former alumina refining operations. The project, which was selected by the U.S. Environmental Protection Agency (EPA) in a Record of Decision issued in July 2012 and approved in a consent decree entered as final in
February 2014 by the U.S. Department of Justice, is aimed at implementing a soil cover over the affected area. As a result, ParentCo began the project work in March 2014; the fieldwork on a majority of this project was completed by the end of June
2016. A completion report was approved by the EPA in September 2016 and this matter, for the completed portion of the project, transitioned into a long-term (approximately 30 years) inspection, maintenance, and monitoring program. Fieldwork for the
remaining portion of the project is expected to be completed in 2019, at which time it would also transition into a long-term inspection, maintenance, and monitoring program. This obligation was transferred from ParentCo to Alcoa Corporation as part
of the Separation Transaction on November 1, 2016. At June 30, 2018 and December 31, 2017, the reserve balance associated with this matter was $4.
Tax
Spain
In July 2013,
following a corporate income tax audit covering the 2006 through 2009 tax years, an assessment was received as a result of Spains tax authorities disallowing certain interest deductions claimed by a former Spanish consolidated tax group
previously owned by ParentCo. The following month, ParentCo filed an appeal of this assessment in Spains Central Tax Administrative Court. In conjunction with this appeal, as required under Spanish tax law, ParentCo provided financial
assurance in this matter in the form of both a bank guarantee (Arconic) and a lien secured with the San Ciprian smelter (Alcoa Corporation) to Spains tax authorities. In January 2015, Spains Central Tax Administrative Court denied
ParentCos appeal of this assessment. Two months later, ParentCo filed an appeal of the assessment in Spains National Court (the National Court). The amount of this assessment, including interest, was $152 (131) as of
June 30, 2018.
30
On July 6, 2018, the National Court denied ParentCos appeal of the assessment;
however, the decision includes a requirement that Spains tax authorities issue a new assessment, which considers available net operating losses of the former Spanish consolidated tax group from prior tax years that can be utilized during the
assessed tax years. Spains tax authorities will not issue a new assessment until this matter is resolved; however, based on estimated calculations completed by Arconic and Alcoa Corporation (collectively, the Companies), the amount
of the new assessment, including applicable interest, is expected to be in the range of $25 to $61 (21 to 53) after consideration of available net operating losses and tax credits. Under the Tax Matters Agreement related to the
Separation Transaction, Arconic and Alcoa Corporation are responsible for 51% and 49%, respectively, of the assessed amount in the event of an unfavorable outcome. On July 12, 2018, the Companies sent a letter to the National Court seeking
clarification on one part of the decision. Once the National Court provides the clarification to the Companies, a
30-business
day period to petition for appeal to Spains Supreme Court begins.
Based on a review of the bases on which the National Court decided this matter, Alcoa Corporation management no longer believes that the
Companies are more likely than not (greater than 50%) to prevail in this matter if an appeal to Spains Supreme Court is pursued. Accordingly, in the 2018 third quarter, Alcoa Corporation expects to record a charge of $30 (26) to
establish a liability for its 49% share of the estimated loss in this matter, representing managements best estimate at this time. As indicated above, the Companies are awaiting clarification on a part of the National Courts decision
and, at a future point in time, will receive an updated assessment from Spains tax authorities, both of which may result in a change to managements estimate following further analysis.
In January 2017, the National Court issued a decision in favor of the former Spanish consolidated tax group related to a similar assessment
for the 2003 through 2005 tax years, effectively making that assessment null and void. Additionally, in August 2017, in lieu of receiving a formal assessment, the Companies reached a settlement with Spains tax authorities for the 2010 through
2013 tax years that had been under audit for a similar matter. Alcoa Corporations share of this settlement was not material to the Companys Consolidated Financial Statements. The ultimate outcomes related to the 2003 through 2005 and the
2010 through 2013 tax years are not indicative of the potential ultimate outcome of the assessment for the 2006 through 2009 tax years due to procedural differences. Additionally, it is possible that the Companies may receive similar assessments for
tax years subsequent to 2013; however, management does not expect any such assessment, if received, to be material to Alcoa Corporations Consolidated Financial Statements.
Brazil (AWAB)
In March 2013, AWAB was notified by the Brazilian Federal Revenue Office (RFB) that approximately $110 (R$220) of
value added tax credits previously claimed are being disallowed and a penalty of 50% assessed. Of this amount, AWAB received $41 (R$82) in cash in May 2012. The value added tax credits were claimed by AWAB for both fixed assets and export sales
related to the Juruti bauxite mine and São Luís refinery expansion. The RFB has disallowed credits they allege belong to the consortium in which AWAB owns an interest and should not have been claimed by AWAB. Credits have also
been disallowed as a result of challenges to apportionment methods used, questions about the use of the credits, and an alleged lack of documented proof. AWAB presented defense of its claim to the RFB on April 8, 2013. If AWAB is
successful in this administrative process, the RFB would have no further recourse. If unsuccessful in this process, AWAB has the option to litigate at a judicial level. Separately from AWABs administrative appeal, in June 2015, new tax
law was enacted repealing the provisions in the tax code that were the basis for the RFB assessing a 50% penalty in this matter. As such, the estimated range of reasonably possible loss is $0 to $27 (R$103), whereby the maximum end of the range
represents the portion of the disallowed credits applicable to the export sales and excludes the 50% penalty. Additionally, the estimated range of disallowed credits related to AWABs fixed assets is $0 to $30 (R$117), which would increase the
net carrying value of AWABs fixed assets if ultimately disallowed. It is managements opinion that the allegations have no basis; however, at this time, the Company is unable to reasonably predict an outcome for this matter.
