Item 1. Financial Statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
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 Company’s 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 2018 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 Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, which includes all disclosures required by GAAP.
References in these Notes to ParentCo refer to Alcoa Inc., a Pennsylvania corporation, and its consolidated subsidiaries through October 31, 2016, at which time it 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 Corporation’s Annual Report on Form 10-K for the year ended December 31, 2018 for additional information.
As of January 1, 2019, the Company changed its accounting method for valuing certain inventories from last-in, first-out (LIFO) to average cost. The effects of the change in accounting principle have been retrospectively applied to all prior periods presented. See Note H for more information regarding the change in inventory accounting method.
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 Corporation’s 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 within Alcoa Corporation’s Aluminum segment. 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 Limited’s 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, 2019 Alcoa Corporation adopted Accounting Standards Update (ASU) No. 2016-02, Leases, issued by the Financial Accounting Standards Board (FASB) regarding the accounting for leases, using the modified retrospective approach. This ASU requires lessees to recognize a right-of-use asset and lease liability on the balance sheet for operating and finance leases with a term of 12 months or more. Additionally, when measuring assets and liabilities arising from a lease, optional payments should be included only if the lessee is reasonably certain to exercise an option to extend the lease, exercise a purchase option, or not exercise an option to terminate the lease. A right-of-use asset represents an entity’s right to use the underlying asset for the lease term, and a lease liability represents an entity’s obligation to make lease payments. The Company has made a policy election not to record any non-lease components in the lease liability. Previously, an asset and liability were only recorded for leases classified as capital leases (financing leases). The measurement, recognition, and presentation of expenses and cash flows arising from leases by a lessee remains the same. Management elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed carry forward of historical lease classifications. Additionally, in July 2018, the FASB issued ASU No. 2018-11, Targeted Improvements, to provide for an alternative transition method to the new lease guidance, whereby an entity can choose to not reflect the impact of the new lease guidance in the prior periods included in its financial statements. The Company elected this alternative transition method upon adoption on January 1, 2019. Management also elected the practical expedient related to land easements, allowing the Company to carry forward the current treatment on existing arrangements.
6
As a result of the adoption, management recorded a right-of-use asset and lease liability, each in the amount of $201, on Alcoa Corporation’s Consolidated Balance Sheet as of January 1, 2019 for several types of operating leases, including land and buildings, alumina refinery process control technology, plant equipment, vehicles, and computer equipment. See Note L for additional information related to the adoption of this standard.
Alcoa Corporation’s adoption of the following accounting guidance in 2019 did not have a material impact on the Company’s Consolidated Financial Statements:
Accounting Standards Update
2018-01 Leases: Land Easement Practical Expedient for Transition
2018-02 Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
2018-07 Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting
Issued
In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General. This ASU makes changes to the disclosures of fair value measurements and defined benefit plans through several removals, modifications, additions, and/or clarifications of the existing requirements. Certain disclosures associated with accumulated other comprehensive income, valuation of Level 3 assets, and sensitivities in assumed health care trend rates and interest rates have been eliminated. New disclosures have been added to explain significant gains and losses related to changes in benefit obligations, changes included in other comprehensive income for recurring Level 3 fair value measurements, and information on significant unobservable inputs used to develop Level 3 fair value measurements. These changes become effective for Alcoa Corporation for its fiscal year ending December 31, 2020 and for interim periods therein with early adoption permitted and retrospective presentation for all periods presented required. Other than updating the applicable disclosures, the adoption of this guidance will not have an impact on the Company’s Consolidated Financial Statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software. This ASU aligns the accounting for cloud computing implementation costs with that of costs to develop or obtain internal-use software, meaning such costs that are part of the application development stage are capitalized as an asset and amortized over the term of the arrangement, otherwise, such costs are expensed as incurred. It also clarifies the classification of amounts related to capitalized implementation costs in the financial statements. This guidance becomes effective for Alcoa Corporation on January 1, 2020, with early adoption permitted. Management has completed our assessment of the impact related to this guidance and concluded that the adoption of this guidance will not have a material impact on the Company’s Consolidated Financial Statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses. This ASU added a new impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes an allowance for its estimate of expected credit losses and applies to most debt instruments, trade receivables, lease receivables, financial guarantee contracts, and other loan commitments. The CECL model does not have a minimum threshold for recognition of impairment losses and entities will need to measure expected credit losses on assets that have a low risk of loss. These changes become effective for Alcoa Corporation on January 1, 2020. Management is finalizing our assessment of the impact of these changes on the Company’s Consolidated Financial Statements but does not expect a material impact from the adoption of this guidance, as our current loss models incorporate both historic and forward-looking information.
C. Restructuring and Other Charges, Net – In the third quarter and nine-month period of 2019, Alcoa Corporation recorded Restructuring and other charges, net, of $185 and $668, respectively, which were comprised of the following components: $134 and $242, respectively, for exit costs related to the smelter curtailment and subsequent divestiture of the Avilés and La Coruña facilities in Spain (see below); $37 (both periods) for employee termination and severance costs related to the implementation of the new operating model (see below); $5 (both periods) related to settlements of certain pension benefits (Note I); $38 (nine-month period only) related to the curtailment of certain pension benefits (see Note I); $319 (nine-month period only) related to the divestiture of Alcoa Corporation’s interest in the Ma’aden Rolling Company (MRC) (see below); $1 and $9, respectively, for closure costs related to a coal mine; and $8 and $18, respectively, for net charges related to various other items.
In September 2019, Alcoa Corporation announced the implementation of a new operating model that will result in a leaner, more integrated, operator-centric organization. Effective November 1, 2019, the new operating model eliminates the business unit structure, consolidates sales, procurement and other commercial capabilities at an enterprise level, and streamlines the Executive Team from 12 to seven direct reports to the Chief Executive Officer. The new structure will reduce overhead with the intention of promoting operational and commercial excellence, and increasing connectivity between the Company’s plants and leadership. As a result of the
7
new operating model, Alcoa Corporation recorded a charge of $37 related to employee termination and severance costs for approximately 260 employees company-wide. The restructuring actions are anticipated to be complete by the end of the first quarter 2020, with cash outlays estimated through March 31, 2020.
In January 2019, Alcoa Corporation reached an agreement with the workers’ representatives at the Avilés and La Coruña (Spain) aluminum facilities as part of the collective dismissal process announced in October 2018 and curtailed the smelters at these two locations, with a combined remaining operating capacity of 124 kmt, in February 2019. As part of the agreement, the Company agreed to conduct a sale process to identify third parties with interest in acquiring the facilities and to maintain the smelters in restart condition up to June 30, 2019. Through the sale process, PARTER Capital Group AG (PARTER), a private equity investment firm, was identified as a potential buyer for both of the Spanish facilities, inclusive of the smelters and casthouses at both facilities and the paste plant at La Coruña. Prior to the June 30, 2019 deadline, Alcoa Corporation agreed with the workers’ representatives to extend the timeline for the potential buyer to meet the financial conditions of a draft share purchase agreement by one week. On July 5, 2019, Alcoa Corporation signed a conditional share purchase agreement with PARTER for the purchase of these two facilities, which was subject to PARTER meeting certain financial conditions prior to July 31, 2019 to support the facilities future operations. Prior to signing the conditional share purchase agreement with PARTER, Alcoa Corporation reached agreement with the workers’ representatives related to the potential transaction. If PARTER was not able to meet the financial conditions prior to July 31, 2019, the Company would have proceeded with the collective dismissal and social plan as of August 1, 2019.
As of July 31, 2019, PARTER met the financial conditions and the transaction has closed. Alcoa Corporation recorded Restructuring and other charges, net, of $134 in the third quarter of 2019 resulting from financial contributions of up to $95 to PARTER per the agreement and a charge of $39 to meet a working capital commitment and write-off the remaining net book value of the plants’ assets. Cash outflows at the close of the transaction were $37 with the remaining financial contributions of $80 to be paid in quarterly installments through the second quarter of 2021.
Restructuring charges recorded in the first quarter of 2019 related to the collective dismissal process included asset impairments of $80, employee-related costs of $15 and contract termination costs of $8. Additional charges recorded in the first quarter included a $15 write down of remaining inventories to their net realizable value, which was recorded in Cost of goods sold, and $2 in miscellaneous charges recorded in Selling, general administrative, and other expenses on the accompanying Statement of Consolidated Operations. Restructuring charges recorded in the second quarter of 2019 related to this process are comprised of severance costs of $3 and other employee-related costs of $2.
In December 2009, Alcoa Corporation invested 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 the Kingdom of Saudi Arabia. The joint venture is owned 74.9% by the Saudi Arabian Mining Company (known as Ma’aden) and 25.1% by Alcoa Corporation, and originally consisted of three separate companies as follows: the Ma’aden Bauxite and Alumina Company (MBAC; the bauxite mine and alumina refinery), the Ma’aden Aluminium Company (MAC; the aluminum smelter and casthouse), and MRC (the rolling mill). Alcoa Corporation accounts for its investment in the joint venture under the equity method as one integrated investment asset, consistent with the terms of the joint venture agreement.