Other
Reynolds
On
January 11, 2016, Sherwin Alumina Company, LLC (Sherwin), the current owner of a refinery previously owned by ParentCo (see below), and one of its affiliate entities, filed bankruptcy petitions in Corpus Christi, Texas for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. Sherwin informed the bankruptcy court that it intends to cease operations because it is not able to continue its bauxite supply agreement. On November 23, 2016, the bankruptcy
court approved Sherwins plans for cessation of its operations. On February 16, 2017, Sherwin filed a bankruptcy Chapter 11 Plan (the Plan) and, on February 17, 2017, the court approved that Plan.
In 2000, ParentCo acquired Reynolds Metals Company (Reynolds, a subsidiary of Alcoa Corporation), which included an alumina
refinery in Gregory, Texas. As a condition of the Reynolds acquisition, ParentCo was required to divest this alumina refinery. In accordance with the terms of the divestiture in 2000, ParentCo agreed to retain responsibility for certain
environmental obligations (see Sherwin, TX in Environmental Matters above) and assigned to the buyer an Energy Services Agreement (ESA) with Gregory Power Partners (Gregory Power) for purchase of steam and electricity by the
refinery.
31
Through the bankruptcy proceedings, the owner of Sherwin exercised its right under the U.S.
Bankruptcy Code to reject the agreement from 2000 containing the previously mentioned retained responsibility, which had the effect of terminating all rights and responsibilities of the parties to the agreement.
As a result of Sherwins initial bankruptcy filing, separate legal actions were initiated against Reynolds by Gregory Power and Sherwin
as described below.
Gregory Power:
On January 26, 2016, Gregory Power delivered notice to Reynolds that
Sherwins bankruptcy filing constitutes a breach of the ESA; on January 29, 2016, Reynolds responded that the filing does not constitute a breach. On September 16, 2016, Gregory Power filed a complaint in the bankruptcy case
against Reynolds alleging breach of the ESA. In response to this complaint, on November 10, 2016, Reynolds filed both a motion to dismiss, including a jury demand, and a motion to withdraw the reference to the bankruptcy court based on the jury
demand. On July 18, 2017, the district court ordered that any trial would be held to a jury in district court, but that the bankruptcy court would retain jurisdiction on all
pre-trial
matters. At this
time, Alcoa Corporation is unable to reasonably predict the ultimate outcome of this matter.
Sherwin:
On October 4,
2016, the Texas Commission on Environmental Quality (TCEQ) filed suit against Sherwin in the bankruptcy proceeding seeking to hold Sherwin responsible for remediation of alleged environmental conditions at the Sherwin refinery site and related
bauxite residue waste disposal areas (known as the Copano facility). On October 11, 2016, Sherwin filed a similar suit against Reynolds in the case. As provided in the Plan, Sherwin, including certain affiliated companies, and Reynolds had
been negotiating an allocation among them as to the ownership of and responsibility for certain areas of the refinery and the Copano facility. In March 2018, Reynolds and Sherwin reached a settlement agreement that assigns to Reynolds all
environmental liabilities associated with the Copano facility and assigns to Sherwin all environmental liabilities associated with the Sherwin refinery site. Additionally, Reynolds and TCEQ reached an agreement that defines the operating and
environmental steps required for the Copano facility, which Reynolds intends to operate for the purpose of managing materials other than bauxite residue waste, including third-party dredge material. The effectiveness and enforceability of each of
these two agreements are
pre-conditioned
on the other being accepted by the bankruptcy court. A public notice and comment period on these agreements expired on April 26, 2018 without material affect to
the documents. On June 5, 2018, the bankruptcy court accepted and entered the agreements into the judicial record as submitted. This date serves as the effective date for both agreements.
On June 5, 2018, the transaction between Sherwin and Reynolds was completed. Under the agreement with Sherwin, in exchange for assuming
full responsibility for the environmental-related liabilities (see below related to the Companys existing reserve) associated with the Copano facility, Reynolds assumed ownership of the land that comprises the Copano facility, as well as land
that serves as a buffer around the Copano facility and other related assets. A third-party appraisal estimated the fair value of the land and other assets to be $16. Under the agreement with TCEQ, a portion of the Copano facility must be closed
within 10 years and the remaining portion must be closed within 30 years, both timeframes began on the effective date. Also, Reynolds is required to install upgrades to certain dust control systems and repair certain structures and drainage systems
at the Copano facility, and prepare and submit to TCEQ a preliminary groundwater assessment report and a drinking water survey report related to the Copano facility within 180 days of the effective date. Accordingly, the Company recognized $16 in
properties, plants, and equipment, $9 in environmental remediation liabilities, and $7 in other related liabilities. Additionally, the Company paid $12 into a trust managed by the state of Texas as financial assurance of the Companys
performance in completing the required obligations. This amount will be returned to the Company upon satisfactory completion of the future closure of the Copano facility in accordance with all applicable laws and regulations. On June 7, 2018,
Sherwin filed a notice of dismissal in the suit against Reynolds; the dismissal was immediately effective as no court order was required.