In the second quarter of 2019, Alcoa Corporation and Ma’aden amended the joint venture agreement that governs the operations of each of the three companies that comprise the joint venture. Under the terms of the amended agreement:
|
|
•
|
Alcoa Corporation made a contribution to MRC in the amount of $100, along with Ma’aden’s earlier capital contribution of $100, to meet current MRC cash requirements, including paying certain amounts owed by MRC to MAC and Alcoa Corporation;
|
|
|
•
|
Alcoa Corporation and Ma’aden consented to the write-off of $235 of MRC’s delinquent payables to MAC;
|
|
|
•
|
Alcoa Corporation transferred its 25.1% interest in MRC to Ma’aden and, as a result, has no further direct or indirect equity interest in MRC;
|
|
|
•
|
Alcoa Corporation is released from all future MRC obligations, including Alcoa Corporation’s sponsor support of $296 of MRC debt (see Note M) and its share of any future MRC cash requirements; and,
|
|
|
•
|
Alcoa Corporation and Ma’aden further defined MBAC and MAC shareholder rights, including the timing and determination of the amount of dividend payments of excess cash to the joint venture partners following required distributions to the commercial lenders of MBAC and MAC; among other matters.
|
The amendment also defines October 1, 2021 as the date after which Alcoa Corporation is permitted to sell all of its shares in both MBAC and MAC collectively, for which Ma’aden has a right of first refusal. The agreement further outlines that Alcoa Corporation’s call option and Ma’aden’s put option, relating to additional interests in the joint venture, are exercisable for a period of six-months after October 1, 2021.
8
The parties will maintain their commercial relationship, which includes Alcoa Corporation providing sales, logistics and customer technical services support for MRC products for the North American can sheet market. The Company will retain its 25.1% minority interest in MBAC and MAC, and Ma’aden will continue to own a 74.9% interest. As of September 30, 2019 and December 31, 2018, the carrying value of Alcoa Corporation’s investment in this joint venture was $615 and $874, respectively.
The $319 restructuring charge resulting from the MRC divestiture includes the write-off of Alcoa Corporation’s investment in MRC of $161, the cash contributions described above of $100, and the write-off of Alcoa Corporation’s share of MRC’s delinquent payables due to MAC of $59 that were forgiven as part of this transaction, which were partially offset by a gain of $1 resulting from the write-off of the fair value of debt guarantee.
In the third quarter and nine-month period of 2018, Alcoa Corporation recorded Restructuring and other charges, net of $177 and $389, respectively, which were comprised of the following components: $174 and $318, respectively, related to settlements and/or curtailments of certain pension and other postretirement employee benefits; $2 and $86, respectively, for costs related to the energy supply agreement at the curtailed Wenatchee (Washington) smelter, including $73 (nine-month period only) associated with management’s decision not to restart the fully curtailed Wenatchee smelter within the term provided in the energy supply agreement; a $15 net benefit (nine-month period only) for settlement of matters related to the Portovesme (Italy) smelter; and a $1 net charge (third quarter only) for miscellaneous items.
Alcoa Corporation does not include Restructuring and other charges, net in the results of its reportable segments. The impact of allocating such charges to segment results would have been as follows:
|
|
|
Third quarter ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Bauxite
|
|
$
|
5
|
|
|
$
|
1
|
|
|
$
|
5
|
|
|
$
|
1
|
|
|
Alumina
|
|
|
15
|
|
|
|
1
|
|
|
|
16
|
|
|
|
3
|
|
|
Aluminum
|
|
|
147
|
|
|
|
2
|
|
|
|
607
|
|
|
|
86
|
|
|
Segment total
|
|
|
167
|
|
|
|
4
|
|
|
|
628
|
|
|
|
90
|
|
|
Corporate
|
|
|
18
|
|
|
|
173
|
|
|
|
40
|
|
|
|
299
|
|
|
Total Restructuring and other charges, net
|
|
$
|
185
|
|
|
$
|
177
|
|
|
$
|
668
|
|
|
$
|
389
|
|
The activity related to layoff costs and other costs included within the restructuring reserve balances is as follows:
|
|
|
Layoff
costs
|
|
|
Other
costs
|
|
|
Total
|
|
|
Balance at December 31, 2017
|
|
$
|
11
|
|
|
$
|
34
|
|
|
$
|
45
|
|
|
Restructuring and other charges, net
|
|
|
2
|
|
|
|
117
|
|
|
|
119
|
|
|
Cash payments
|
|
|
(7
|
)
|
|
|
(95
|
)
|
|
|
(102
|
)
|
|
Other(1)
|
|
|
(1
|
)
|
|
|
(14
|
)
|
|
|
(15
|
)
|
|
Balance at December 31, 2018
|
|
|
5
|
|
|
|
42
|
|
|
|
47
|
|
|
Restructuring and other charges, net
|
|
|
52
|
|
|
|
160
|
|
|
|
212
|
|
|
Cash payments
|
|
|
(9
|
)
|
|
|
(84
|
)
|
|
|
(93
|
)
|
|
Other(1)
|
|
|
(6
|
)
|
|
|
(5
|
)
|
|
|
(11
|
)
|
|
Balance at September 30, 2019
|
|
$
|
42
|
|
|
$
|
113
|
|
|
$
|
155
|
|
|
(1)
|
Other includes reversals of previously recorded restructuring charges, the effects of foreign currency translation, and reclassifications to other reserves, primarily asset retirement obligations, environmental remediation obligations and pension and/or other postretirement benefit costs.
|
The noncurrent portion of the reserve at September 30, 2019 was $19, of which $18 relates to financial contributions to PARTER.
9
D. Segment Information – The operating results of Alcoa Corporation’s reportable segments were as follows (differences between segment totals and consolidated amounts are in Corporate):
|
|
|
Bauxite
|
|
|
Alumina
|
|
|
Aluminum
|
|
|
Total
|
|
|
Third quarter ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party sales
|
|
$
|
100
|
|
|
$
|
771
|
|
|
$
|
1,677
|
|
|
$
|
2,548
|
|
|
Intersegment sales
|
|
|
251
|
|
|
|
369
|
|
|
|
4
|
|
|
|
624
|
|
|
Total sales
|
|
$
|
351
|
|
|
$
|
1,140
|
|
|
$
|
1,681
|
|
|
$
|
3,172
|
|
|
Segment Adjusted EBITDA
|
|
$
|
134
|
|
|
$
|
223
|
|
|
$
|
43
|
|
|
$
|
400
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion, and amortization
|
|
$
|
35
|
|
|
$
|
54
|
|
|
$
|
88
|
|
|
$
|
177
|
|
|
Equity loss
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(5
|
)
|
|
$
|
(5
|
)
|
|
Third quarter ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party sales
|
|
$
|
67
|
|
|
$
|
1,101
|
|
|
$
|
2,198
|
|
|
$
|
3,366
|
|
|
Intersegment sales
|
|
|
224
|
|
|
|
544
|
|
|
|
6
|
|
|
|
774
|
|
|
Total sales
|
|
$
|
291
|
|
|
$
|
1,645
|
|
|
$
|
2,204
|
|
|
$
|
4,140
|
|
|
Segment Adjusted EBITDA
|
|
$
|
106
|
|
|
$
|
660
|
|
|
$
|
84
|
|
|
$
|
850
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion, and amortization
|
|
$
|
27
|
|
|
$
|
48
|
|
|
$
|
91
|
|
|
$
|
166
|
|
|
Equity income (loss)
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
(5
|
)
|
|
$
|
5
|
|
|
|
|
Bauxite
|
|
|
Alumina
|
|
|
Aluminum
|
|
|
Total
|
|
|
Nine months ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party sales
|
|
$
|
232
|
|
|
$
|
2,532
|
|
|
$
|
5,169
|
|
|
$
|
7,933
|
|
|
Intersegment sales
|
|
|
733
|
|
|
|
1,231
|
|
|
|
11
|
|
|
|
1,975
|
|
|
Total sales
|
|
$
|
965
|
|
|
$
|
3,763
|
|
|
$
|
5,180
|
|
|
$
|
9,908
|
|
|
Segment Adjusted EBITDA
|
|
$
|
372
|
|
|
$
|
964
|
|
|
$
|
(50
|
)
|
|
$
|
1,286
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion, and amortization
|
|
$
|
90
|
|
|
$
|
157
|
|
|
$
|
262
|
|
|
$
|
509
|
|
|
Equity income (loss)
|
|
|
—
|
|
|
|
15
|
|
|
|
(44
|
)
|
|
|
(29
|
)
|
|
Nine months ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party sales
|
|
$
|
191
|
|
|
$
|
3,083
|
|
|
$
|
6,722
|
|
|
$
|
9,996
|
|
|
Intersegment sales
|
|
|
699
|
|
|
|
1,534
|
|
|
|
14
|
|
|
|
2,247
|
|
|
Total sales
|
|
$
|
890
|
|
|
$
|
4,617
|
|
|
$
|
6,736
|
|
|
$
|
12,243
|
|
|
Segment Adjusted EBITDA
|
|
$
|
316
|
|
|
$
|
1,690
|
|
|
$
|
501
|
|
|
$
|
2,507
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion, and amortization
|
|
$
|
83
|
|
|
$
|
150
|
|
|
$
|
305
|
|
|
$
|
538
|
|
|
Equity income (loss)
|
|
|
—
|
|
|
|
23
|
|
|
|
(13
|
)
|
|
|
10
|
|
10
The following table reconciles total Segment Adjusted EBITDA to consolidated net (loss) income attributable to Alcoa Corporation:
|
|
|
Third quarter ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Total Segment Adjusted EBITDA(1)
|
|
$
|
400
|
|
|
$
|
850
|
|
|
$
|
1,286
|
|
|
$
|
2,507
|
|
|
Unallocated amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transformation(2)
|
|
|
(6
|
)
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
Intersegment eliminations(1),(3)
|
|
|
25
|
|
|
|
21
|
|
|
|
110
|
|
|
|
(55
|
)
|
|
Corporate expenses(4)
|
|
|
(27
|
)
|
|
|
(22
|
)
|
|
|
(79
|
)
|
|
|
(75
|
)
|
|
Provision for depreciation, depletion, and
amortization
|
|
|
(184
|
)
|
|
|
(173
|
)
|
|
|
(530
|
)
|
|
|
(559
|
)
|
|
Restructuring and other charges, net (C)
|
|
|
(185
|
)
|
|
|
(177
|
)
|
|
|
(668
|
)
|
|
|
(389
|
)
|
|
Interest expense
|
|
|
(30
|
)
|
|
|
(33
|
)
|
|
|
(90
|
)
|
|
|
(91
|
)
|
|
Other expenses, net (N)
|
|
|
(27
|
)
|
|
|
(2
|
)
|
|
|
(118
|
)
|
|
|
(32
|
)
|
|
Other(5)
|
|
|
(18
|
)
|
|
|
(10
|
)
|
|
|
(47
|
)
|
|
|
(69
|
)
|
|
Consolidated (loss) income before income taxes
|
|
|
(52
|
)
|
|
|
455
|
|
|
|
(137
|
)
|
|
|
1,235
|
|
|
Provision for income taxes
|
|
|
(95
|
)
|
|
|
(260
|
)
|
|
|
(361
|
)
|
|
|
(569
|
)
|
|
Net income attributable to noncontrolling
interest
|
|
|
(74
|
)
|
|
|
(201
|
)
|
|
|
(324
|
)
|
|
|
(467
|
)
|
|
Consolidated net (loss) income attributable to
Alcoa Corporation
|
|
$
|
(221
|
)
|
|
$
|
(6
|
)
|
|
$
|
(822
|
)
|
|
$
|
199
|
|
|
(1)
|
As of January 1, 2019, the Company changed its accounting method for valuing certain inventories from LIFO to average cost. The effects of the change in accounting principle have been retrospectively applied to all prior periods presented. As a result, in the third quarter and nine-month period of 2018, Total Segment Adjusted EBITDA increased $11 and $44, respectively, and Intersegment eliminations increased $38 and decreased $37, respectively.