At the time the agreements were signed by all parties, the Company had a reserve of $29 for its proportionate share of environmental-related
matters at both the Sherwin refinery site and the Copano facility based on the terms of the divestiture of the Sherwin refinery in 2000 (see Sherwin, TX in Environmental Matters above). While Reynolds no longer has any responsibility for
environmental-related matters at the Sherwin refinery site, it assumed additional responsibility for environmental-related matters at the Copano facility ($9 see above). In managements judgment, the $38 reserve as of June 30, 2018
is sufficient to satisfy the Companys revised responsibilities and obligations under the settlement agreements. Upon changes in facts or circumstances, a change to the reserve may be required.
Suralco
On December 16, 2016, Boskalis International B.V. (Boskalis) initiated a binding arbitration proceeding against
Suriname Aluminum Company, LLC (Suralco), an AWAC company, seeking $47 plus prejudgment interest and associated taxes in connection with a dispute arising under a contract for mining services in Suriname between Boskalis and Suralco. Boskalis
asserted four separate claims under the contract.
32
In February 2018, the arbitration hearing was held before a three-person panel under the rules of
the International Chamber of Commerce. The panel issued its decision on May 29, 2018, finding in favor of Boskalis on two claims and against Boskalis on two claims. For the two claims on which Boskalis prevailed, the panel awarded Boskalis $29,
including prejudgment interest of $3. The award is final and cannot be appealed. Accordingly, in the 2018 second quarter, Alcoa Corporation recorded a charge of $29 ($17 after noncontrolling interest), including $26 in Cost of goods sold and $3 in
Interest expense on the accompanying Statement of Consolidated Operations. On June 6, 2018, the Company made the $29 cash payment to Boskalis closing this matter.
The claim that represented the majority of the arbitration award centered around a contract provision requiring Suralco to make a true
up payment at the end of the contract in the event that Suralco was unable to receive delivery of the full contract quantity, thus allowing Boskalis to recover its fixed production costs and a suitable return on its investment. While Suralco
argued that all required deliveries had been made during the amended contract term and that no true up payment was required because a true up would amount to a double payment for bauxite deliveries after the initial contract
term, Boskalis argued that the deliveries were not made within the original contract term and thus, a true up payment was required. On the basis of its analysis of the facts and applicable law, management concluded that the likelihood of
an unfavorable decision on Boskalis claims was remote (25% or less). Throughout the course of the proceeding, and even after the conclusion of the hearing, managements judgment of the likelihood of an unfavorable outcome remained the
same.
General
In addition to the
matters discussed above, various other lawsuits, claims, and proceedings have been or may be instituted or asserted against Alcoa Corporation, including those pertaining to environmental, product liability, safety and health, contract dispute, and
tax matters, and other actions and claims arising out of the normal course of business. While the amounts claimed in these other matters may be substantial, the ultimate liability is not readily determinable because of the considerable uncertainties
that exist. Accordingly, it is possible that the Companys liquidity or results of operations in a particular period could be materially affected by one or more of these other matters. However, based on facts currently available, management
believes that the disposition of these other matters that are pending or asserted will not have a material adverse effect, individually or in the aggregate, on the financial position of the Company.
Commitments
Investments
Alcoa Corporation has an investment in a joint venture related to the ownership and operation of an integrated aluminum complex (bauxite mine,
alumina refinery, aluminum smelter, and rolling mill) in Saudi Arabia. The joint venture is owned 74.9% by the Saudi Arabian Mining Company (known as Maaden) and 25.1% by Alcoa Corporation and consists of three separate companies
as follows: one each for the mine and refinery, the smelter, and the rolling mill. Alcoa Corporation accounts for its investment in the joint venture under the equity method. As of June 30, 2018 and December 31, 2017, the carrying value of
Alcoa Corporations investment in this joint venture was $889 and $887, respectively.
Capital investment in the project is expected
to total approximately $10,800 (SAR 40.5 billion) and has been funded through a combination of equity contributions by the joint venture partners and project financing obtained by the joint venture companies, which has been partially guaranteed by
both partners (see below). Both the equity contributions and the guarantees of the project financing are based on the joint ventures partners ownership interests. Originally, it was estimated that Alcoa Corporations total equity
contribution in the joint venture related to the capital investment in the project would be approximately $1,100, of which Alcoa Corporation has contributed $982. Based on changes to both the projects capital investment and equity and debt
structure from the initial plans, the estimated $1,100 equity contribution may be reduced. Separate from the capital investment in the project, Alcoa Corporation contributed $66 (Maaden contributed $199) to the joint venture in 2017 for
short-term funding purposes in accordance with the terms of the joint venture companies financing arrangements. Both partners may be required to make such additional contributions in future periods.