|
|
(2)
|
Transformation includes, among other items, the Adjusted EBITDA of previously closed operations.
|
|
(3)
|
Concurrent with the change in inventory accounting method as of January 1, 2019, management elected to change the presentation of certain line items in the reconciliation of total Segment Adjusted EBITDA to Consolidated net (loss) income attributable to Alcoa Corporation. Corporate inventory accounting previously included the impact of LIFO, metal price lag and intersegment eliminations. The impact of LIFO has been eliminated with the change in inventory method. Metal price lag attributable to the Company’s rolled operations business is now netted within the Aluminum segment to simplify presentation of an impact that nets to zero in consolidation. Only intersegment eliminations remain as a reconciling line item and are labeled as such.
|
|
(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 Corporation’s Statement of Consolidated Operations that are not included in the Adjusted EBITDA of the reportable segments.
|
The following table details Alcoa Corporation’s Sales by product division:
|
|
|
Third quarter ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Primary aluminum
|
|
$
|
1,341
|
|
|
$
|
1,658
|
|
|
$
|
4,117
|
|
|
$
|
5,176
|
|
|
Alumina
|
|
|
770
|
|
|
|
1,098
|
|
|
|
2,529
|
|
|
|
3,079
|
|
|
Flat-rolled aluminum
|
|
|
294
|
|
|
|
472
|
|
|
|
933
|
|
|
|
1,417
|
|
|
Energy
|
|
|
71
|
|
|
|
115
|
|
|
|
225
|
|
|
|
261
|
|
|
Bauxite
|
|
|
95
|
|
|
|
63
|
|
|
|
216
|
|
|
|
179
|
|
|
Other(1)
|
|
|
(4
|
)
|
|
|
(16
|
)
|
|
|
(23
|
)
|
|
|
(53
|
)
|
|
|
|
$
|
2,567
|
|
|
$
|
3,390
|
|
|
$
|
7,997
|
|
|
$
|
10,059
|
|
|
(1)
|
Other includes realized gains and losses related to embedded derivative instruments designated as cash flow hedges of forward sales of aluminum.
|
11
E. 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):
|
|
|
Third quarter ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Net (loss) income attributable to Alcoa Corporation
|
|
$
|
(221
|
)
|
|
$
|
(6
|
)
|
|
$
|
(822
|
)
|
|
$
|
199
|
|
|
Average shares outstanding – basic
|
|
|
186
|
|
|
|
186
|
|
|
|
185
|
|
|
|
186
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
Stock units
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
Average shares outstanding – diluted
|
|
|
186
|
|
|
|
186
|
|
|
|
185
|
|
|
|
189
|
|
In the third quarter and nine-month period of 2019, basic average shares outstanding and diluted average shares outstanding were the same because the effect of potential shares of common stock was anti-dilutive since Alcoa Corporation generated a net loss. As a result, five million stock units and stock options combined were not included in the computation of diluted EPS for both the third quarter and nine-month period of 2019. Had Alcoa Corporation generated net income in the third quarter or nine-month period of 2019, one million common share equivalents related to stock units and stock options combined would have been included in diluted average shares outstanding for the respective periods.
In the third quarter of 2018, basic average shares outstanding and diluted average shares outstanding were the same because the effect of potential shares of common stock was anti-dilutive since Alcoa Corporation generated a net loss. As a result, four million stock awards and stock options combined were not included in the computation of diluted EPS. Had Alcoa Corporation generated net income in the third quarter of 2018, two million potential shares of common stock related to stock awards and stock options combined would have been included in diluted average shares outstanding.
12
F. Accumulated Other Comprehensive Loss
The following table details the activity of the three components that comprise Accumulated other comprehensive loss for both Alcoa Corporation’s shareholders and Noncontrolling interest:
|
|
|
Alcoa Corporation
|
|
|
Noncontrolling interest
|
|
|
|
|
Third quarter ended
September 30,
|
|
|
Third Quarter Ended
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Pension and other postretirement benefits (I)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(2,232
|
)
|
|
$
|
(2,502
|
)
|
|
$
|
(47
|
)
|
|
$
|
(44
|
)
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized net actuarial (loss) gain and prior service
cost/benefit
|
|
|
(38
|
)
|
|
|
174
|
|
|
|
(11
|
)
|
|
|
4
|
|
|
Tax benefit (expense)
|
|
|
11
|
|
|
|
(1
|
)
|
|
|
4
|
|
|
|
(1
|
)
|
|
Total Other comprehensive (loss) income
before reclassifications, net of tax
|
|
|
(27
|
)
|
|
|
173
|
|
|
|
(7
|
)
|
|
|
3
|
|
|
Amortization of net actuarial loss and prior
service cost/benefit(1)
|
|
|
49
|
|
|
|
227
|
|
|
|
2
|
|
|
|
1
|
|
|
Tax expense(2)
|
|
|
(3
|
)
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
—
|
|
|
Total amount reclassified from Accumulated
other comprehensive loss, net of tax(7)
|
|
|
46
|
|
|
|
225
|
|
|
|
1
|
|
|
|
1
|
|
|
Total Other comprehensive income (loss)
|
|
|
19
|
|
|
|
398
|
|
|
|
(6
|
)
|
|
|
4
|
|
|
Balance at end of period
|
|
|
(2,213
|
)
|
|
|
(2,104
|
)
|
|
|
(53
|
)
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
(2,053
|
)
|
|
|
(1,911
|
)
|
|
|
(804
|
)
|
|
|
(746
|
)
|
|
Other comprehensive loss(3)
|
|
|
(224
|
)
|
|
|
(142
|
)
|
|
|
(75
|
)
|
|
|
(54
|
)
|
|
Balance at end of period
|
|
|
(2,277
|
)
|
|
|
(2,053
|
)
|
|
|
(879
|
)
|
|
|
(800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges (J)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
(420
|
)
|
|
|
(554
|
)
|
|
|
36
|
|
|
|
21
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change from periodic revaluations
|
|
|
60
|
|
|
|
(60
|
)
|
|
|
2
|
|
|
|
12
|
|
|
Tax (expense) benefit
|
|
|
(15
|
)
|
|
|
10
|
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
Total Other comprehensive income (loss)
before reclassifications, net of tax
|
|
|
45
|
|
|
|
(50
|
)
|
|
|
1
|
|
|
|
8
|
|
|
Net amount reclassified to earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aluminum contracts(4)
|
|
|
9
|
|
|
|
26
|
|
|
|
—
|
|
|
|
—
|
|
|
Financial contracts(5)
|
|
|
(4
|
)
|
|
|
(6
|
)
|
|
|
(6
|
)
|
|
|
(4
|
)
|
|
Interest rate contracts(6)
|
|
|
4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Foreign exchange contracts(4)
|
|
|
4
|
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
Sub-total
|
|
|
13
|
|
|
|
23
|
|
|
|
(6
|
)
|
|
|
(4
|
)
|
|
Tax benefit (expense)(2)
|
|
|
3
|
|
|
|
(2
|
)
|
|
|
2
|
|
|
|
1
|
|
|
Total amount reclassified from
Accumulated other comprehensive
loss, net of tax(7)
|
|
|
16
|
|
|
|
21
|
|
|
|
(4
|
)
|
|
|
(3
|
)
|
|
Total Other comprehensive income (loss)
|
|
|
61
|
|
|
|
(29
|
)
|
|
|
(3
|
)
|
|
|
5
|
|
|
Balance at end of period
|
|
|
(359
|
)
|
|
|
(583
|
)
|
|
|
33
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Accumulated other comprehensive loss
|
|
$
|
(4,849
|
)
|
|
$
|
(4,740
|
)
|
|
$
|
(899
|
)
|
|
$
|
(814
|
)
|
13
|
|
|
Alcoa Corporation
|
|
|
Noncontrolling interest
|
|
|
|
|
Nine months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Pension and other postretirement benefits (I)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(2,283
|
)
|
|
$
|
(2,786
|
)
|
|
$
|
(46
|
)
|
|
$
|
(47
|
)
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized net actuarial (loss) gain and prior service
cost/benefit
|
|
|
(120
|
)
|
|
|
250
|
|
|
|
(14
|
)
|
|
|
7
|
|
|
Tax benefit (expense)
|
|
|
28
|
|
|
|
(3
|
)
|
|
|
4
|
|
|
|
(2
|
)
|
|
Total Other comprehensive (loss) income
before reclassifications, net of tax
|
|
|
(92
|
)
|
|
|
247
|
|
|
|
(10
|
)
|
|
|
5
|
|
|
Amortization of net actuarial loss and prior
service cost/benefit(1)
|
|
|
177
|
|
|
|
487
|
|
|
|
4
|
|
|
|
2
|
|
|
Tax expense(2)
|
|
|
(15
|
)
|
|
|
(52
|
)
|
|
|
(1
|
)
|
|
|
—
|
|
|
Total amount reclassified from Accumulated
other comprehensive loss, net of tax(7)
|
|
|
162
|
|
|
|
435
|
|
|
|
3
|
|
|
|
2
|
|
|
Total Other comprehensive income (loss)
|
|
|
70
|
|
|
|
682
|
|
|
|
(7
|
)
|
|
|
7
|
|
|
Balance at end of period
|
|
|
(2,213
|
)
|
|
|
(2,104
|
)
|
|
|
(53
|
)
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
(2,071
|
)
|
|
|
(1,467
|
)
|
|
|
(810
|
)
|
|
|
(581
|
)
|
|
Other comprehensive loss(3)
|
|
|
(206
|
)
|
|
|
(586
|
)
|
|
|
(69
|
)
|
|
|
(219
|
)
|
|
Balance at end of period
|
|
|
(2,277
|
)
|
|
|
(2,053
|
)
|
|
|
(879
|
)
|
|
|
(800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges (J)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
(211
|
)
|
|
|
(929
|
)
|
|
|
31
|
|
|
|
51
|
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change from periodic revaluations
|
|
|
(212
|
)
|
|
|
344
|
|
|
|
35
|
|
|
|
(18
|
)
|
|
Tax benefit (expense)
|
|
|
39
|
|
|
|
(58
|
)
|
|
|
(11
|
)
|
|
|
5
|
|
|
Total Other comprehensive (loss) income
before reclassifications, net of tax
|
|
|
(173
|
)
|
|
|
286
|
|
|
|
24
|
|
|
|
(13
|
)
|
|
Net amount reclassified to earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aluminum contracts(4)
|
|
|
34
|
|
|
|
87
|
|
|
|
—
|
|
|
|
—
|
|
|
Financial contracts(5)
|
|
|
(36
|
)
|
|
|
(26
|
)
|
|
|
(31
|
)
|
|
|
(17
|
)
|
|
Interest rate contracts(6)
|
|
|
4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Foreign exchange contracts(4)
|
|
|
12
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
Sub-total
|
|
|
14
|
|
|
|
63
|
|
|
|
(31
|
)
|
|
|
(17
|
)
|
|
Tax benefit (expense)(2)
|
|
|
11
|
|
|
|
(3
|
)
|
|
|
9
|
|
|
|
5
|
|
|
Total amount reclassified from
Accumulated other comprehensive
loss, net of tax(7)
|
|
|
25
|
|
|
|
60
|
|
|
|
(22
|
)
|
|
|
(12
|
)
|
|
Total Other comprehensive (loss) income
|
|
|
(148
|
)
|
|
|
346
|
|
|
|
2
|
|
|
|
(25
|
)
|
|
Balance at end of period
|
|
|
(359
|
)
|
|
|
(583
|
)
|
|
|
33
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Accumulated other comprehensive loss
|
|
$
|
(4,849
|
)
|
|
$
|
(4,740
|
)
|
|
$
|
(899
|
)
|
|
$
|
(814
|
)
|
|
(1)
|
These amounts were included in the computation of net periodic benefit cost for pension and other postretirement benefits (see Note I).
|
|
(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)
|
These amounts were reported in Other expenses, net of the accompanying Statement of Consolidated Operations.
|
|
(7)
|
A positive amount indicates a corresponding charge to earnings and a negative amount indicates a corresponding benefit to earnings.
|
14
G. Investments – A summary of unaudited financial information for Alcoa Corporation’s equity investments is as follows (amounts represent 100% of investee financial information):
|
|
|
Third quarter ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Sales
|
|
$
|
1,051
|
|
|
$
|
1,343
|
|
|
$
|
3,474
|
|
|
$
|
3,963
|
|
|
Cost of goods sold
|
|
|
809
|
|
|
|
1,062
|
|
|
|
2,789
|
|
|
|
3,100
|
|
|
Net income (loss)
|
|
|
4
|
|
|
|
46
|
|
|
|
(73
|
)
|
|
|
143
|
|
In December 2009, Alcoa Corporation invested 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 the Kingdom of Saudi Arabia. The joint venture is owned 74.9% by Ma’aden and 25.1% by Alcoa Corporation, and originally consisted of three separate companies: MBAC, MAC, and MRC. Alcoa Corporation accounts for its investment in the joint venture under the equity method as one integrated investment asset, consistent with the terms of the joint venture agreement.
During the second quarter of 2019, Alcoa Corporation and Ma’aden amended the joint venture agreement that governs the operations of each of the three companies that comprise the joint venture. The amendment resulted in various changes (described in detail in Note C), effectively divesting the Company’s investment in MRC. The Company retained its 25.1% minority interest in MBAC and MAC, and Ma’aden will continue to own a 74.9% interest.
H. Inventories
|
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
Finished goods
|
|
$
|
282
|
|
|
$
|
346
|
|
|
Work-in-process
|
|
|
276
|
|
|
|
189
|
|
|
Bauxite and alumina
|
|
|
493
|
|
|
|
609
|
|
|
Purchased raw materials
|
|
|
447
|
|
|
|
529
|
|
|
Operating supplies
|
|
|
151
|
|
|
|
146
|
|
|
|
|
$
|
1,649
|
|
|
$
|
1,819
|
|
As of January 1, 2019, the Company changed its method for valuing certain of its inventories held in the United States and Canada to the average cost method of accounting from the LIFO method. Inventories held by other subsidiaries of the parent company were previously, and continue to be, valued principally using the average cost method. Management believes that the change in accounting is preferable as it results in a consistent method to value inventory across all regions of the business, it improves comparability with industry peers, and it more closely resembles the physical flow of inventory.