The rolling mill and mining and refining companies have project financing totaling $3,246 (reflects principal repayments made through
June 30, 2018), of which a combined $815 represents Alcoa Corporations and AWACs respective 25.1% interest in the rolling mill company and the mining and refining company. Alcoa Corporation, itself and on behalf of AWAC, has issued
guarantees (see below) to the lenders in the event of default on the debt service requirements by the rolling mill company through 2018 and 2021 and by the mining and refining company through 2019 and 2024 (Maaden issued similar
33
guarantees related to its 74.9% interest). Alcoa Corporations guarantees for the rolling mill and mining and refining companies cover total remaining debt service requirements of $107 in
principal and up to a maximum of approximately $35 in interest per year (based on projected interest rates). Previously, Alcoa Corporation issued similar guarantees related to the project financing of the smelting company. In December 2017, the
smelting company refinanced and/or amended all of its existing outstanding debt. The guarantees that were previously required of the Company related to the smelting company were effectively terminated. At June 30, 2018 and December 31,
2017, the combined fair value of the guarantees was $3, which was included in Other noncurrent liabilities and deferred credits on the accompanying Consolidated Balance Sheet. In the event Alcoa Corporation would be required to make payments under
the guarantees related to the mining and refining company, 40% of such amount would be contributed to Alcoa Corporation by Alumina Limited, consistent with its ownership interest in AWAC.
As a result of the Separation Transaction, the various lenders to the joint venture companies required Arconic to maintain joint and several
guarantees with Alcoa Corporation. In the event of default by any of the joint venture companies, the lenders would make a claim against both Alcoa Corporation and Arconic. Accordingly, Alcoa Corporation would perform under its guarantee; however,
if the Company failed to perform, Arconic would be required to perform under its own guarantee. Arconic would then subsequently seek indemnification from Alcoa Corporation under the terms of the Separation and Distribution Agreement.
O. Other Expenses (Income), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second quarter ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Equity (income) loss
|
|
$
|
(3
|
)
|
|
$
|
3
|
|
|
$
|
(1
|
)
|
|
$
|
10
|
|
Foreign currency (gains) losses, net
|
|
|
(30
|
)
|
|
|
(11
|
)
|
|
|
(27
|
)
|
|
|
5
|
|
Net loss (gain) from asset sales
|
|
|
2
|
|
|
|
4
|
|
|
|
(3
|
)
|
|
|
(116
|
)
|
Net loss (gain) on
mark-to-market
derivative instruments (L)
|
|
|
6
|
|
|
|
19
|
|
|
|
(11
|
)
|
|
|
16
|
|
Non-service
costs Pension & OPEB
(K)
|
|
|
39
|
|
|
|
22
|
|
|
|
77
|
|
|
|
43
|
|
Other
|
|
|
(5
|
)
|
|
|
(9
|
)
|
|
|
(5
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9
|
|
|
$
|
28
|
|
|
$
|
30
|
|
|
$
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the 2017
six-month
period, Net gain from asset sales included a
$120 gain related to the sale of certain energy operations in the United States.
P. Subsequent Events
Management evaluated all activity of
Alcoa Corporation and concluded that no subsequent events have occurred that would require recognition in the Consolidated Financial Statements or disclosure in the Notes to the Consolidated Financial Statements, except as described below.
On July 6, 2018, Alcoa Corporation, along with Arconic, received notice of a court decision related to an outstanding appeal of an income
tax matter associated with a former Spanish consolidated tax group previously owned by ParentCo (see Spain in the Tax section of Note N).
34
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Alcoa Corporation:
Results of Review of Financial Statements
We have
reviewed the accompanying consolidated balance sheet
of Alcoa Corporation and its subsidiaries (the Company) as of June 30, 2018, and the related statements of consolidated operations, consolidated comprehensive (loss)
income, and changes in consolidated equity for the three-month and
six-month
periods ended June 30, 2018 and 2017 and the statement of consolidated cash flows for the
six-month
periods ended June 30, 2018 and 2017, including the related notes (collectively referred to as the interim financial statements). Based on our reviews, we are not aware of any
material modifications that should be made to the accompanying interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet
of the Company as of December 31, 2017, and the related statements of consolidated operations, consolidated comprehensive (loss) income, changes in consolidated equity, and consolidated cash flows for the year then ended (not presented herein),
and in our report dated February 23, 2018, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of
December 31, 2017, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
These interim financial
statements are the responsibility of the Companys management. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to
the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of
interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the
standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers
LLP
Pittsburgh, Pennsylvania
August 2, 2018
35
Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations.
(dollars in millions, except
per-share
amounts, average realized prices, and
average cost amounts; dry metric tons in millions (mdmt); metric tons in thousands (kmt))
References in this Managements Discussion
and Analysis of Financial Condition and Results of Operations to ParentCo refer to Alcoa Inc., a Pennsylvania corporation, and its consolidated subsidiaries (through October 31, 2016, at which time was renamed Arconic Inc.
(Arconic)). On November 1, 2016 (the Separation Date), ParentCo separated into two standalone, publicly-traded companies, Alcoa Corporation and Arconic (the Separation Transaction). In connection with the Separation
Transaction, as of October 31, 2016, the Company and Arconic entered into several agreements to effect the Separation Transaction, including a Separation and Distribution Agreement and a Tax Matters Agreement. See Overview in the
Managements Discussion and Analysis of Financial Condition and Results of Operations in Part II Item 7 of Alcoa Corporations Annual Report on Form
10-K
for the year ended December 31, 2017 for
additional information.