The effects of the change in accounting principle from LIFO to average cost have been retrospectively applied to all periods presented. This change resulted in a favorable adjustment to Retained earnings of $205 and an unfavorable adjustment to Noncontrolling interest of $35 as of January 1, 2018. In addition, certain financial statement line items in the Company’s Statement of Consolidated Operations, Statement of Consolidated Comprehensive Income, and Statement of Consolidated Cash Flows for the third quarter and the nine months ended September 30, 2018 and Consolidated Balance Sheet as of December 31, 2018 were adjusted as follows:
15
|
|
As Originally Reported
|
|
|
Effect of Change
|
|
|
As Adjusted
|
|
|
Statement of Consolidated Operations for the third quarter ended September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
$
|
2,534
|
|
|
$
|
(49
|
)
|
|
$
|
2,485
|
|
|
Provision for income taxes
|
|
251
|
|
|
|
9
|
|
|
|
260
|
|
|
Net income
|
|
155
|
|
|
|
40
|
|
|
|
195
|
|
|
Net income attributable to noncontrolling interest
|
|
196
|
|
|
|
5
|
|
|
|
201
|
|
|
Net loss attributable to Alcoa Corporation
|
|
(41
|
)
|
|
|
35
|
|
|
|
(6
|
)
|
|
Earnings per share attributable to Alcoa Corporation common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.22
|
)
|
|
$
|
0.19
|
|
|
$
|
(0.03
|
)
|
|
Diluted
|
|
(0.22
|
)
|
|
|
0.19
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Consolidated Comprehensive Income for the third quarter ended
September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
$
|
337
|
|
|
$
|
40
|
|
|
$
|
377
|
|
|
Comprehensive income attributable to noncontrolling interest
|
|
151
|
|
|
|
5
|
|
|
|
156
|
|
|
Comprehensive income attributable to Alcoa Corporation
|
|
186
|
|
|
|
35
|
|
|
|
221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Consolidated Operations for the nine months ended September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
$
|
7,547
|
|
|
$
|
(7
|
)
|
|
$
|
7,540
|
|
|
Provision for income taxes
|
|
569
|
|
|
|
—
|
|
|
|
569
|
|
|
Net income
|
|
659
|
|
|
|
7
|
|
|
|
666
|
|
|
Net income attributable to noncontrolling interest
|
|
475
|
|
|
|
(8
|
)
|
|
|
467
|
|
|
Net income attributable to Alcoa Corporation
|
|
184
|
|
|
|
15
|
|
|
|
199
|
|
|
Earnings per share attributable to Alcoa Corporation common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.99
|
|
|
$
|
0.08
|
|
|
$
|
1.07
|
|
|
Diluted
|
|
0.97
|
|
|
|
0.09
|
|
|
|
1.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Consolidated Comprehensive Income for the nine months ended
September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
$
|
864
|
|
|
$
|
7
|
|
|
$
|
871
|
|
|
Comprehensive income attributable to noncontrolling interest
|
|
238
|
|
|
|
(8
|
)
|
|
|
230
|
|
|
Comprehensive income attributable to Alcoa Corporation
|
|
626
|
|
|
|
15
|
|
|
|
641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet as of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
$
|
1,644
|
|
|
$
|
175
|
|
|
$
|
1,819
|
|
|
Prepaid expenses and other current assets
|
|
301
|
|
|
|
19
|
|
|
|
320
|
|
|
Retained earnings
|
|
341
|
|
|
|
229
|
|
|
|
570
|
|
|
Noncontrolling interest
|
|
2,005
|
|
|
|
(35
|
)
|
|
|
1,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Consolidated Cash Flows for the nine months ended September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
659
|
|
|
$
|
7
|
|
|
$
|
666
|
|
|
Deferred income taxes
|
|
(16
|
)
|
|
|
—
|
|
|
|
(16
|
)
|
|
(Increase) in inventories
|
|
(279
|
)
|
|
|
(7
|
)
|
|
|
(286
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table compares the amounts that would have been reported under LIFO with the amounts recorded under the average cost method in the Consolidated Financial Statements as of September 30, 2019 and for the third quarter and nine months then ended:
16
|
|
As Computed under LIFO
|
|
|
As Reported under Average Cost
|
|
|
Effect of Change
|
|
|
Statement of Consolidated Operations for the third quarter ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
$
|
2,104
|
|
|
$
|
2,120
|
|
|
$
|
16
|
|
|
Provision for income taxes
|
|
92
|
|
|
|
95
|
|
|
|
3
|
|
|
Net loss
|
|
(128
|
)
|
|
|
(147
|
)
|
|
|
(19
|
)
|
|
Net income attributable to noncontrolling interest
|
|
70
|
|
|
|
74
|
|
|
|
4
|
|
|
Net loss attributable to Alcoa Corporation
|
|
(198
|
)
|
|
|
(221
|
)
|
|
|
(23
|
)
|
|
Earnings per share attributable to Alcoa Corporation common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(1.07
|
)
|
|
$
|
(1.19
|
)
|
|
$
|
(0.12
|
)
|
|
Diluted
|
|
(1.07
|
)
|
|
|
(1.19
|
)
|
|
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Consolidated Comprehensive Income for the third quarter ended
September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
$
|
(356
|
)
|
|
$
|
(375
|
)
|
|
$
|
(19
|
)
|
|
Comprehensive loss attributable to noncontrolling interest
|
|
(14
|
)
|
|
|
(10
|
)
|
|
|
4
|
|
|
Comprehensive loss attributable to Alcoa Corporation
|
|
(342
|
)
|
|
|
(365
|
)
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Consolidated Operations for the nine months ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
$
|
6,495
|
|
|
$
|
6,489
|
|
|
$
|
(6
|
)
|
|
Provision for income taxes
|
|
348
|
|
|
|
361
|
|
|
|
13
|
|
|
Net loss
|
|
(491
|
)
|
|
|
(498
|
)
|
|
|
(7
|
)
|
|
Net income attributable to noncontrolling interest
|
|
305
|
|
|
|
324
|
|
|
|
19
|
|
|
Net loss attributable to Alcoa Corporation
|
|
(796
|
)
|
|
|
(822
|
)
|
|
|
(26
|
)
|
|
Earnings per share attributable to Alcoa Corporation common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(4.29
|
)
|
|
$
|
(4.43
|
)
|
|
$
|
(0.14
|
)
|
|
Diluted
|
|
(4.29
|
)
|
|
|
(4.43
|
)
|
|
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Consolidated Comprehensive Income for the nine months ended
September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
$
|
(849
|
)
|
|
$
|
(856
|
)
|
|
$
|
(7
|
)
|
|
Comprehensive income attributable to noncontrolling interest
|
|
231
|
|
|
|
250
|
|
|
|
19
|
|
|
Comprehensive loss attributable to Alcoa Corporation
|
|
(1,080
|
)
|
|
|
(1,106
|
)
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet as of September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
$
|
1,471
|
|
|
$
|
1,649
|
|
|
$
|
178
|
|
|
Prepaid expenses and other current assets
|
|
236
|
|
|
|
245
|
|
|
|
9
|
|
|
Retained deficit
|
|
(455
|
)
|
|
|
(252
|
)
|
|
|
203
|
|
|
Noncontrolling interest
|
|
1,887
|
|
|
|
1,871
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Consolidated Cash Flows for the nine months ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(491
|
)
|
|
$
|
(498
|
)
|
|
$
|
(7
|
)
|
|
Deferred income taxes
|
|
46
|
|
|
|
59
|
|
|
|
13
|
|
|
Decrease in inventories
|
|
117
|
|
|
|
111
|
|
|
|
(6
|
)
|
17
I. Pension and Other Postretirement Benefits – The components of net periodic benefit cost were as follows:
|
|
|
Third quarter ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
Pension benefits
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Service cost
|
|
$
|
12
|
|
|
$
|
13
|
|
|
$
|
36
|
|
|
$
|
41
|
|
|
Interest cost(1)
|
|
|
55
|
|
|
|
56
|
|
|
|
167
|
|
|
|
170
|
|
|
Expected return on plan assets(1)
|
|
|
(81
|
)
|
|
|
(84
|
)
|
|
|
(244
|
)
|
|
|
(256
|
)
|
|
Recognized net actuarial loss(1)
|
|
|
43
|
|
|
|
47
|
|
|
|
127
|
|
|
|
154
|
|
|
Amortization of prior service cost(1)
|
|
|
1
|
|
|
|
2
|
|
|
|
4
|
|
|
|
6
|
|
|
Settlements(2)
|
|
|
5
|
|
|
|
232
|
|
|
|
5
|
|
|
|
399
|
|
|
Curtailments(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
38
|
|
|
|
5
|
|
|
Net periodic benefit cost
|
|
$
|
35
|
|
|
$
|
266
|
|
|
$
|
133
|
|
|
$
|
519
|
|
|
|
|
Third quarter ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
Other postretirement benefits
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Service cost
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
4
|
|
|
Interest cost(1)
|
|
|
10
|
|
|
|
8
|
|
|
|
28
|
|
|
|
26
|
|
|
Recognized net actuarial loss(1)
|
|
|
2
|
|
|
|
3
|
|
|
|
7
|
|
|
|
10
|
|
|
Amortization of prior service benefit(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
Settlements(2)
|
|
|
—
|
|
|
|
(56
|
)
|
|
|
—
|
|
|
|
(56
|
)
|
|
Curtailments(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(28
|
)
|
|
Net periodic benefit cost
|
|
$
|
13
|
|
|
$
|
(43
|
)
|
|
$
|
38
|
|
|
$
|
(45
|
)
|
|
(1)
|
These amounts were reported in Other expenses, net on the accompanying Statement of Consolidated Operations (see Note N).
|
|
(2)
|
These amounts were reported in Restructuring and other charges, net on the accompanying Statements of Consolidated Operations (see Note C) and of Cash Flows.
|
Plan Actions. In 2019, management initiated the following actions to certain pension plans:
Action# 1 – In June 2019, the Company entered into a new, six-year collective bargaining agreement with the National Union of Aluminum Employees of Baie-Comeau. Under the agreement, all Canadian union employees that are participants in one of the Company’s defined benefit pension plans will cease accruing retirement benefits for future service effective January 1, 2021. This change will affect approximately 700 employees, who are targeted to be transitioned to a target benefit plan, where the funding risk is assumed by the employees. The Company will contribute approximately 12% of these participants’ eligible earnings on an annual basis. The Company will also contribute additional contributions of approximately $2 spread over a three-year period to improve the financial position of the newly established target benefit plan. Participants already collecting benefits or who terminated with a vested benefit under the defined benefit pension plan are not affected by these changes.
Action# 2 – In July 2019, the Company entered into a new, six-year collective bargaining agreement with the United Steelworkers representing the employees of Aluminerie de Bécancour Inc. Under the agreement, all Canadian union employees that are participants in one of the Company’s defined benefit pension plans ceased accruing retirement benefits for future service effective July 21, 2019. This change affected approximately 900 employees, who were transitioned to a member-funded pension plan, where the funding risk is assumed by the employees. The Company will contribute approximately 12% of these participants’ eligible earnings on an annual basis. To improve the financial positions of both the existing defined benefit pension plan and newly established member-funded pension plan, the Company will contribute approximately $5 in 2020 to the existing defined benefit pension plan and approximately $2 spread over a five-year period to the newly established member-funded pension plan. Participants already collecting benefits or who terminated with a vested benefit under the defined benefit pension plan are not affected by these changes.