Results of Operations
Selected Financial Data
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second quarter ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Sales
|
|
$
|
3,579
|
|
|
$
|
2,859
|
|
|
$
|
6,669
|
|
|
$
|
5,514
|
|
Net income attributable to Alcoa Corporation
|
|
|
75
|
|
|
|
75
|
|
|
|
225
|
|
|
|
300
|
|
Diluted earnings per share attributable to Alcoa Corporation common shareholders
|
|
|
0.39
|
|
|
|
0.40
|
|
|
|
1.19
|
|
|
|
1.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shipments of alumina (kmt)
|
|
|
2,285
|
|
|
|
2,388
|
|
|
|
4,661
|
|
|
|
4,643
|
|
Shipments of aluminum products (kmt)
|
|
|
853
|
|
|
|
833
|
|
|
|
1,647
|
|
|
|
1,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average realized price per metric ton of alumina
|
|
$
|
467
|
|
|
$
|
314
|
|
|
$
|
425
|
|
|
$
|
319
|
|
Average realized price per metric ton of primary aluminum
|
|
|
2,623
|
|
|
|
2,199
|
|
|
|
2,556
|
|
|
|
2,141
|
|
Net income attributable to Alcoa Corporation was $75, or $0.39 per diluted share, in the 2018 second quarter
compared with $75, or $0.40 per share, in the 2017 second quarter, and $225, or $1.19 per share, in the 2018
six-month
period compared to $300, or $1.61 per share, in the 2017
six-month
period.
The results in the 2018 second quarter compared to the 2017 second quarter were
mainly driven by improved pricing for both aluminum products and alumina. This positive impact was offset by a charge associated with the settlement of certain employee retirement benefit obligations, higher raw materials and maintenance costs, and
charges related to operational decisions on a U.S. smelter.
In the 2018
six-month
period, the
decrease in results of $75 was principally related to a net charge for several actions associated with employee retirement benefit plans, the absence of a gain on the sale of certain energy operations, higher raw materials and maintenance costs, and
charges related to operational decisions on a U.S. smelter. These negative impacts were mostly offset by improved pricing for both aluminum products and alumina.
Sales
Sales improved $720, or 25%, and $1,155, or 21%, in the 2018 second quarter and
six-month
period, respectively, compared to the same periods in 2017. In both periods, the increase was largely attributable to a higher average realized price for each of alumina, primary aluminum, and
flat-rolled aluminum.
Cost of goods sold
COGS as a percentage of Sales was 73.5% in the 2018 second quarter and 75.2% in the
2018
six-month
period compared with 80.0% in the 2017 second quarter and 78.2% in the 2017
six-month
period. The percentage in both periods was positively impacted by a
higher average realized price for both aluminum products and alumina, somewhat offset by higher costs for carbon materials and caustic soda, increased maintenance expenses, and net unfavorable foreign currency movements due to a weaker U.S. dollar.
Provision for depreciation, depletion, amortization
The provision for DD&A increased $2, or 1%, and $17, or 5%, in the
2018 second quarter and
six-month
period, respectively, compared with the corresponding periods in 2017. In both periods, the increase was primarily due to higher amortization of deferred mining costs
($5-second
quarter and
$12-six
months) and a
write-off
of costs for projects no longer being pursued
($3-second
quarter and
$6-six
months). The negative impact in the 2018 second quarter was partially offset by net favorable foreign currency movements, due mostly to a
stronger U.S. dollar against the Brazilian real.
36
Restructuring and other charges
Restructuring and other charges in the 2018 second
quarter and
six-month
period were $231 and $212, respectively, which were comprised of the following components: $167 and $144 (net), respectively, related to settlements and/or curtailments of certain pension
and other postretirement employee benefits; $80 and $84, respectively, for additional costs related to the curtailed Wenatchee (Washington) smelter, including $73 in both periods associated with recent management decisions (see below); a $15 net
benefit in both periods related to the Portovesme (Italy) smelter; and a $1 net benefit in both periods for miscellaneous items.
In June
2018, management decided not to restart the fully curtailed Wenatchee smelter within the term provided in the related electricity supply agreement. Alcoa Corporation was therefore required to make a $62 payment to the energy supplier under the
provisions of the agreement. Additionally, management decided to permanently close one (38 kmt) of the four potlines at this smelter. This potline has not operated since 2001 and the investments needed to restart this line are cost prohibitive. The
remaining three curtailed potlines have a capacity of 146 kmt. In connection with these decisions, the Company recognized a charge of $73, composed of the $62 payment, $10 for asset impairments, and $1 for asset retirement obligations triggered by
the decision to decommission the potline.
Restructuring and other charges in the 2017 second quarter and
six-month
period were $12 and $22, respectively, which were comprised of the following components: $5 and $18, respectively, for additional contract costs related to the curtailed Wenatchee smelter; $11 and
$13, respectively, for layoff costs related to cost reduction initiatives, including the separation of approximately 110 employees in the Aluminum segment; and a reversal of $4 and $9, respectively, associated with several reserves related to prior
periods.