The above actions caused the respective plans to be remeasured, including an update to the discount rates used to determine the benefit obligations of the affected plans. The following table presents certain information and the financial impacts of these actions on the accompanying Consolidated Financial Statements:
18
|
Action#
|
|
Number of
affected
plan
participants
|
|
Weighted
average
discount
rate as of
December 31,
2018
|
|
|
Plan
remeasurement
date
|
|
Weighted
average
discount rate
as of plan
remeasurement
date
|
|
|
Increase to
accrued
pension
benefits
liability
|
|
|
Curtailment
charge(1)
|
|
|
1
|
|
~700
|
|
3.85%
|
|
|
May 31, 2019
|
|
3.15%
|
|
|
$
|
52
|
|
|
$
|
38
|
|
|
2
|
|
~900
|
|
3.80%
|
|
|
June 30, 2019
|
|
3.00%
|
|
|
$
|
23
|
|
|
$
|
—
|
|
|
(1)
|
These amounts represent the accelerated amortization of a portion of the existing prior service cost and was reclassified from Accumulated other comprehensive loss to Restructuring and other charges, net (see Note C) on the accompanying Statement of Consolidated Operations.
|
J. 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 entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable 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 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
|
|
|
•
|
Level 2 - Inputs 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 3 - Inputs 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 the risks of changing commodity prices, foreign currency exchange rates and interest rates. Alcoa Corporation’s commodity and derivative activities include aluminum, energy, foreign exchange and interest rate contracts which 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 Corporation’s aluminum, energy, foreign exchange and interest rate 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 $12 and $65, respectively, at September 30, 2019 and $2 and $54, respectively, at December 31, 2018. 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 $40 and $43 in the 2019 third quarter and nine-month period, respectively, and an unrealized loss of $7 and an unrealized gain of $6 in the 2018 third quarter and nine-month period, respectively, in Other comprehensive (loss) income. Additionally, Alcoa Corporation reclassified a realized loss of $16 and $28 in the 2019 third quarter and nine-month period, respectively, and $3 and $10 in the 2018 third quarter and nine-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 made in 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.
Alcoa Corporation had a power contract at one of its facilities which expired in March 2019 that indexed the price of power to the London Metal Exchange (LME) price of aluminum plus the Midwest premium. Prior to its expiration, this embedded derivative
19
was 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. Management elected not to qualify the embedded derivative for hedge accounting treatment.
In March 2019, Alcoa Corporation and the counterparty to the power contract described above entered into a new power contract which also contains an embedded derivative that indexes the price of power to the LME price of aluminum plus the Midwest premium. The embedded aluminum 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. An overall increase in actual LME price and the Midwest premium will result in a higher cost of power and a corresponding decrease to the derivative asset or increase to the derivative liability. The embedded derivative has been designated as a cash flow hedge of forward sales of aluminum. Unrealized gains and losses will be included in Accumulated other comprehensive loss on the accompanying Consolidated Balance Sheet while realized gains and losses will be included in Sales on the accompanying Statement of Consolidated Operations.
20
The following table presents quantitative information related to the significant unobservable inputs for Level 3 derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at
September 30,
2019
|
|
|
Unobservable
input
|
|
Range
($ in full amounts)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial contract
|
|
|
$119
|
|
|
Interrelationship of forward energy price and the Consumer Price Index and price of electricity beyond forward curve
|
|
Electricity: $70.04 per megawatt hour in 2019 to $55.30 per megawatt hour in 2021
|
|
Embedded aluminum derivative
|
|
|
-
|
|
|
Interrelationship of LME price to the amount of megawatt hours of energy needed to produce the forecasted metric tons of aluminum
|
|
Aluminum: $1,708 per metric ton in October 2019 to $1,728 per metric ton in December 2019
Midwest premium: $0.1800 per pound in October 2019 and to $0.1900 per pound in December 2019
Electricity: rate of 2 million megawatt hours per year
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded aluminum derivative
|
|
|
201
|
|
|
Interrelationship of LME price to the amount of megawatt hours of energy needed to produce the forecasted metric tons of aluminum
|
|
Aluminum: $1,708 per metric ton in 2019 to $2,257 per metric ton in 2027
Electricity: rate of 4 million megawatt hours per year
|
|
|
|
|
|
|
Embedded aluminum derivatives
|
|
|
206
|
|
|
Interrelationship of LME and Midwest premium price to the amount of megawatt hours of energy needed to produce the forecasted metric tons of aluminum
|
|
Aluminum: $1,708 per metric ton in 2019 to $2,365 per metric ton in December 2029 (two contracts) and $2,660 per metric ton in 2036 (one contract)
Midwest premium: $0.1800 per pound in 2019 to $0.1900 per pound in 2029 (two contracts) and 2036 (one contract)
Electricity: rate of 11 million megawatt hours per year
|
|
|
|
|
|
|
Embedded aluminum derivative
|
|
|
2
|
|
|
Interrelationship of LME price to overall energy price
|
|
Aluminum: $1,847 per metric ton in October 2019 to December 2019
|
|
|
|
|
|
|
Embedded credit derivative
|
|
|
18
|
|
|
Estimated spread between the respective 30-year debt yield of Alcoa Corporation and the counterparty
|
|
3.08% (30-year debt yields: Alcoa Corporation – 6.44% (estimated) and counterparty – 3.36%)
|
21
The fair values of Level 3 derivative instruments recorded as assets and liabilities in the accompanying Consolidated Balance Sheet were as follows:
|
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
Asset Derivatives
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Fair value of derivative instruments – current:
|
|
|
|
|
|
|
|
|
|
Financial contract
|
|
$
|
77
|
|
|
$
|
70
|
|
|
Fair value of derivative instruments – noncurrent:
|
|
|
|
|
|
|
|
|
|
Embedded aluminum derivatives
|
|
|
—
|
|
|
|
41
|
|
|
Financial contract
|
|
|
42
|
|
|
|
42
|
|
|
Total derivatives designated as hedging instruments
|
|
|
119
|
|
|
|
153
|
|
|
Total Asset Derivatives
|
|
$
|
119
|
|
|
$
|
153
|
|
|
Liability Derivatives
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Fair value of derivative instruments – current:
|
|
|
|
|
|
|
|
|
|
Embedded aluminum derivatives
|
|
$
|
29
|
|
|
$
|
46
|
|
|
Fair value of derivative instruments – noncurrent:
|
|
|
|
|
|
|
|
|
|
Embedded aluminum derivatives
|
|
|
380
|
|
|
|
218
|
|
|
Total derivatives designated as hedging instruments
|
|
|
409
|
|
|
|
264
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Fair value of derivative instruments – current:
|
|
|
|
|
|
|
|
|
|
Embedded aluminum derivative
|
|
|
—
|
|
|
|
5
|
|
|
Embedded credit derivative
|
|
|
4
|
|
|
|
4
|
|
|
Fair value of derivative instruments – noncurrent:
|
|
|
|
|
|
|
|
|
|
Embedded credit derivative
|
|
|
14
|
|
|
|
16
|
|
|
Total derivatives not designated as hedging instruments
|
|
|
18
|
|
|
|
25
|
|
|
Total Liability Derivatives
|
|
$
|
427
|
|
|
$
|
289
|
|
The following tables present a reconciliation of activity for Level 3 derivative instruments:
|
|
Assets
|
|
|
Liabilities
|
|
|
Third quarter ended September 30, 2019
|
|
Financial
contracts
|
|
|
Embedded
aluminum
derivatives
|
|
|
Embedded
credit
derivative
|
|
|
Balance at July 1, 2019
|
|
$
|
132
|
|
|
$
|
515
|
|
|
$
|
20
|
|
|
Total gains or losses (realized and unrealized)
included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
—
|
|
|
|
(9
|
)
|
|
|
—
|
|
|
Cost of goods sold
|
|
|
(19
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
|
Other expenses, net
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
Other comprehensive income (loss)
|
|
|
7
|
|
|
|
(97
|
)
|
|
|
—
|
|
|
Other
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Balance at September 30, 2019
|
|
$
|
119
|
|
|
$
|
409
|
|
|
$
|
18
|
|
|
Change in unrealized gains or losses included in earnings for
derivative instruments held at September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses, net
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
22
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Nine months ended September 30, 2019
|
|
Embedded
aluminum
derivatives
|
|
|
Financial
contracts
|
|
|
Embedded
aluminum
derivatives
|
|
|
Embedded
credit
derivative
|
|
|
Opening balance – January 1, 2019
|
|
$
|
41
|
|
|
$
|
112
|
|
|
$
|
269
|
|
|
$
|
20
|
|
|
Total gains or losses (realized and unrealized)
included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
—
|
|
|
|
—
|
|
|
|
(34
|
)
|
|
|
—
|
|
|
Cost of goods sold
|
|
|
—
|
|
|
|
(78
|
)
|
|
|
—
|
|
|
|
(3
|
)
|
|
Other expenses, net
|
|
|
—
|
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
1
|
|
|
Other comprehensive (loss) income
|
|
|
(41
|
)
|
|
|
89
|
|
|
|
181
|
|
|
|
—
|
|
|
Other
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
(5
|
)
|
|
|
—
|
|
|
Closing balance – September 30, 2019
|
|
$
|
—
|
|
|
$
|
119
|
|
|
$
|
409
|
|
|
$
|
18
|
|
|
Change in unrealized gains or losses included in earnings
for derivative instruments held at September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses, net
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
1
|
|
In the first quarter of 2019, there was an expiration of an existing and an issuance of a new embedded aluminum derivative (see above). In the 2019 nine-month period, there were no purchases, sales 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
Alcoa Corporation has six Level 3 embedded aluminum derivatives and one Level 3 financial contract that have been designated as cash flow hedges.
At September 30, 2019 and December 31, 2018, these embedded aluminum derivatives hedged forecasted aluminum sales of 2,397 kmt and 2,508 kmt, respectively. Assuming market rates remain constant with the rates at September 30, 2019, a realized loss of $29 is expected to be recognized in Sales over the next 12 months. There was no ineffectiveness related to these six derivative instruments in the 2019 and 2018 third quarter and nine-month periods.
At September 30, 2019 and December 31, 2018, the financial contract hedges forecasted electricity purchases of 4,510,440 and 6,348,276 megawatt hours, respectively. Assuming market rates remain consistent with the rates at September 30, 2019, a realized gain of $76 is expected to be recognized in Cost of goods sold over the next 12 months. There was no ineffectiveness related to this derivative instrument in the third quarter and nine-month period of 2019. The amount of hedge ineffectiveness related to this derivative instrument was not material in the 2018 third quarter and nine-month period.
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 Corporation’s 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. 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.
23
Other Financial Instruments
The carrying values and fair values of Alcoa Corporation’s other financial instruments were as follows:
|
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
|
|
Carrying
value
|
|
|
Fair
value
|
|
|
Carrying
value
|
|
|
Fair
value
|
|
|
Cash and cash equivalents
|
|
$
|
841
|
|
|
$
|
841
|
|
|
$
|
1,113
|
|
|
$
|
1,113
|
|
|
Restricted cash
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
Long-term debt due within one year
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
Long-term debt, less amount due within one year
|
|
|
1,805
|
|
|
|
1,955
|
|
|
|
1,801
|
|
|
|
1,863
|
|
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.
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.
K. Income Taxes – Alcoa Corporation’s estimated annualized effective tax rate (AETR) for 2019 as of September 30, 2019 differs from the U.S. federal statutory rate of 21% primarily due to losses in countries with full valuation reserves resulting in no tax benefit, as well as foreign income taxed in higher rate jurisdictions.
|
|
|
Nine-months ended September 30,
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
(Loss) income before income taxes
|
|
$
|
(137
|
)
|
|
|
$
|
1,235
|
|
|
Estimated annualized effective tax rate
|
|
|
(686.2
|
)
|
%
|
|
|
43.6
|
%
|
|
Income tax expense
|
|
$
|
942
|
|
|
|
$
|
538
|
|
|
(Favorable) unfavorable tax impact related to losses in jurisdictions with no tax benefit
|
|
|
(590
|
)
|
|
|
|
5
|
|
|
Discrete tax charge
|
|
|
9
|
|
|
|
|
26
|
|
|
Provision for income taxes
|
|
$
|
361
|
|
|
|
$
|
569
|
|
The Provision for income taxes for the 2019 nine-month period includes the change in estimated AETR from the second quarter of 2019. The change in estimated AETR is primarily due to fluctuating alumina and aluminum market prices as well as restructuring charges incurred in the 2019 nine-month period that resulted in changes to the distribution of the (Loss) income before income taxes in the Company’s various jurisdictions, inclusive of those which receive no tax benefit from generated losses.
L. Leasing
As a result of the adoption of ASU No. 2016-02, Leases, management recorded a right-of-use asset and lease liability, each in the amount of $201, on Alcoa Corporation’s Consolidated Balance Sheet as of January 1, 2019 for several types of operating leases, including land and buildings, alumina refinery process control technology, plant equipment, vehicles, and computer equipment. These amounts are equivalent to the aggregate future lease payments on a discounted basis. The leases have remaining terms of one to 38 years. The discount rate applied to these leases is the Company’s incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments, unless there is a rate implicit in the lease agreement. Lease expense for the third quarter ended September 30, 2019, includes costs from operating leases of $21, variable lease payments of $4 and immaterial short-term rental expense. Lease expense for the nine-months ended September 30, 2019, includes costs from operating leases of $60, variable lease payments of $12 and short-term rental expense of $4. New leases of $4 and $11 were added during the three and nine-months ended September 30, 2019, respectively. The Company does not have material financing leases.
The following represents the aggregate right-of use assets and related lease obligations as of September 30, 2019:
24
|
Amounts recognized in the Consolidated Balance Sheet at September 30, 2019:
|
|
|
|
|
|
Properties, plants and equipment, net
|
|
$
|
158
|
|
|
Other current liabilities
|
|
|
62
|
|
|
Other noncurrent liabilities and deferred credits
|
|
|
96
|
|
|
Total operating lease liabilities
|
|
$
|
158
|
|
|
|
|
|
|
|
The weighted average lease term and weighted average discount rate as of September 30, 2019 were as follows:
|
Weighted average lease term
|
|
|
|
Operating leases
|
|
4.1 years
|
|
Weighted average discount rate
|
|
|
|
Operating leases
|
|
5.3%
|
The future cash flows related to the operating lease obligations as of September 30, 2019 were as follows:
|
Year Ending December 31,
|
|
Operating leases
|
|
|
2019 (excluding the nine months ended September 30)
|
|
$
|
21
|
|
|
2020
|
|
|
68
|
|
|
2021
|
|
|
51
|
|
|
2022
|
|
|
19
|
|
|
2023
|
|
|
10
|
|
|
Thereafter
|
|
|
21
|
|
|
Total lease payments (undiscounted)
|
|
|
190
|
|
|
Less: discount to net present value
|
|
|
(32
|
)
|
|
Total
|
|
$
|
158
|
|
Disclosures related to periods presented prior to the adoption of ASU No. 2016-02
The Company adopted ASU No. 2016-02, Leases, on January 1, 2019 using the modified retrospective approach which requires the following disclosure for periods presented prior to adoption. The following table represents minimum annual lease commitments as of December 31, 2018 under long-term operating leases:
|
Year Ending December 31,
|
|
Operating leases
|
|
|
2019
|
|
$
|
74
|
|
|
2020
|
|
|
56
|
|
|
2021
|
|
|
42
|
|
|
2022
|
|
|
11
|
|
|
2023
|
|
|
5
|
|
|
Thereafter
|
|
|
21
|
|
|
Total lease payments
|
|
$
|
209
|
|
M. Contingencies and Commitments
Contingencies
Environmental Matters
Alcoa Corporation participates in environmental assessments and cleanups at several locations. These include currently or previously owned or operated 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 technology advancements.
Alcoa Corporation’s environmental remediation reserve balance reflects the most probable costs to remediate identified environmental conditions for which costs can be reasonably estimated. The following table details the changes in the carrying value of recorded environmental remediation reserves:
25
|
Balance at December 31, 2017
|
$
|
294
|
|
|
Liabilities incurred
|
|
19
|
|
|
Cash payments
|
|
(25
|
)
|
|
Reversals of previously recorded liabilities
|
|
(3
|
)
|
|
Foreign currency translation and other
|
|
(5
|
)
|
|
Balance at December 31, 2018
|
|
280
|
|
|
Liabilities incurred
|
|
4
|
|
|
Cash payments
|
|
(12
|
)
|
|
Reversals of previously recorded liabilities
|
|
(1
|
)
|
|
Foreign currency translation and other
|
|
(2
|
)
|
|
Balance at September 30, 2019
|
$
|
269
|
|
At September 30, 2019 and December 31, 2018, the current portion of Alcoa Corporation’s environmental remediation reserve balance was $31 and $44, respectively. In the third quarter and nine-month period of 2019, the Company incurred liabilities of $2 and $4, respectively. These charges are primarily recorded in Cost of goods sold on the accompanying Statement of Consolidated Operations.
Payments related to remediation expenses applied against the reserve were $2 and $12 in the 2019 third quarter and nine-month period, respectively. These amounts include mandated expenditures as well as those not required by any regulatory authority or third party. The reserve also reflects a decrease of $2 in both the third quarter and nine-month period of 2019, due to the effects of foreign currency translation.
In the nine-month period of 2018, the remediation reserve was increased by $15 due to a charge of $9 related to the former Sherwin location (see below), a reversal of $2 related to the Portovesme location, and a net charge of $8 associated with several sites. Of the changes to the reserve in the nine-month period of 2018, a 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, net on the accompanying Statement of Consolidated Operations.
Payments related to remediation expenses applied against the reserve were $5 and $19 in the 2018 third quarter and nine-month period, respectively. These amounts include mandated expenditures as well as those not required by any regulatory authority or third party. The reserve also reflects both a decrease of $1 and $6 in the 2018 third quarter and nine-month period, respectively, due to the effects of foreign currency translation and an increase of $1 in the 2018 nine-month period for reclassifications made between this reserve and the Company’s liability for asset retirement obligations.
The estimated timing of cash outflows on the environmental remediation reserve at September 30, 2019 is as follows:
|
2019 (excluding the nine months ended September 30, 2019)
|
$
|
8
|
|
|
2020 - 2024
|
|
146
|
|
|
Thereafter
|
|
115
|
|
|
Total
|
$
|
269
|
|
Reserve balances at September 30, 2019 and December 31, 2018, associated with significant sites with active remediation underway or for future remediation were $207 and $214, respectively. In management’s judgment, the Company’s reserves are sufficient to satisfy the provisions of the respective action plans. Upon changes in facts or circumstances, a change to the reserve may be required. The Company’s significant sites include:
Pocos de Caldas, Brazil—Associated with the 2015 closure of the Alcoa Alumínio S.A. smelter in Pocos de Caldas, Brazil, an environmental remediation reserve was established for remediation of historic spent potlining storage and disposal areas. The final remediation plan is currently under review; such review could require the reserve balance to be adjusted.