Alcoa Corporation does not include Restructuring and other charges in the results of its reportable segments. The impact of
allocating such charges to segment results would have been as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second quarter ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Bauxite
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Alumina
|
|
|
3
|
|
|
|
(1
|
)
|
|
|
2
|
|
|
|
(1
|
)
|
Aluminum
|
|
|
79
|
|
|
|
15
|
|
|
|
84
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment total
|
|
|
82
|
|
|
|
14
|
|
|
|
86
|
|
|
|
26
|
|
Corporate
|
|
|
149
|
|
|
|
(2
|
)
|
|
|
126
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring and other charges
|
|
$
|
231
|
|
|
$
|
12
|
|
|
$
|
212
|
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2018, approximately 125 of the 140 employees associated with 2017 restructuring programs
were separated. The remaining separations for the 2017 restructuring programs are expected to be completed by the end of 2018.
In the
2018
six-month
period, cash payments of $2 were made against layoff reserves related to 2017 restructuring programs.
Other expenses (income), net
Other expenses, net was $9 in the 2018 second quarter compared with $28 in the 2017 second quarter,
and Other expenses, net was $30 in the 2018
six-month
period compared to Other income, net of $51 in the 2017
six-month
period.
The positive change of $19 in the 2018 second quarter was principally the result of net favorable foreign currency movements ($19) and a
smaller net loss on
mark-to-market
derivative instruments ($13), partially offset by higher
non-service
costs related to pension
and other postretirement employee benefit plans ($17).
In the 2018
six-month
period, the negative
change of $81 was largely attributable to the absence of a gain on the sale of certain energy operations in the United States ($120) and higher
non-service
costs related to pension and other postretirement
employee benefit plans ($34). These items were partially offset by a net favorable change in each of the following: foreign currency movements ($32),
mark-to-market
derivative instruments ($27), and Alcoa Corporations share of the earnings of the aluminum complex joint venture in Saudi Arabia ($11).
37
Noncontrolling interest
Net income attributable to noncontrolling interest was $155
in the 2018 second quarter and $279 in the 2018
six-month
period compared with $63 in the 2017 second quarter and $146 in the 2017
six-month
period. These amounts are
entirely related to Alumina Limiteds 40% ownership interest in several affiliated operating entities, which own, have an interest in, or operate the bauxite mines and alumina refineries within Alcoa Corporations Bauxite and Alumina
segments (except for the Poços de Caldas mine and refinery and a portion of the São Luís refinery, all in Brazil) and the Portland smelter (Aluminum segment) in Australia. These individual entities comprise an unincorporated
global joint venture between Alcoa Corporation and Alumina Limited known as Alcoa World Alumina and Chemicals (AWAC). Alcoa Corporation owns 60% of these individual entities, which are consolidated by the Company for financial reporting purposes and
include Alcoa of Australia Limited (AofA), Alcoa World Alumina LLC, and Alcoa World Alumina Brasil Ltda. Alumina Limiteds 40% interest in the earnings of such entities is reflected as Noncontrolling interest on Alcoa Corporations
Statement of Consolidated Operations.
In the 2018 second quarter and
six-month
period, these
combined entities generated higher net income compared to the same periods in 2017. The favorable change in earnings was mainly driven by an improvement in operating results (see Bauxite and Alumina in Segment Information below).
Segment Information
Bauxite
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second quarter ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Production
(1)
(mdmt)
|
|
|
11.3
|
|
|
|
11.0
|
|
|
|
22.5
|
|
|
|
22.1
|
|
Third-party shipments (mdmt)
|
|
|
1.6
|
|
|
|
1.6
|
|
|
|
2.7
|
|
|
|
3.0
|
|
Average cost per dry metric ton of
bauxite
(2)
|
|
$
|
19
|
|
|
$
|
18
|
|
|
$
|
19
|
|
|
$
|
17
|
|
Third-party sales
|
|
$
|
77
|
|
|
$
|
80
|
|
|
$
|
124
|
|
|
$
|
150
|
|
Intersegment sales
|
|
|
226
|
|
|
|
208
|
|
|
|
475
|
|
|
|
427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
303
|
|
|
$
|
288
|
|
|
$
|
599
|
|
|
$
|
577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
100
|
|
|
$
|
97
|
|
|
$
|
210
|
|
|
$
|
207
|
|
(1)
|
The production amounts do not include additional bauxite (approximately 3 mdmt per annum) that AWAC is entitled
to receive (i.e. an amount in excess of its equity ownership interest) from certain other partners at the mine in Guinea.
|
(2)
|
Includes all production-related costs, including conversion costs, such as labor, materials, and utilities;
depreciation, depletion, and amortization; and plant administrative expenses.
|
Bauxite production increased 3% in the
2018 second quarter and 2% in the 2018
six-month
period compared with the corresponding periods in 2017. The improvement in both periods was primarily due to higher production at six of this segments
seven mines, including Boké (Guinea), due to the absence of a force majeure event (civil unrest) that disrupted normal operations in the 2017 second quarter, and Huntly (Australia), Al Baitha (Saudi Arabia), and Juruti (Brazil), each of
which due to planned increases. In both periods, the higher production was somewhat offset by a decline at the Trombetas (Brazil) mine due to the consortiums decision to reduce production in response to a partial curtailment of a third-party
alumina refinery in Brazil.