Fusina and Portovesme, Italy—Alcoa Corporation’s subsidiary Alcoa Trasformazioni S.r.l. (Trasformazioni) has remediation projects underway for its closed smelter sites at Fusina and Portovesme. Cleanup plans at both sites have been approved by the Italian Ministry of Environment and Protection of Land and Sea (MOE). For the Fusina site, Trasformazioni began work on a soil remediation project in October 2017 and expects to complete the project in 2020. Additionally, Trasformazioni agreed to make annual payments to MOE over a 10-year period, ending in 2022, for groundwater emergency containment and natural resource damages related to the Fusina site. For the Portovesme site, Trasformazioni began work on a soil remediation project in mid-2016 and expects it to be complete by the end of 2020. Additionally, Trasformazioni participates in a groundwater remediation project which will not
26
have a final remedial design completed until mid-2020; such design conclusion may result in a change to the existing reserve for Portovesme.
Suriname—Associated with the 2017 closure of the Suralco refinery and bauxite mine, an environmental remediation reserve was established for treatment and disposal of refinery waste and soil remediation. The work began in 2017 and is expected to be completed at the end of 2025.
Hurricane Creek, Arkansas—The Company, through its subsidiaries, operated two mining areas and refineries near Hurricane Creek, Arkansas, before their closure in 1990. In accordance with regulations, the Company is responsible for ongoing monitoring and maintenance for water quality surrounding the mine areas and residue disposal areas. In instances where the Company has ongoing monitoring and maintenance responsibilities, it is Alcoa Corporation’s policy to maintain a reserve equal to five years of expected costs.
Massena, New York—Associated with the closure of the Massena East smelter by the Company’s subsidiary, Reynolds Metals Company, in 2015, an environmental remediation reserve was established for subsurface soil remediation to be performed after demolition of the structures. Remediation work is expected to commence in 2020 and will take four to eight years to complete.
Sherwin, Texas—In connection with the 2018 settlement of a dispute related to the previously-owned Sherwin alumina refinery, the Company’s subsidiary, Copano Enterprises LLC, accepted responsibility for the final closure of four bauxite residue waste disposal areas (known as the Copano facility). Work commenced on the first residue bed in 2018 and will take eight to twelve years to complete, depending on the nature of its potential re-use. Work on the next three beds has not commenced but is expected to be completed by 2048, depending on its potential re-use. See Sherwin in the Other section below for a complete description of this matter.
Longview, Washington—In connection with a 2018 Consent Decree and Cleanup Action Plan with the State of Washington Department of Ecology, the Company’s subsidiary, Northwest Alloys, accepted certain responsibilities for future remediation of contaminated soil and sediments at the site located near Longview, Washington.
Other Sites—The Company is in the process of decommissioning various other 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, there are approximately 35 remediation projects at these other sites that are planned or underway. 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 may be required. At September 30, 2019 and December 31, 2018, the reserve balance associated with these activities was $62 and $66, respectively.
Tax
Spain—In July 2013, following a corporate income tax audit covering the 2006 through 2009 tax years, an assessment was received from Spain’s tax authorities disallowing certain interest deductions claimed by ParentCo’s Spanish consolidated tax group. ParentCo filed an appeal of this assessment and provided financial assurance in the form of both a bank guarantee (Arconic) and a lien secured with the San Ciprian smelter (Alcoa Corporation) to Spain’s tax authorities. In January 2015, Spain’s Central Tax Administrative Court denied ParentCo’s appeal of this assessment. Two months later, ParentCo filed an appeal of the assessment in Spain’s National Court (the National Court). The amount of this assessment, including interest, was $152 (€131) as of June 30, 2018.
On July 6, 2018, the National Court denied ParentCo’s appeal of the assessment; however, the decision includes a requirement that Spain’s 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. Spain’s 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) as of July 6, 2018, the amount of the new assessment, including applicable interest, was 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 November 8, 2018, the Companies filed a petition for appeal to Spain’s Supreme Court, to which Spain’s tax authorities have filed their opposition.
In March 2019, the Spanish Supreme Court accepted the Companies’ petition for appeal which allowed the Companies to prepare and submit an appeal on May 6, 2019.
Notwithstanding the appeal process, based on a review of the basis on which the National Court decided this matter, Alcoa Corporation management no longer believed that the Companies were more likely than not (greater than 50%) to prevail in this matter. Accordingly, in the third quarter of 2018, Alcoa Corporation recorded a charge of $30 (€26) in Provision for income taxes to establish a liability for its 49% share of the estimated loss in this matter, representing management’s best estimate at the time. As the appeal
27
progresses or when the Companies receive an updated assessment from Spain’s tax authorities, management may revise its estimated liability.
Separately, 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 Spain’s tax authorities for the 2010 through 2013 tax years that had been under audit for a similar matter. Alcoa Corporation’s share of this settlement was not material to the Company’s 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. Also, 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 Corporation’s 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 AWAB’s 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 for these matters is $0 to $53. It is management’s 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—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. Under the terms of the divestiture, ParentCo agreed to retain responsibility for certain environmental obligations 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.
In January 2016, Sherwin Alumina Company, LLC (Sherwin), a successor owner of the refinery previously owned by Reynolds, filed for bankruptcy due to its inability to continue its bauxite supply agreement. As a result of Sherwin’s bankruptcy filing, separate legal actions were initiated against Reynolds by Sherwin and Gregory Power.
Sherwin: This matter sought to determine responsibility for remediation of environmental conditions at the Sherwin refinery site and related bauxite residue waste disposal areas (known as the Copano facility). In May 2018, Reynolds and Sherwin concluded a settlement agreement, which was accepted by the bankruptcy court in June 2018, that assigned to Reynolds all environmental liabilities associated with the Copano facility and assigned to Sherwin all environmental liabilities associated with the Sherwin refinery site. At September 30, 2019 and December 31, 2018, the Company had a reserve of $38 for its share of environmental-related matters at Copano facility. (See Sherwin, Texas in Environmental Matters above.)
Gregory Power: In January 2016, Gregory Power delivered notice to Reynolds that Sherwin’s bankruptcy filing constitutes a breach of the ESA. Since that time, various responses, complaints and motions have been actioned, including the addition of Allied Alumina LLC (Allied) to an amended complaint. (Sherwin operated as a subsidiary of Allied.) In May 2019, a settlement agreement was reached between Gregory Power, Allied and Reynolds in which all claims pending against the parties will be voluntarily dismissed. The settlement is conditioned on the execution of various commercial agreements, which have been executed by the parties. On June 2, 2019, the Court entered a Stipulation of Dismissal, formally concluding the litigation. The settlement does not have an impact on the Consolidated Financial Statements.
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, safety and health, commercial, tax, product liability, intellectual property infringement, employment, and employee and retiree benefit 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 Company’s 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
28
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
In December 2009, Alcoa Corporation invested 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 Ma’aden and 25.1% by Alcoa Corporation, and originally consisted of three separate companies: the MBAC, MAC, and MRC. Alcoa Corporation divested its ownership interest in MRC in the second quarter of 2019 as described in Note C. Alcoa Corporation accounts for its investment in the joint venture under the equity method as one integrated investment asset, consistent with the terms of the joint venture agreement. As of September 30, 2019 and December 31, 2018, the carrying value of Alcoa Corporation’s investment in this joint venture was $615 and $874, respectively.
At the time of closing, MRC had project financing totaling $1,179, of which $296 represented Alcoa Corporation’s 25.1% interest in the rolling mill company prior to the divestiture. Alcoa Corporation had issued guarantees to the lenders in the event of default on the debt service requirements by MRC through 2018 and 2021 (Ma’aden issued similar guarantees related to its 74.9% interest). Alcoa Corporation’s guarantees for MRC covered total remaining debt service requirements of $50 in principal and up to a maximum of approximately $10 in interest per year (based on projected interest rates). Previously, Alcoa Corporation issued similar guarantees related to the project financing of both MAC and MBAC. In December 2017 and July 2018, MAC and MBAC, respectively, refinanced and/or amended all of their existing outstanding debt. The guarantees that were previously required of the Company related to both MAC and MBAC were effectively terminated. At December 31, 2018, the combined fair value of the guarantees was $1, which was included in Other noncurrent liabilities and deferred credits on the accompanying Consolidated Balance Sheet. As part of Alcoa Corporation’s divestiture of MRC, the guarantee related to MRC was effectively terminated.
N. Other Expenses, Net
|
|
|
Third quarter ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Equity loss (income)
|
|
$
|
7
|
|
|
$
|
(1
|
)
|
|
$
|
34
|
|
|
$
|
(2
|
)
|
|
Foreign currency (gains) losses, net
|
|
|
(1
|
)
|
|
|
(22
|
)
|
|
|
16
|
|
|
|
(49
|
)
|
|
Net (gain) loss from asset sales
|
|
|
(5
|
)
|
|
|
3
|
|
|
|
(6
|
)
|
|
|
—
|
|
|
Net gain on mark-to-market derivative
instruments (J)
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
—
|
|
|
|
(19
|
)
|
|
Non-service costs – Pension & OPEB (I)
|
|
|
30
|
|
|
|
32
|
|
|
|
89
|
|
|
|
109
|
|
|
Other
|
|
|
(4
|
)
|
|
|
(2
|
)
|
|
|
(15
|
)
|
|
|
(7
|
)
|
|
|
|
$
|
27
|
|
|
$
|
2
|
|
|
$
|
118
|
|
|
$
|
32
|
|
29