Third-party sales for the Bauxite segment declined 4% and 17% in the 2018 second quarter and
six-month
period, respectively, compared to the same periods in 2017. In the 2018 second quarter, the decrease was mostly driven by a drop in average realized price. The decline in the 2018
six-month
period was principally caused by lower volume and a drop in average realized price.
Intersegment sales increased 9% in the 2018 second quarter and 11% in the 2018
six-month
period
compared with the corresponding periods in 2017, mainly the result of a higher average realized price.
Adjusted EBITDA for this segment
increased $3 in both the 2018 second quarter and
six-month
period, respectively, compared to the same periods in 2017. The increase in both periods was largely attributable to the previously mentioned higher
average realized price for intersegment sales mostly offset by higher maintenance and transportation expenses.
38
In the 2018 third quarter (comparison with the 2017 third quarter), higher production at the
Juruti (Brazil) and Huntly (Australia) mines are anticipated as this segment expands its mining areas.
Alumina
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second quarter ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Production (kmt)
|
|
|
3,227
|
|
|
|
3,249
|
|
|
|
6,400
|
|
|
|
6,460
|
|
Third-party shipments (kmt)
|
|
|
2,285
|
|
|
|
2,388
|
|
|
|
4,661
|
|
|
|
4,643
|
|
Average realized third-party price per metric ton of alumina
|
|
$
|
467
|
|
|
$
|
314
|
|
|
$
|
425
|
|
|
$
|
319
|
|
Average cost per metric ton of alumina*
|
|
$
|
290
|
|
|
$
|
255
|
|
|
$
|
284
|
|
|
$
|
249
|
|
Third-party sales
|
|
$
|
1,068
|
|
|
$
|
749
|
|
|
$
|
1,982
|
|
|
$
|
1,483
|
|
Intersegment sales
|
|
|
536
|
|
|
|
384
|
|
|
|
990
|
|
|
|
745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
1,604
|
|
|
$
|
1,133
|
|
|
$
|
2,972
|
|
|
$
|
2,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
638
|
|
|
$
|
227
|
|
|
$
|
1,030
|
|
|
$
|
524
|
|
*
|
Includes all production-related costs, including raw materials consumed; conversion costs, such as labor,
materials, and utilities; depreciation and amortization; and plant administrative expenses.
|
At June 30, 2018, the
Alumina segment had 2,519 kmt of curtailed refining capacity (idle assets and process slowdowns) on a base capacity of 15,064 kmt. Both curtailed capacity and base capacity were unchanged compared to March 31, 2018.
Alumina production decreased by 1% in both the 2018 second quarter and
six-month
period compared with
the corresponding periods in 2017, principally caused by equipment and process issues at the Pinjarra (Australia) and São Luís (Brazil) refineries, mostly offset by higher production at nearly all other refineries within this
segments global refining system.
Third-party sales for the Alumina segment improved 43% in the 2018 second quarter and 34% in the
2018
six-month
period compared to the same periods in 2017. The increase in both periods was mostly related to a 49% (second quarter) and 33% (six months) rise in average realized price. The positive impact in
the 2018 second quarter was slightly offset by a 4% decrease in volume. In both periods, the change in average realized price was principally driven by a 64% (second quarter) and 37% (six months) higher average alumina index price (on
30-day
lag). In the 2018 second quarter and
six-month
period, 94% and 95%, respectively, of smelter-grade third-party shipments were based on the alumina index/spot price,
compared with 86% in both the 2017 second quarter and
six-month
period.
Intersegment sales
improved 40% and 33% in the 2018 second quarter and
six-month
period, respectively, compared with the corresponding periods in 2017, primarily due to a higher average realized price. The positive impact in the
2018 second quarter was slightly offset by decreased shipments to the Aluminum segment. The lower demand from the Aluminum segment was largely attributable to the absence of shipments to a smelter in Canada due to the curtailment of two potlines in
January 2018 (see Aluminum below), partially offset by increased shipments related to both the partial restart of a U.S. smelter in the second quarter of 2018 and capacity restarted in
mid-2017
that was
curtailed in December 2016 at a smelter in Australia (see Aluminum below).
Adjusted EBITDA for this segment climbed $411 in the 2018
second quarter and $506 in the 2018
six-month
period compared to the same periods in 2017. In both periods, the improvement was mainly the result of the previously mentioned higher average realized prices,
slightly offset by a higher cost for caustic soda, increased maintenance and transportation expenses, and lower total volume.
In the 2018
third quarter (comparison with the 2017 third quarter), higher costs for both caustic soda and energy and an increase in maintenance expenses are expected.
39
Aluminum
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second quarter ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Primary aluminum production (kmt)
|
|
|
565
|
|
|
|
575
|
|
|
|
1,119
|
|
|
|
1,134
|
|
Third-party aluminum shipments
(1)
(kmt)
|
|
|
853
|
|
|
|
833
|
|
|
|
1,647
|
|
|
|
1,634
|
|
Average realized third-party price per metric ton of primary aluminum
(2)
|
|
$
|
2,623
|
|
|
$
|
2,199
|
|
|
$
|
2,556
|
|
|
$
|
2,141
|
|
Average cost per metric ton of primary
aluminum
(3)
|
|
$
|
2,409
|
|
|
$
|
2,000
|
|
|
$
|
2,394
|
|
|
$
|
1,944
|
|
Third-party sales
|
|
$
|
2,413
|
|
|
$
|
1,988
|
|
|
$
|
4,524
|
|
|
$
|
3,794
|
|
Intersegment sales
|
|
|
4
|
|
|
|
3
|
|
|
|
8
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
2,417
|
|
|
$
|
1,991
|
|
|
$
|
4,532
|
|
|
$
|
3,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
231
|
|
|
$
|
234
|
|
|
$
|
384
|
|
|
$
|
451
|
|
(1)
|
Third-party aluminum shipments are composed of both primary aluminum and flat-rolled aluminum.
|
(2)
|
Average realized price per metric ton of primary aluminum includes three elements: a) the underlying base metal
component, based on quoted prices from the LME; b) the regional premium, which represents the incremental price over the base LME component that is associated with the physical delivery of metal to a particular region (e.g., the Midwest premium for
metal sold in the United States); and c) the product premium, which represents the incremental price for receiving physical metal in a particular shape (e.g., billet, rod, slab, etc.) or alloy.
|
(3)
|
Includes all production-related costs, including raw materials consumed; conversion costs, such as labor,
materials, and utilities; depreciation and amortization; and plant administrative expenses.
|
In January 2018, a lockout
of the bargained hourly employees commenced at the Bécancour (Canada) smelter, as labor negotiations reached an impasse. Accordingly, management initiated a curtailment of two (207 kmt) of the three potlines at the smelter.
In the 2018 second quarter, Alcoa Corporation completed the restart of two (108 kmt) of the three potlines included in the partial restart
plan (announced in July 2017) for the Warrick (Indiana) smelter. In May 2018, the third line (53 kmt) scheduled for restart had been shut down due to pot instability, which caused a temporary power outage. The Company now expects to complete the
restart of the third potline by the end of 2018; costs to restart this line are not expected to be material.
In June 2018, management
approved the permanent closure of one (38 kmt) of the four potlines at the Wenatchee (Washington) smelter. This potline has not operated since 2001, and the investments needed to restart that line are cost prohibitive. The other three potlines (146
kmt) at this smelter remain curtailed. See Restructuring and other charges in Results of Operations above for a description of charges associated with this closure.
At June 30, 2018, the Aluminum segment had 917 kmt of idle smelting capacity on a base smelting capacity of 3,173 kmt. Idle capacity
decreased by 146 kmt and base capacity decreased by 38 kmt compared to March 31, 2018. The decrease in idle capacity during the 2018 second quarter was due to the restart of 108 kmt of capacity at the Warrick smelter and the permanent closure
of 38 kmt at the Wenatchee smelter. The decrease in base capacity during the 2018 second quarter was also due to the permanent closure of 38 kmt at the Wenatchee smelter.
Primary aluminum production decreased 2% and 1% in the 2018 second quarter and
six-month
period,
respectively, compared with the corresponding periods in 2017. The decline in both periods was principally due to lower production at the Bécancour smelter as a result of the previously mentioned curtailment, mostly offset by new production
at the Warrick smelter due to the partial restart of capacity in the 2018 second quarter and higher production at the Portland (Australia) smelter due to the completed restart in
mid-2017
of capacity that was
curtailed in December 2016 as a result of an unexpected power outage caused by a fault in the Victorian transmission network.
Third-party
sales for the Aluminum segment improved 21% in the 2018 second quarter and 19% in the 2018
six-month
period compared to the same periods in 2017. In both periods, the increase was largely attributable to a 19%
rise in average realized price of primary aluminum, higher pricing for flat-rolled aluminum, and a 2% (second quarter) and 1% (six months) increase in overall aluminum volume.
The change in average realized price of primary aluminum was mainly driven by a 16% (second quarter) and 18% (six months) higher average LME
price (on
15-day
lag) and increased regional premiums, which rose by an average of 140% (second quarter) and 92% (six months) in the United
40
States and Canada and 42% (second quarter) and 27% (six months) in Europe. The higher overall aluminum volume was primarily the result of increased primary aluminum shipments, mostly offset by a
decline in flat-rolled aluminum shipments in accordance with the targeted volumes defined in the tolling arrangement with Arconic.
Adjusted EBITDA for this segment decreased $3 and $67 in the 2018 second quarter and
six-month
period,
respectively, compared with the corresponding periods in 2017. The decline in both periods was largely related to higher costs for alumina, carbon materials, and energy; net unfavorable foreign currency movements due to a weaker U.S. dollar,
particularly against the euro; realized losses from embedded derivatives in energy supply contracts due to the rise in LME aluminum prices; increased maintenance and transportation expenses; and costs for tariffs on imports from this segments
foreign operations, primarily from Canada, which was subjected to U.S. Section 232 tariffs effective June 1, 2018. These negative impacts were mostly offset by the previously mentioned higher average realized price of primary aluminum.
In the 2018 third quarter (comparison with the 2017 third quarter), primary aluminum production is expected to be lower due to the
absence of production from the two curtailed potlines at the Bécancour smelter partially offset by production from the partial restart of the Warrick smelter. Also, higher costs for alumina, carbon materials, and energy are expected.